nils bernstein : overview of developments in denmark speech by mr nils bernstein, governor of the national bank of denmark, at the annual meeting of the danish bankers association, copenhagen, 30 november 2009. * * * the recession in the world economy seems to be over. most oecd countries are returning to positive growth rates. world trade is slowly beginning to pick up again after its sharp downturn. turning to denmark, we currently only have an overview of developments in the first half of the year. we still don ’ t have a full picture of how things have evolved since the early summer, but in the assessment of danmarks nationalbank, denmark is also gradually beginning to move out of the recession that set in around the turn of the year 2008. it looks as if our aggregate output bottomed out in mid - 2009 at a level of 7 per cent below the most recent peak in 2007. most forecasts show that the recovery will be slow, and in our assessment we will not be back at the 2007 output level until some time in 2013 at the earliest. the business sector has considerable spare capacity, and unemployment is therefore set to rise for another year or so. crucial factors will be consumer spending and the contribution from exports to growth. right now the extensive stimulus packages launched in denmark and abroad, as well as inventory adjustments, are the main factors that have halted the slowdown and are once again driving the economy forward. it remains to be seen whether this momentum will be self - sustaining once the stimulus packages and expansionary fiscal and monetary policies are phased out. the outlook for the coming years is particularly uncertain – much can go wrong – but we believe that the economy will gradually recover. one of the current challenges is how to finance the large government deficits resulting from the expansionary fiscal policies in denmark and abroad. if these policies are rolled back too late, fear of a debt spiral and inflation may push up interest rates. on the other hand, if they are rolled back too early, the financial markets may, once again, come under strong pressure. further stimulus packages may be required. this balancing act is very much about ensuring investor confidence in the sustainability of the future economic policy. lack of confidence will cause interest rates to rise, which in turn could trigger a downward spiral of increasing budget deficits and interest costs. this risk could dampen growth, so we need to have a sustainable fiscal consolidation plan. and a sustainable and credible plan requires agreement – not only on the objectives, but also

already running at a high speed, thanks to factors such as a low level of international interest rates. and, overall, we gave the housing market in denmark too much leeway. it is the imbalances created in denmark and abroad during the boom that have brought on the current situation. as you know, the government guarantee on all deposits with and loans to banks in denmark will expire in just under one year. this scheme is the most extensive and necessary step taken in denmark when the financial crisis really hit us in autumn 2008. guarantees of this size must inherently be short - lived, and we must now prepare for the time after its expiry. don ’ t count on an extension of the scheme. it will be replaced by an increased deposit guarantee of kr. 750, 000, and until the end of next year its will be possible to subscribe to guarantees for individual loans applying until the end of 2013. this deposit guarantee of kr. 750, 000 will cover the vast majority of all private individuals making bank deposits. the temporary guarantee scheme for individual issuances is essentially mainly available to large banks. danmarks nationalbank is aware that the sector is working on umbrella schemes that will enable several smaller banks to make joint issues based on government guarantees. danmarks nationalbank takes a positive approach to these initiatives and the possibility of accepting them as part of our collateral basis. as far as we can see, larger deposits and other financing have to some extent made their way to some banks under cover of the general government guarantee. some degree of adaptation must be expected when this guarantee expires. for the credit extension system overall, it is, however, important that the relevant financial institutions take timely action to procure financing elsewhere or reduce their lending surplus. the larger banks must take their share of responsibility for restoring the smooth operation of the money market. the financial crisis has clearly demonstrated that banking is not just another sector of the economy. in return for the extensive bank rescue packages i expect the banks to face up to their social responsibility and role and to contribute actively to the functioning of the markets without government guarantees. the future financial architecture in denmark also involves the expiry of the legislation allowing “ the financial stability company ” to acquire banks when the general government guarantee expires. as far as i can see, the government ’ s acquisition of ailing banks has had the desired effect, i. e. banking transactions with traditional customers have, as far as possible, continued although