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Where negative interest rates are already reality – News Economy: Money



Extremely low mortgage loans have been a problem since the financial crisis. In Denmark they were sometimes also negative. That is, the person who buys certain types of mortgage loans in Denmark for the purchase of a home receives an interest from the bank instead of charging a debtor. Such negative interest rates are most evident in floating rate loans with short deadlines.

But even in Denmark, mortgage lenders are still not receiving cash from the banks. This is because the fees that the banks charge for their settlement still outweigh the negative interest rates. The level of mortgage loans in Denmark has even recently hired the Supreme Court. The country's competition authority blames the low level of competition between the banks.

The corresponding sentences are clearly not in the negative area. According to various press reports, with values ​​between minus 0.04 and minus 0.3 percent, they are still close to the zero interest rate limit. Comprehensive information about this and the number of customers concerned is missing because they are not reported by the banks.


In Denmark, mortgage rates are auctions on bonds: View of the capital Copenhagen. Photo: iStock.

The negative interest rates in Denmark do not depend on the banks' decisions, but on the structure of the local market. The banks are usually just the intermediaries of the mortgages. They get funds from investors who sell bonds for them. These bonds are supported by mortgages. The mortgage rates then arise from the auctions of such bonds. For up to five annual loans, this has already resulted in negative interest rates.

The fact that negative interest rates on mortgages can occur at all is in itself a most worrying development. They have been considered unlikely to date, as negative interest rates on bank deposits by the public.

The development in Denmark is particularly important from Switzerland's point of view because the two countries share a number of similarities. Like Switzerland, the Scandinavian country is not a member of the Monetary Union and has its own currency with the crown. As an EU country, Denmark, as Switzerland (which is not one of them), is very keen that the krona will not appreciate the euro. Because as the franc the crown is regarded as a sanctuary. Unlike the Swiss National Bank, Denmark's central bank does not even have an inflation target – the stability of the euro is above all.

Lessons for Switzerland can also be drawn, because no country in the world has known negative interest rates for as long as Denmark. The development there can therefore be delayed even with us. The Danish central bank introduced the negative interest rate already in July 2012. From February 2015 to January 2016, it reached a record length of 0.75 per cent and has since fallen to 0.65 per cent. In January 2015, the Swiss National Bank (SNB) lowered its interest rate to this lowest level worldwide and has since left it. SNB introduced negative interest rates in December 2014.

Lessons for Switzerland

In Denmark and Switzerland, extremely low interest rates have caused private household debt to explode. In Denmark, with a share of 280 percent of disposable income in 2018, they were higher than in any other country from the developed countries (OECD). Switzerland already took fifth place with a share of 210 percent. In both countries, mortgage lending is the main reason for this. And since properties were bought with the money, both countries have seen a sharp increase in house prices.


Denmark's current happiness could end when interest rates rise suddenly and home ownership is no longer sustainable. Photo: iStock

Although the debt is largely covered by property values, international organizations such as the International Monetary Fund see a certain risk of financial stability in both countries. However, the greatest risk exists if persistent negative interest rates continue to inflate mortgage debt, so many debtors cannot even afford the costs and property prices, even if they do not have low future interest rates, so that the debt is no longer covered. As a result, not only the households that need, but also banks and investors.

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Created: 22/07/2019, 15:50


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