bodil nyboe andersen : recent economic developments in denmark speech by mrs bodil nyboe andersen, governor of the national bank of denmark, at the annual meeting of the association of danish mortgage banks, copenhagen, 29 april 2004. * * the danish economy has shown very positive trends in the last decades even though economic growth has been modest recently. various governments have implemented a number of structural reforms since the beginning of the 1980s. as a result, the danish economy is today extremely robust with strong economic fundamentals. the fixed - exchange - rate policy, which was introduced in 1982, has been a cornerstone of this development. however, a sustainable and credible fixed - exchange - rate policy requires that the rest of the economic policy and the structural conditions are in order. in denmark this called for a number of economic reforms that began in the 1980s. the cost - of - living adjustment was abolished and the central - government finances improved. the deductibility of interest payments was restricted and interest taxation reduced. all of these factors contributed to breaking expectations of a devaluation - inflation spiral. however, breaking these expectations took its toll and, as many people in the financial sector may still recall, the years around 1990 were lean years for denmark. on the other hand, these measures resolved some of the structural problems that had burdened the danish economy for many years. since the beginning of the 1990s denmark has seen stable growth with declining inflation, lower interest rates and the accumulation of solid surpluses on both public finances and the balance of payments, as well as gradual expansion of pension savings. in recent years denmark has seen strong growth in real wages, and at the same time danish companies have successfully carried out rationalisation measures. even though unemployment has been increasing for a period of time, unemployment has been low on a european scale in the last 5 - 10 years. this indicates that the structural reforms already implemented in the labour market have contributed to enhancing the flexibility of the danish economy. in international assessments and comparisons it is noted that denmark has successfully applied a long - term and medium - term orientation to its economic policy without resorting to short - term fiscal - policy measures. most recently, the imf delegation that visited denmark in march this year described this as follows in their conclusions : “ at the same time, denmark has been well - served by focusing on medium term fiscal targets, and relying on large automatic stabilizers to support demand during downturns. discretionary counter - cyclical policy

##er's ability to meet payments. however, the interest - rate risk still rests on the borrowers and bondholders, respectively, not on the mortgage - credit institute. this is different from the home - financing system in the usa, which is otherwise similar to the danish system in that the borrower may remortgage by redeeming the loan when interest rates decline. in the usa the conversion risk is to a large extent assumed by two privileged institutes with a large proportion of the housing loans on their balance sheets. these institutes have encountered significant risk - management problems as a consequence of interest - rate fluctuations. they have thus had to conduct very extensive hedging in the bond market, among other things, and this again has led to pronounced volatility in the bond market. denmark did not experience a similar increase in volatility. at international meetings we are sometimes asked why this increase did not happen in denmark. one explanation is our balance principle, which ensures that the conversion risk is spread out on a large number of investors rather than being concentrated on a few mortgage - credit institutes. the next question is then : why did denmark introduce the balance principle? this is not quite as easy to answer. when the mortgage - credit system was founded there were no clearly expressed considerations about the balance principle. what happened was that the borrowers joined forces - just like the cooperative movement in other areas of the economy - to be able to provide joint collateral and issue standardised bonds. the balance principle has been a cornerstone of the mortgage - credit system in denmark for more than 100 years. since then the authorities - including danmarks nationalbank - have come to appreciate it to such a degree that they have again and again resisted the request from the mortgage - credit institutes to relax the balance principle.