Alarm Bells Start in Denmark Over Foreign Debt--Europe’s Highest

Denmark, which for years has boasted one of the world’s highest standards of living, now holds another, less enviable record--Western Europe’s highest per capita external debt.

At the end of 1986, Denmark’s foreign debt stood at $40.3 billion--more than 40% of its gross domestic product.

Divided among a population of just over 5 million, that means that every Danish man, woman and child is in the red to the tune of around $8,000.

“No doubt, Danes would see to it that they made ends meet if they had to. So far, we haven’t had to since foreign banks are still very keen to lend us money,” said Nils Erik Soerensen, director of the debt division at the Danish Finance Ministry.

Some Alarm Bells

But the size of the debt is beginning to ring some alarm bells. Ordinary Danes joke that the Washington-based International Monetary Fund might soon be running the country’s economic affairs, a prospect dismissed as absurd by Danish officials and analysts.

“It has been too tempting for Danes to run a balance of payments deficit because we have not had any serious problems financing it,” Soerensen said.

But a report by the foreign ministry at the end of last year concluded: “If the foreign debt continues to climb, the burden of interest will be so great that Danish society with its present structure will be unable to pay it.”

To compound the problem, Denmark is ruled by a center-right coalition that is 20 seats short of a parliamentary majority, forcing the government to seek the approval of the opposition Social Democrats for any major policy initiative.

In December, after tortuous negotiations with the opposition, the government did succeed in passing a new export-boosting package, through which it hopes to eliminate the current account deficit and eventually trim the debt.

Record Deficit

In 1986, Denmark’s current account deficit hit a record $5.3 billion. The government expects it narrowed to $2.9 billion in 1987 and predicts it will shrink to $2.4 billion this year.

The package gives exporting companies tax breaks, cutting their expenses by around 8%. But many analysts worry that it may be insufficient to solve the problem.

“Exports are seen as the only way out of Denmark’s difficulties. The export package will help but it won’t work fast enough,” said Rob Rogers, an analyst with Enskilda Securities.

Central bank governor Erik Hoffmeyer told Reuters the export package would barely mitigate the effects of an excessively generous 1987 wage pact between employers and unions. It resulted in an 11% rise in labor costs in 1987.

“The intention of the package was to restore something which had gone wrong but which hadn’t had any great impact yet. The strong wage increases in early 1987 certainly diminished our competitive power,” Hoffmeyer said.

“It is highly dangerous to encourage the foreign indebtedness. We warned against this policy for a large number of years,” he said. “But I’m not pessimistic about the prospects of a rich country like this one to service its debt,” he added.

Sluggish Economy

The problem, he said, was that it would be difficult to boost exports in the face of a sluggish international economy.

“Expansion in other countries, especially in West Germany, has been disappointing. This is obviously the reason we have . . . a stagnating economy,” Hoffmeyer said.

According to the Organization for Economic Cooperation and Development, the Danish economy will contract by about 1% this year. It fell by 0.75% in 1987.

Unemployment is expected to grow from the current 8% of the work force to between 9.55% and 10%.

Analysts agree that in order for the export package to succeed, wage increases must be kept very low in the next few years.

“If they can keep wages down, Denmark may be able to climb out of its difficulties. But it will be painful and may well mean lowering living standards,” said Enskilda’s Rogers.

“We have a history of stop-go policies. If we can continue to encourage the exports sector, we could solve our most pressing problems,” said Jacob Dahl, an analyst with Copenhagen brokers Lannung & Co.

“But the danger is that we could start raising consumption again. We Danes are just too spoiled,” he said.