By Irina Poghosyan – MSc International Business and Management student at Westminster Business Schoo
At the international level, debt enhances the wellbeing of a country if it is used very carefully, but can easily become a two-edged sword that brings disaster and irrecoverable catastrophes both at the individual and governmental levels. Hence without debt, a country is at risk of staying and remaining poor whereas borrowing can be a solution resulting in the country being more compatible in the modern society: businesses can save and make investments even though their sales will be lower. However, as the international practices show it is a reasonable concern when debt is rising continuously. When its ratios rise beyond a certain level, financial crises become both more probable and more dangerous (Cecchetti and Zampolli, 2011). Debt comprises the governmental, non-financial and household that are equally important and can simultaneously bring vulnerabilities to the countries’ economies.
Regarding the vulnerabilities, large household gross debt and low liquid assets are posing them. Denmark’s household debt is the biggest among OECD countries since 2000 (see the graph above). In 2000 Denmark’s household debt as a percentage of GDP was 95% and was constantly growing until 2010 it reached 152%. These household balance sheets were the largest in OECD hence brought their own impact through the years. In the short run, the increase of the household debt to GDP ratio expanded the GDP growth rate of Denmark. Already in the late 2000s, the country ended with a 3.7% year on year annual change in GDP. In 3 years, it was dropped to 0.4%. In 2008, being heavily dependent on household debt( at that time Denmark’s household debt was 150% of its GDP, whereas the threshold was pitched to only 60%) Denmark had to face a steadily decreasing y-y GDP growth which was -4.9% in early 2009. While household debt levels endure very high in a global comparison, Danish households have deleveraged and refinanced mortgages in the current economic acceleration, which has sponsored consumption and committed to an improved mortgage construction (European Commission, 2019).
As the United States housing bubble started in 2006 Denmark was also heavily dependent on household debt which had a severe impact on GDP as stated above. However, it is worth mentioning that after the crisis Denmark was one of the few European countries (including the United Kingdom) that managed to overcome the post-financial crisis uncertainties quickly (www.nationalbanken.dk, 2018). There are mainly two reasons for that quick recovery: the first one is the stable exchange rate which created a solid fundament for economic advancement and the second important aspect is the higher-priced Danish products. The latter naturally brought Denmark to a more beneficiary position than its trade partner France. Meaning that Denmark’s net exports were positive from 2000 until late 2016 (Oec.world, 2017). Selling their products at higher prices while the import products were not experiencing a growth in the prices improved the population’s wellbeing. In contradiction, from late 2000 until nowadays France has had a trade deficit with an $80 billion gap (Oec.world, 2017).
The European Commission later in 2019 announced and published a draft spending of all Eurozone members. According to that, France, Italy, Belgium, and Spain did not meet the required debt reduction target and failed to make appropriate economic adjustments to reduce their debt burden (FT.com). High debt burdens are limiting the ability to respond to economic shocks and any “black swan” events, such as COVID-19 pandemic nowadays. Failure of decreasing public debt in European countries might increase the tension among those countries whose public debts are increasing in the upcoming years, which in turn might have a negative effect on the debt market within member countries.
France was the only country showing a debt deficit of 3% of GDP in 2019. At the end of the 2019 financial year, France’s Minister of Economy announced that the government will cut down the taxes in order to encourage public spending, thus contributing towards improving the slowdown of the global economy. However, the statistics show that the forecast of France’s debt burden will be 98.8% of GDP in 2020 and respectively 99.2 % of GDP in 2021 (FT.com).
Overall, the government debt of Denmark was undeviatingly decreasing reaching 34.1% in 2019 alongside the sustainability of the Fiscal Policy. In addition, thanks to small primary surpluses the gross public debt has continued to fall since 2010 (see below).
As a result of the high level of debt, of which a large share is at a variable rate of interest, changes in interest rates will have a stronger impact on disposable income than they did 10-20 years ago. Changes in income are of major significance to consumption, so private consumption has also become more sensitive to interest rates, which may reduce macroeconomic stability in certain situations. This may be the case if, for example, interest rates rise at a time of high unemployment and weak growth. However, in normal circumstances, increases in interest rates coincide with rising growth and employment.
Reference List:
www.nationalbanken.dk. (2018). How has Denmark managed since the financial crisis? [online] Available at: http://www.nationalbanken.dk/en/publications/themes/Pages/How-has-Denmark-managed-since-the-finansial-crisis.aspx.
Oec.world. (2017). OEC – Denmark (DNK) Exports, Imports, and Trade Partners. [online] Available at: https://oec.world/en/profile/country/dnk/.
Oec.world. (2017b). OEC – France (FRA) Exports, Imports, and Trade Partners. [online] Available at: https://oec.world/en/profile/country/fra/.
Lombardi, M., Mohanty, M. and Shim, I. (2017). The real effects of household debt in the short and long run. [online] Available at: https://www.bis.org/publ/work607.pdf
European Commission (2019). Assessment of the 2019 Convergence Programme for Denmark. [online] https://ec.europa.eu/, European Commission, pp.1–17. Available at: https://ec.europa.eu/info/sites/info/files/economy-finance/04_dk_cp_assessment_0.pdf [Accessed 14 Apr. 2020].
European Commission (2019b). Assessment of the 2019 Convergence Programme for Denmark. [online] https://ec.europa.eu/, European Commission, pp.1–17. Available at: https://ec.europa.eu/info/sites/info/files/economy-finance/04_dk_cp_assessment_0.pdf [Accessed 14 Apr. 2020].
Cecchetti, S. and Zampolli, F. (2011). The real effects of debt. [online] Available at: https://www.bis.org/publ/othp16.pdf [Accessed 25 Oct. 2019].
tradingeconomics.com. (2020). Denmark Private Debt to GDP | 1995-2018 Data | 2019-2020 Forecast | Historical | Chart. [online] Available at: https://tradingeconomics.com/denmark/private-debt-to-gdp [Accessed 14 Apr. 2020].
Tradingeconomics.com. (2019). France Government Debt to GDP. [online] Available at: https://tradingeconomics.com/france/government-debt-to-gdp.
Dombey, D. (2019). France and Italy warned by Brussels over high debt levels. [online] Financial Times. Available at: https://www.ft.com/content/a4ce3948-0b87-11ea-bb52-34c8d9dc6d84.
CEICdata.com (2018). France Government Debt: % of GDP. [online] Ceicdata.com. Available at: https://www.ceicdata.com/en/indicator/france/government-debt–of-nominal-gdp.
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