Fitch Affirms Denmark at 'AAA'; Outlook Stable

Fri Feb 28, 2014 12:07am EST

LONDON, February 28 (Fitch) Fitch Ratings has affirmed Denmark's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AAA' with Stable Outlooks. The issue ratings on Denmark's senior unsecured foreign and local currency bonds have also been affirmed at 'AAA'. The Country Ceiling has been affirmed at 'AAA' and the Short-term foreign currency IDR at 'F1+'. KEY RATING DRIVERS Denmark's 'AAA' IDRs and Stable Outlook reflect the following key rating drivers: The track record of macro-financial stability reflected by low and stable inflation, current account surpluses and the stable banking sector. Public finances are consistent with the 'AAA' median, with the gross general government debt (EU-definition) estimated at 44.3% of GDP in 2013. The Danish government's proven record of fiscal discipline strengthens credibility for its current medium-term fiscal strategy. Although lacking a strong reserve currency status, the recent eurozone crisis has shown market confidence in Denmark's public finances and Danish krone assets. Large inflows of safe haven capital allowed the sovereign to borrow at historically low rates, and the government has successfully exploited the favourable financing environment to extend the average maturity and duration of its debt portfolio, reducing refinancing and interest rate risk. Danish households' high level of indebtedness is a rating weakness (gross debt amounted to 265% of disposable income in 2012). A high level of household assets offsets the high gross debt to give a positive net financial asset position, estimated at 134% of GDP, mitigating household credit risk to some extent, but the illiquidity of these assets still pose some concerns for debt servicing should house prices see renewed falls or interest rates rise sharply. The high leverage has also led to large swings in private consumption and hence GDP growth volatility relative to most 'AAA' peers, and continues to weigh on the outlook for private consumption. The economy has strong external finances compared with 'AAA' peers, with a persistent current account surplus, low net external debt and a positive international investment position. Net external debt has been falling since 2008 and was estimated to be 0.4% of GDP in 2013. Major banks' balance sheets have generally remained resilient in terms of asset quality, capitalisation and liquidity, as reflected in the Fitch Banking System Indicator of 'a', although profitability remains pressured due to low interest rates. Systemic banks performed well in recent stress tests, and extraordinary support measures introduced during the global financial crisis are being unwound. The Macro-Prudential Indicator, which reflects the build-up of systemic risk, is currently at '1' (low risk). The rating remains supported by the relatively wealthy, high value-added and diverse economy. The severity of the 2009 recession and weak recovery led to a significant rise in unemployment, although structural unemployment is estimated to be moderate. Denmark has strong and transparent institutions, which contribute to a stable political and economic environment, outperforming the 'AAA' rated medians in five out of six World Bank governance indicators. It also ranks very highly in the Ease of Doing Business Index. RATING SENSITIVITIES The Outlook is Stable, reflecting Fitch's assessment that the downside risks to the sovereign's 'AAA' rating are currently not material. However, the following risk factors individually or collectively could result in a negative rating action: - A further protracted stagnation of the economy (e.g. precipitated by continued deleveraging and renewed substantial decline in house prices) accompanied by deteriorating public finances and the financial sector. - A material worsening of the global economic outlook and/or turmoil in Denmark's main trading partners would likely affect Denmark's economic recovery and potentially place pressure on Danish public finances and the financial sector through its extensive trade and financial linkages to the eurozone and the rest of the world. - There is a strong and broad political consensus regarding Denmark's fiscal strategy characterised by long-standing commitment to fiscal discipline. Material deviation from this consensus or an erosion of support for it, resulting in a rapidly worsening fiscal position could put pressure on the rating. - Fitch expects demand for Danish mortgage bonds to remain strong in light of the need for predominantly domestic financial institutions, insurance companies and pension funds to hold highly liquid, high-quality securities in domestic currency. However, a significant increase in reliance on international debt investors for mortgage bonds could have a systemic impact on financial stability in Denmark in the event of a period of financial stress. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions: Fitch's forecasts for the general government balance and debt level are based on the assumption that the government remains committed to its current medium-term fiscal strategy. Fitch assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key macroeconomic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term. It also assumes that the risk of fragmentation of the eurozone remains low. The Danish krone currency peg to the euro under the ERM2 is assumed to remain in place. Contact: Primary Analyst Eugene Chiam Research Analyst +44 20 3530 1512 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Alex Muscatelli Director +44 20 3530 1695 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. 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