February 23, 2015 / 12:11 PM / 5 years ago

Fitch: Danish Krone Peg Defence Looks Credible, But Has Risks

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Danish Krone Peg Defence Looks Credible, but Carries Risks here LONDON, February 23 (Fitch) Steps by the Danish authorities to maintain the euro-krone peg reflect a very strong commitment to a fixed exchange rate, and support Fitch Ratings' view that the peg will not be abandoned. Defending the peg avoids the potential disruption of a revaluation or float, but carries its own risks. Danmarks Nationalbank cut its interest rate on certificates of deposit for the fourth time this year, to -0.75%, on 5 February. The central bank has also increased its purchases of foreign exchange in the market, and the Ministry of Finance has suspended bond issuance until further notice on the central bank's recommendation. But it is not yet clear what further actions the authorities might have to take. Accumulating reserves generates positive carry for the central bank (at current interest rates), but increases the risk of a negative valuation impact at a later date if the peg is not maintained indefinitely. Negative deposit rates could also reduce bank profitability by reducing net interest margins, as they will be difficult to pass on to retail depositors. More broadly, there is a risk that monetary easing to defend the peg will result in a build-up of credit risk in the financial system. If the peg were abandoned, sharp krone appreciation would also carry risks. The impact would vary across sectors. Our full report 'Danish Krone Peg Defence Looks Credible, But Carries Risks' is available to subscribers at www.fitchratings.com or by clicking the link. Contact: Eugene Chiam Associate Director Sovereigns +44 20 3530 1512 Fitch Ratings Limited 30 North Colonnade London E14 5GN Douglas Renwick Senior Director Sovereigns +44 20 3530 1045 Mark Brown Senior Director Fitch Wire +44 20 3530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL 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. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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