The Euro Crisis

For the first time ever, the Danes cut one of their official interest rates to below zero on Thursday.

Struggling against a tide of foreign capital seeking a safe haven, the Danes are trying to keep their exchange rate from rising to the point of throttling domestic industry. Unfortunately, one way or another, the struggle to retain competitiveness is likely to be a forlorn hope.

Denmark’s certificate of deposit rate was chopped by a quarter point to where CDs now yield minus 0.2%. Which is to say holders of these certificates willingly pay the Danish government a fifth of a percentage point for Denmark to hold their money.

True, this isn’t a unique event. But it’s exceedingly rare. Though maybe becoming less so.

Switzerland made aggressive use of negative interest rates during the 1970s, when it was trying desperately to dissuade capital from flooding the country as investors sought a safe haven from the ravages of global inflation and fears of Middle East instability.

Like Denmark, Switzerland is once again struggling against these capital flows, albeit nowadays they’re coming from closer to home.

Market rates on various short-dated Swiss, German and Danish government paper have been negative during the past year. Indeed, what started off as negative rates on the most short-dated bills has been creeping along the yield curve. On Friday morning, yields on the German two-year note, known as the Schatz, dropped to minus 0.01%.

The flip side of these hyper-low yields is high and rising yields across the euro zone’s periphery. Last week’s euro-zone summit helped to calm some market nerves; Spanish and Italian government bonds rallied. But now they’ve started to reverse their gains. Flows are heading from countries where investors fear forced euro-exit to those at the core or which have histories of solid currencies and sound economic policies. Like Germany, Switzerland and Denmark.

So will it work?