As in Ireland, the Danish credit-fuelled bubble appears to be ending in tears, writes Clare MacCarthyin Copenhagen
FOR IRISH readers, the tale of Denmark's slide into the economic doldrums has an eerily familiar ring.
Most of the main ingredients are there: open-handed bankers who doled out credit to all and sundry; reckless consumers who splurged cash on flat screens and new cars; and greedy developers who kept piling up the building blocks without ever pausing to think that somebody, somewhere, would one day have to pay the bill.
And just like at home, the Danish version of boom-bubble-bust seems to be ending in tears.
Earlier this year, Denmark became the first EU country to confirm it was in recession when it announced its second consecutive quarter of negative growth.
A forest of "for sale or rent" signs outside Danish homes and offices is a powerful reminder that the property market has stalled. And shoppers' increasing preference for yellow pack staples, over foie gras and other luxuries, shows that belts are tightening as spending power shrinks.
Danish economists are being unusually blunt about the predicament: "We've ended up in the worst possible scenario that we could have imagined. The stock markets are collapsing and property prices are falling. There's a credit crisis, high energy prices and high interest rates," said Helge Pedersen, chief economist of Nordea, Scandinavia's largest bank.
But all of these ills are shared by a whole swathe of other European countries. Things might be bad in Denmark, but they could be a whole lot worse. And even amid the uncertainty of the ongoing efforts to save the global economy, there remain several reasons to be cheerful in Denmark - for the moment at least.
One of these is unemployment. Figures released by Denmark's state statistics agency last Thursday showed the country's August jobless total at 1.6 per cent - the lowest in over 30 years. While this headline figure was exactly the same as the previous month and thereby halted a three-year spree of continuous job creation, it was markedly different from the 10-year high of 6.3 per cent recorded in Ireland for September.
And even should Danish economists' worst-case scenario of a doubling in the unemployment total within two years become reality, the country's dole queue would still only number 88,000 people.
However, the relatively modest scale of the potential problem would be cold comfort for those people who will actually lose their jobs.
As in Ireland, the indications are that the construction industry is first in line to take a tumble.
Large-scale layoffs have not yet occurred but last week Gelsted Bygningsindustri, a subsidiary of the double-glazing manufacturer Velux, warned its 230 employees that the company might fold because of the credit crunch. "When people suddenly have little or no chance of borrowing money in the bank, very few start building home extensions and our sales of new windows decline," said Gelsted's director, David P Meyer.
The expected slowdown follows an extended period where the construction industry worked to capacity and getting a builder to cross your threshold - even at €60 an hour cash-in-hand - was the stuff of dreams.
Søren Folkersen, a spokesman for the Union of Building Industry workers, says the writing is on the wall. "This will hit right across the construction industry. Our sources indicate that after Christmas we'll see the poorest outlook for new orders we've had for ages."
Folkersen and other industry insiders said this forecast of lost orders and lost jobs made a mockery of the government's focus on a shortage of workers.
Earlier last week, Danish prime minister Anders Fogh Rasmussen began a round of tripartite negotiations with labour bosses and employers to find ways of attracting workers.
A chronic labour shortage - as illustrated by the difficulty of contracting tradesmen - has long been the Achilles heel of the Danish economy.
Employers have complained that Denmark's tight
immigration policies have limited their access to imported labour and stymied their capacity to expand.
After much dallying, the government now appears to be dealing with the labour crunch by tweaking immigration rules and encouraging those Danes
already in jobs to work longer hours.
Some observers say this is a belated response to a problem that will solve itself as the economy gears down. But others, including Jes Asmussen, chief economist at Handelsbanken, a leading Swedish bank, caution that the prospect of a slowdown should not reverse the politicians' efforts to boost the supply of labour.
"A shortage of labour remains a long-term problem for the Danish economy and efforts should still be made to get Danes to work more. Otherwise, the problem of an overheating economy will reappear once the economic cycle swings upwards again," Asmussen said.
Just when the economy will make a definitive turn remains, of course, a moot point.
Remarkably, Denmark appears to have executed a soft landing after the shock of being the first EU member to slide into recession. That recession was as brief as it was mild: a 0.2 per cent dip in GDP in the fourth quarter of 2007 was followed by a 0.6 per cent decline in the first quarter of 2008 - two successive periods of lower growth and the technical definition of an economy in recession.
But the recovery was equally rapid and a pick-up in consumer spending over the next three months nudged the economy back on track with a 0.4 per cent expansion.
This increase in household spending, economists said, was a direct result of the labour shortage. The demand for workers propelled wage growth to its highest rate in seven years and gave people the capacity to spend on new cookers and garages despite higher borrowing costs, accelerating inflation and lower property prices.
While the recovery was welcome, it was still modest, as is the government's prediction for full-year economic growth, which sees 2008 coming in at 1.1 per cent, slowing to 0.5 per cent in 2009.
But this, of course, all hinges on how the credit crunch pans out, particularly with regard to the banking sector. Although not much larger than Ireland, Denmark has about 120 banks, and is therefore one of Europe's most heavily over-banked markets.
Two of these banks - Roskilde Bank and EBH - have already buckled under the pressure of deteriorating balance sheets.
Roskilde, the first of the pair to fail, was bailed out last month by a consortium of 100 Danish financial companies who injected DKR4.5bn (€574 million) after an audit revealed a gaping pit of bad loans in the property sector.
Denmark's rescue mechanism was markedly different to the track chosen by both the US and Ireland, where the governments sought to provide the safety nets.
In Denmark, the government has sought to emphasise the financial sector's accountability in solving its own problems.
"The government has a responsibility for ensuring financial stability but it's important to stress that the sector itself must be part of the solution," said Lene Espersen, Denmark's economy minister.
Real or not, the possibility that more small Danish banks could collapse is worrying a great deal of ordinary savers. And while Brian Cowen magnanimously guaranteed all savings in Irish banks, the Danes have been considerably more circumspect, only raising the ceiling for deposit protection to the equivalent of €50,270 from €40,200.
The relatively low level of protection has sparked a flurry of cash flows between Danish banks as customers seek to limit their holdings in any one bank to the €50,270 ceiling.
It is the larger banks in Denmark - Danske Bank and Jyske Bank, for example - who are being seen as the safer havens and are benefiting from the new cash flows.
"The smaller banks are being drained of liquidity. But some of these smaller banks have well-managed loan portfolios and don't deserve to be landed in trouble because of customer withdrawals," said Søren Nicolaisen of the Federation of Small and Medium Enterprises.
But despite accelerating apprehension about the magnitude of Denmark's economic problems and its implications, pockets of typically Danish irrational exuberance remain. Although the country faces a demographic time bomb in the form of a rapidly ageing population, most Danes remain convinced that their cradle-to-grave welfare system can shield them from a global meltdown.
This confidence in their system may be part of the reason the Danes so quickly started spending their way out of recession earlier this year.
It might also explain why, with an even bigger crisis now looming, many Danes are content to carry on as usual: 86 per cent of the population took a summer holiday this year, and of these, 61 per cent said they had spent the same or more money than in the previous year.
So far, there's no indication yet that anything will be different next summer.
