After Swiss Capitulation, Will Danes Keep Their Peg?

Older bills feature a homburg wearer. Should we keep faith in homburg wearers?

First off, you can discount the headline from the rather sensationalistic Daily Telegraph--bastion of economic illiteracy--that the removal of Denmark's krone (DKK) peg may cause similar effects to the disruption caused by the Swiss uncoupling the franc's value from that of the euro. From BIS figures, the Swiss franc (CHF) is the world's sixth most-traded currency in global markets--involved in 5.2% of all transactions--whereas the Danish krone's share of 0.8% is a rounding error in comparison. It's simply not one of the world's most widely traded currencies, and Denmark is not quite a global trading powerhouse despite being a very advanced country due to its size.

That said, the Danes are wading into dangerous territory by attempting to ward speculative money away through negative interest rates on short-term deposits. That is, they are trying to prevent speculators from going "long" on krones since you would actually lose money holding onto it:

Denmark is trying to silence currency speculators as the government and central bank insist the Nordic country won’t follow Switzerland in severing its euro ties. “Circumstances significantly different from Denmark’s” were behind the Swiss National Bank’s decision, Danish Economy Minister Morten Oestergaard said in a phone interview. “Any comparison between Denmark and Switzerland is impossible.”

The comments followed yesterday’s surprise decision by the Danish central bank to cut its deposit rate by 15 basis points to minus 0.2 percent, matching a record low last seen during the darkest hours of Europe’s debt crisis in 2012. Like the Swiss, the Danes lowered rates after interventions in the market proved insufficient.

What the Daily Telegraph unsurprisingly neglects to mention [surprise!] is that the Danish authorities actually have an agreement with the ECB formalizing its longstanding peg. Unlike the Swiss authorities who are Johnny-come-latelys to the pegging sweepstakes, the Danes have been at it since the German occupation:

According to the exchange-rate agreement between Denmark and the ECB, currency interventions to defend the peg will “in principle be automatic and unlimited...” Denmark has “a long-lasting and politically firmly anchored fixed-currency policy,” [Economy Minister Morten] Oestergaard said. “This situation should not be overly dramatized.” 

On one hand, then, global consequences of the Danish krone breaking its peg to the euro from around its current level of 7.43 should be minimal (outside of Denmark). Whether it's in the interests of Danish officials to do so is another question. Sure Danish officials say their situation is different from that of Switzerland and that they will defend at all costs, but the latter reassurance was also made by the Swiss a week before their peg was broken.

My take? The Danes will attempt to tough it out--perhaps by making short-term rates even more negative in the coming days. However, if these attempts prove unsuccessful or too costly, they will remove the peg...and reset it at a somewhat lower EUR/DKK level. Like Dick Cheney and waterboarding, I believe pegging is in their blood.