Denmark highlights naked truth about negative lending

Eva Christiansen has become something of a star in Denmark. The sex therapist was propelled into the limelight not for her career but because of a loan she took from Realkredit Danmark, the country's biggest lender.

The reason? Ms Christiansen received a negative interest rate for her three-year loan, meaning the lender - part of Danske Bank - is paying for her to borrow money. The interest rate of minus 0.0172 per cent - which equates to her receiving about DKr7 each month from the bank - is just one sign of the "Through The Looking Glass" effects of extreme central banking measures in Scandinavia.

Plenty of central banks have resorted to unconventional measures such as buying government bonds. But none have gone quite so far as Sweden's Riksbank or Denmark's Nationalbank. The Riksbank became the first central bank in the world to take its main policy rate - the so-called repo rate - into negative territory. Nationalbanken in turn cut its deposit rate - the amount it pays or in this case charges banks for placing money with it - four times in three weeks at the start of this year to a world record low of minus 0.75 per cent.

Scandinavian bankers are under no illusions about the test such rates pose to the financial system. "We operate in exceptional times, where economic relationships are turned upside down with negative interest rates. A development that calls for caution; there is no history book to turn to," Annika Falkengren, chief executive of SEB, told shareholders at the Swedish bank's annual meeting.

A Danish banker is even more blunt: dealing with negative rates is like "learning to drive a car backwards". So far, however, the impact appears to have been manageable. Fears that negative rates could lead to widespread hoarding of cash or banks charging all customers for current accounts have proven wide of the mark.

Many Danish banks such as Danske have started charging their biggest corporate and institutional clients for depositing cash and Swedish lenders such as SEB have started discussions with similar clients. After all, if the banks themselves are having to pay 0.75 per cent - in Denmark's case - for depositing cash at the central bank, then it makes sense for those wanting to park large amounts of cash at lenders to share some of that burden. (The central bank has helped recently by greatly increasing the amount lenders can deposit before incurring a negative rate.)

But most banks have been careful to avoid charging the general public for current accounts. One exception was Erhvervsbank, a small Danish lender that said in February that it would charge 0.5 per cent on deposits. Larger lenders say they are keen to avoid any action that could encourage consumer cash hoarding.

Similarly, negative rates for loans have so far not become entrenched in Denmark, where many retail borrowers take out short-term loans of one or three years. Even Ms Christiansen will still pay the bank each month due to the fees on her loan. Recent auctions of short-term mortgage bonds unexpectedly had a positive interest rate. That in turn helped out some Danish banks, who had suggested they would suspend sales of new loans rather than issued at negative rates. At least part of the problem, according to bankers, was the financial equivalent of the Y2K problem - ensuring that banks' computers could deal with negative interest rates (just as many computers were supposed to have difficulties in dealing with the year 2000). Many are revamping their IT systems to ensure they can handle negative rates for borrowers and depositors.

But there is concern for what happens should negative rates persist for a long time. The biggest immediate concern is over whether low rates will fuel housing bubbles. Denmark, whose households are already the most indebted in the world, has seen prices in some parts of Copenhagen rise above their pre-crisis peak. In Sweden, the Riksbank remains deeply concerned about high levels of household debt being pushed up further.

Scandinavian bankers also say that the longer negative rates go on for, the more likely it is that normal consumers could be charged for depositing cash. As one says: "We just don't know how in the long run this will affect us. It is so completely new. But the longer it goes on, the more there is a risk for distortions."

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Twitter: @rmilneNordic

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