{
  "title": "Denmark -- Concluding Statement of the 2008 IMF Mission",
  "publication": "IMF News, October 2, 2008",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs100208",
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  "summary": "Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries).",
  "publishDate": "2008-10-02",
  "sections": [
    {
      "heading": "Initial assessment and policy priorities",
      "content": "- Strong initial conditions, sound policies, and solid institutions position the Danish economy well to face significant challenges.\n- Main policy priorities:\n  - Contain spillovers from the global financial crisis.\n  - Manage the cyclical slowdown.\n  - Strengthen fiscal sustainability.\n- The global financial crisis increases the premium on making liquidity available to sound banks; Danish banks have small exposures to US subprime assets, but contagion has come through increased risk aversion and a dry-up of liquidity.\n- Temporary liquidity facilities established by Danmarks Nationalbank are welcome.\n- The ongoing slowdown is a necessary adjustment to allow wage and price pressures to ease; despite negative growth at the turn of the year, output remains above potential, unemployment is exceptionally low, and wages are rising too fast.\n- Liquidity crisis likely to sharpen the slowdown but does not justify loosening fiscal policy.\n- Upfront action is needed to ensure fiscal sustainability due to significant demographic changes and an already high tax burden; recent proposals by the labor market commission would help."
    },
    {
      "heading": "Macroeconomic outlook and risks",
      "content": "- Central outlook (assuming global liquidity crisis abates):\n  - Growth to slow during 2008-10 and then rise back to potential once unemployment reaches a sustainable level.\n  - Confidence shaken by higher interest rates and inflation, a turnaround in the property market, and the worsening global crisis.\n  - Consumption and investment growth expected to remain sluggish; exports constrained by high labor costs and weak export markets.\n  - Wage growth expected to slow over time, allowing firms to rebuild profit margins and create conditions for sustainable growth.\n  - GDP growth projections: slightly less than one percent this year and slightly less than half a percent in 2009-10, with a pickup in 2011.\n  - External current account balance projected to strengthen slightly owing to contraction in domestic demand.\n  - Inflation, anchored by the peg to the euro, should decline as wage growth slows and global commodity price increases abate.\n- Main risks:\n  - Significant worsening of the external environment: a protracted global liquidity squeeze could compound banking stresses, curtail bank credit and domestic demand, and be magnified by a sharp drop in housing prices.\n  - Momentum in recent high wage growth: nominal wage growth pushed to nearly 5 percent by tight labor market conditions, the generous 2008 public sector wage agreement, and rising food and fuel prices; real wages have grown faster than productivity. If wage growth does not slow, firms' profitability could be undermined, possibly leading to a protracted period of high unemployment.\n- Competitiveness assessment:\n  - Real effective exchange rate assessed as well aligned.\n  - Denmark's productivity growth is slower than that of its trading partners while real wage growth has been faster, eroding wage competitiveness.\n  - Export market share has eroded; improvements in terms-of-trade have mitigated price competitiveness effects but cannot be relied on indefinitely.\n  - Future alternatives: a sufficiently strong wage adjustment or weaker competitiveness leading to higher unemployment."
    },
    {
      "heading": "Banking sector",
      "content": "- Overall sector entered the crisis from a position of strength, but the global liquidity shortfall has exposed pockets of vulnerability.\n- Capitalization and asset quality:\n  - Sector is well capitalized, though buffers have been slimmed with the phasing-in of Basel II and IFRS.\n  - Loan portfolios and mortgages currently performing well, but deterioration in asset quality in real estate development and construction sectors due to end of the property boom.\n- Vulnerabilities:\n  - Some small and medium-sized banks that rapidly increased lending during the boom and relied on wholesale deposits and money market funding are particularly vulnerable.\n  - Liquidity crisis combined with cyclical slowdown has put such banks under severe pressure and could reinforce merger trends at a time when finding partners may be more difficult.\n- Authorities' responses and facilities:\n  - Preemptive bank resolution approach has worked well: contingency facility established by the Danish Bankers Association in 2007; used in August 2008 to facilitate purchase of Roskilde Bank; Danmarks Nationalbank intervened in a small bank with liquidity and asset quality problems; some small banks purchased by larger institutions.\n  - Danmarks Nationalbank initiatives to enhance liquidity include:\n    - Temporary secured lending facility based on \"loan bills\".\n    - Temporary credit facility offering banks credit on basis of their excess capital adequacy.\n    - Expanded collateral base for borrowing by banks.\n    - Extraordinary auction of treasury bills acceptable as collateral for borrowing from the US Federal Reserve.\n    - Auction of funds obtained through swap lines with the US Federal Reserve to address dollar shortage.\n- Surveillance and supervision:\n  - Current conditions underscore importance of intensifying financial sector surveillance and supervision.\n  - DFSA's initiatives to sharpen focus on liquidity are welcome.\n  - Scope exists to further strengthen financial stability work and ensure DFSA has resources to recruit and retain staff, especially given expanded mandate under Basel II."
