March 12 (The following statement was released by the rating
Fitch Ratings has affirmed Denmark's Long-term foreign
and local currency Issuer Default Ratings (IDR) at 'AAA' with a Stable Outlook.
Fitch has simultaneously affirmed the Short-term foreign currency IDR at 'F1+'
and the Country Ceiling for Denmark at 'AAA'.
KEY RATING DRIVERS
The affirmation and Stable Outlook reflect the following key rating factors:
- The track record of macro-financial stability reflected in low and stable
inflation, current account surpluses and the stable banking sector despite a
high level of household indebtedness and weakening housing market.
- Public finances are in line with the 'AAA' median indicators with the EU
definition of general government gross debt at 46% of GDP in 2012. The Danish
government's long-standing commitment to fiscal discipline and historical record
of turning deficits into surpluses strengthens the credibility of its fiscal
strategy to adhere to EU recommendations to bring the 2013-2014 budget within
the 3% reference level.
- Concerns for the banking sector arising from the bursting of the housing
bubble in 2008 and the global financial crisis in 2009 have eased, and large
Danish banks in particular have improved balance sheets and capitalisation. The
progress of the supervisory and regulatory initiatives in Denmark have also
contributed to financial stability and the introduction of a bank resolution
regime somewhat reduced the contingent liability for the sovereign. However, a
few small Danish banks still remain under pressure and need more capital.
- The rating remains supported by the relatively wealthy, high value-added and
diverse economy. The severity of the 2009 recession and weak recovery has 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 high on the
Ease of Doing Business index.
- The economy has strong external finances with low net external debt, low net
sovereign external debt, and a positive international investment position. At
5.2% of GDP in 2012, the current account surplus is also significantly higher
than the 'AAA' median, reflecting Denmark's position as a strong export-oriented
- Although lacking a strong reserve currency status, the recent eurozone crisis
has shown market confidence in Denmark's public finances and krone assets, with
large safe haven capital flowing into the economy, allowing the government to
borrow at record low interest rates.
- The authorities have successfully exploited the favourable financing
environment for Denmark by materially increasing the average maturity and
duration of government debt, reducing refinancing and interest rate risk.
The Stable Outlook reflects Fitch's assessment that the downside risks to the
'AAA' rating are currently not material. Nonetheless, the following risk factors
individually, or collectively, may result in a negative rating action:
- As a small open economy with extensive trade and financial linkages to the
rest of the world and eurozone, a material worsening of the global economic
outlook and/or intensification of the eurozone crisis would affect Denmark's
economic recovery and potentially place pressure on public finances and the
- A more protracted stagnation of the economy than currently anticipated due to
household deleveraging and further downturn in the housing market that was
accompanied by deteriorating public finances and worsening asset quality.
- The political consensus on fiscal strategy and long-standing commitment to
fiscal discipline in Denmark supports the rating. A reversal of this approach
would be negative for the rating.
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 fiscal
-Danish exports are reliant on the eurozone for its markets and Fitch assumes
that the eurozone remains intact and that there is no materialisation of severe
tail risks to global financial stability that could trigger a sharp
deterioration in net exports for Denmark. Contagion through Denmark's largest
bank with some foreign operations could also threaten financial stability in
Denmark, which could result in an expansion of the sovereign's balance sheet.
-Domestic demand for Danish mortgage covered bonds continues to be strong given
the necessity for predominantly domestic financial institutions, insurance
companies and pension funds to hold highly liquid, high quality, securities in
Based on Fitch assessment of the relative strength of the banking sector, it is
assumed that the fiscal risk arising from contingent liabilities from the
financial sector is very small.
-The euro currency peg remains in place.