increase in interest rates had a smaller impact than it would normally have. on the basis of the lessons learned from the crisis we believe that we will need to maintain a larger foreign - exchange reserve than in recent years. nevertheless, it should be borne in mind that our target is to keep the exchange rate stable. the foreign - exchange reserve is one of the tools for observing this target, and its size depends very much on its buffer function. the foreign - exchange reserve has to some extent been increased by raising sovereign loans in foreign currency, but market conditions have also allowed danmarks nationalbank to buy foreign exchange. * * * later this year, the legislation on covered bonds – or sdos, as we call them in danish – will be reviewed on the basis of the experience gained. it is important to take into account what the financial crisis has taught us and to perform a thorough analysis. it is still to early to draw any firm conclusions as regards potential amendments. in this context, it may be useful to outline some of the preliminary observations from the financial crisis that seem to be particularly relevant. firstly, access to capital may be limited when the need is greatest. secondly, house prices may fluctuate strongly and have to some extent been driven by innovation in the mortgage market. thirdly, if the problems reach a systemic level, they no longer affect only lenders and borrowers, but become problems to society as a whole. in its 2007 consultation response concerning sdo legislation, danmarks nationalbank indicated that it preferred a robust and simple model and that the upper loan - to - value limit for residential properties was set at 70 per cent at the time that the loan was granted and not subsequently raised. since the loan - to - value ratio may not exceed 80 per cent, a substantial buffer is required. experience with a scarce supply of capital when the need is greatest, combined with the drop in property prices, may warrant an even greater margin. the launch of covered bonds means that credit institutions must restore the underlying collateral if house prices fall. this has introduced a risk in the danish mortgage system that did not exist previously – a risk that has been accentuated by the financial crisis. danmarks nationalbank finds it important to consider this aspect carefully when reviewing sdo legislation. after all, government guarantees do not last forever. late in the sdo legislation process a deal was struck whereby sdo loans can be redeemed at par. this provision has limited the scope for product development, and

nils bernstein : recent economic and financial developments in denmark speech by mr nils bernstein, governor of the national bank of denmark, at the annual meeting of the danish mortgage banks'federation, copenhagen, 31 march 2009. the spoken version is the final version. * * * thank you for inviting me to speak here today. the economic outlook in still deteriorating. global output is now expected to decline by more than ½ per cent this year. that may not sound so bad. but, in comparison, global growth was 5 per cent in the boom years. in denmark, a decline in the range of 1½ per cent is expected for the second year running. international growth estimates are regularly adjusted downwards. there is a high degree of uncertainty, and it is impossible to say when the tide will turn. a few very recent indicators, mainly for the usa, are slightly more positive than they have been for some time, but it is still too early to talk of an economic spring. all over the world, economic policies have been eased significantly. policy interest rates are historically low in many countries, and fiscal policies are highly expansionary. this is also the case in denmark. the fiscal - policy initiatives taken in denmark amount to kr. 20 billion in both 2009 and 2010. relative to the size of the economy they are in line with those taken by many other oecd countries, but do not forget that unemployment in denmark is one third of the oecd average. government finances in denmark are also more sensitive to cyclical fluctuations than they are in other countries, so that public expenditure and revenue automatically stimulate the economy more in a recession. nevertheless, unemployment is expected to rise for some time yet. initially it is a question of restoring financial market confidence. that will have a positive effect on the real economy, including consumption, and then unemployment figures will probably begin to go down. we do not believe that unemployment will peak until early 2011. the economy must grow by 1 - 2 per cent to prevent a further increase. the government balance showed a surplus of kr. 50 billion last year. next year, a deficit of the same magnitude is expected. this is equivalent to a reversal of 5½ per cent of gdp. just over half of the deterioration is attributable to the automatic stabilisers, while the rest is the result of the decisions made. the government budget deficit means that there will, once again, be a need for net issuance of government bonds, following a period of