    },
    {
      "heading": "Stabilization policy",
      "content": "- Recommended near-term stance: neutral fiscal stance given the macro outlook and high wage growth.\n  - Demand management goal: allow economy to slow until output returns to capacity, labor market pressures ease, and wage growth decelerates to a sustainable rate.\n  - Risk of \"hard landing\" considered small; early phases cushioned by high employment and wage inertia and later by strong automatic stabilizers.\n  - Case for fiscal easing at present judged weak; fiscal sustainability concerns argue for keeping fiscal position as tight as possible.\n  - Authorities should resist pressure to relax fiscal stance in 2009, aiming instead for a fiscal effect of approximately zero.\n- Exchange rate policy:\n  - Fixed exchange rate policy (peg to the euro) supported: anchors inflation expectations, disciplines macroeconomic and structural policy frameworks, contributed to strong fiscal policy.\n  - Peg implies Denmark effectively imports euro area monetary posture; appropriate while Denmark and euro area face similar financial market challenges.\n  - Peg has not come under pressure during months of the financial crisis, reflecting market confidence."
    },
    {
      "heading": "Fiscal sustainability and structural policies",
      "content": "- Achievements and remaining gap:\n  - Significant fiscal achievements over past two decades: expenditure ratio declined, general government surplus among highest in EU, debt ratio declined to a little over 20 percent.\n  - Generous social welfare system and unfavorable demographic outlook pose a significant long-term fiscal challenge.\n- Long-term framework:\n  - Denmark articulated and implemented a long-term fiscal sustainability framework resting on two pillars:\n    - Accumulating assets in good times (favorable demographics and North Sea oil revenues).\n    - Implementing structural reforms to strengthen work incentives and increase the labor force.\n  - First pillar set out in the 2015 plan targeting fiscal surpluses during next several years to increase net government assets to about 10 percent of GDP.\n  - Second pillar includes reforms to increase retirement age starting in 2019 and index it to longevity, strengthen work incentives, and reduce tax wedge on wages.\n- Recommendations and measures:\n  - Further reforms of social benefits will be needed; mission strongly endorses recent proposals by the Labor Market Commission.\n  - Bringing forward the increase in the retirement age to 2009 and reducing the duration of unemployment benefits would reduce budget expenditures and raise revenues by boosting structural employment.\n  - Measures to increase revenue may be needed to close long-term fiscal gap; consider introduction of user fees, indexation of tax on residential property, and reducing deductibility of mortgage interest.\n  - Work of the Tax Commission provides a window to improve taxation structure and address fiscal sustainability; regrettable that the Commission's mandate requires a revenue-neutral package and excludes taxation on residential property; authorities urged to consider a more ambitious package.\n- Development assistance:\n  - Denmark committed to maintaining development assistance at internationally high level of 0.8 percent of gross national income.\n\nDenmark -- Concluding Statement of the 2008 IMF Mission, October 2, 2008.\n\n---\n\n\n References\n\n- Denmark and the IMF\n- Mission Concluding Statements\n- PRESS CENTER\n- Article IV\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs100208"
    }
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    "Published: October 2, 2008",
    "Strong initial conditions, sound policies, and solid institutions position the Danish economy well to face significant challenges.",
    "Main policy priorities:",
    "The global financial crisis increases the premium on making liquidity available to sound banks; Danish banks have small exposures to US subprime assets, but contagion has come through increased risk aversion and a dry-up of liquidity.",
    "Temporary liquidity facilities established by Danmarks Nationalbank are welcome.",
    "The ongoing slowdown is a necessary adjustment to allow wage and price pressures to ease; despite negative growth at the turn of the year, output remains above potential, unemployment is exceptionally low, and wages are rising too fast.",
    "Liquidity crisis likely to sharpen the slowdown but does not justify loosening fiscal policy.",
    "Upfront action is needed to ensure fiscal sustainability due to significant demographic changes and an already high tax burden; recent proposals by the labor market commission would help.",
    "Central outlook (assuming global liquidity crisis abates):",
    "Main risks:",
    "Competitiveness assessment:",
    "Overall sector entered the crisis from a position of strength, but the global liquidity shortfall has exposed pockets of vulnerability.",
    "Capitalization and asset quality:",
    "Vulnerabilities:",
    "Authorities' responses and facilities:",
    "Surveillance and supervision:",
    "Recommended near-term stance: neutral fiscal stance given the macro outlook and high wage growth.",
    "Exchange rate policy:",
    "Achievements and remaining gap:",
    "Long-term framework:",
    "Recommendations and measures:",
    "Development assistance:",
    "[Denmark and the IMF](http://www.imf.org/external/country/DNK/index.htm)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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