Nine EU countries downgraded but Denmark retains AAA rating

Denmark’s AAA rating may lower interest rates and attract investors but Nordea strategist argues Danish bonds are unattractive investment due to their low yields

admin

Jan 17, 2012

Denmark is now one of only six EU countries to retain the prized triple-A credit rating from top rating agency Standard & PoorÂ’s, after it downgraded nine EU countries last week on Friday.

S&P also chose to downgrade the European bailout fund, the EFSF, on Monday night after two of its major lenders, Austria and France, were included in the first round of downgrades.

But while the downgrades only reinforce the negative outlook for European economies, Denmark might stand to benefit from remaining in the elite triple-A club.

Â”The downgrades arenÂ’t going to dramatically affect the Danish economy,Â” Jesper Ragnvid, a finance professor at Copenhagen Business School, told Politiken newspaper. Â“What might happen, however, is that investors will choose to sell French bonds and buy Danish bonds instead. That would lower our interest rates.Â”

John Bo Northroup, CEO of financial publication Ã˜konomiske Ugebrev, agreed with this appraisal.

Â“I am leaning towards the viewpoint that the S&P downgrade in the short term will enhance the safe haven image of little Denmark – even though our currency and the scale of our economy is way too small to serve as a true safe haven. Nevertheless, this should result in lower rates, or sustained low rates, in Denmark.Â”

But while Danish bonds will continue to be regarded as safe investments, the low yield makes them relatively unprofitable , leading Henrik Drusebjerg, a senior strategist at Nordea, to urge investors to scout for more risky investments to ensure profitable returns.

Â”There will come a time where there wonÂ’t be much yield left in bonds,Â” Drusebjerg told BÃ¸rsen newspaper. Â“The question is whether you are going to stick around and recoup the few percent thatÂ’s possible or if you will use the drop in interest rates to look at alternatives.Â”

Margrethe Vestager (Radikale), the economy minister, tried to downplay the short-term benefit of DenmarkÂ’s retained AAA rating, however, arguing that the future stability of the Danish economy rests in EuropeÂ’s hands.

Â“In the larger scheme of things, a drop in Danish interest rates is quite small,Â” Vestager told Politiken. Â“It would be better for the Danish economy if the whole of the European economy got back on its feet again so they could afford to buy our products.Â”