While unemployment in Denmark is almost the lowest in Europe despite a minimum wage not far below $20 an hour and some of the world’s steepest taxes, the country clearly represents a place where the usual rules tend not to apply.

And as if in line with this, negative interest rates in Denmark seems to have become the normal since 2012 where one can get paid to borrow money and charged to save it.

Negative interest rates – a monetary policy tool once viewed by mainstream economists as approaching apostasy, if not a virtual impossibility, has been the norm in Scandinavia’s third-largest economy with a population of around 5 million and the country seems deep into an unprecedented experiment with it. While homeowners, in some cases, are actually making money on mortgages, companies—though not yet individuals—are paying lenders for the privilege of keeping funds on deposit.

Making the country a long-term petri dish for what happens when the laws of financial gravity are inverted, most private-sector forecasters don’t expect Denmark’s central bank to go positive again until 2018 at the earliest.

If Econ 101 is to be believed, negative rates should have stomach-churning consequences: asset bubbles, capital flight and the frenetic manufacture of very heavy vaults to hold money pulled from banks, although some dovish economists have advocated negative rates as a salve for deflation and anemic growth.

However there aren’t such evidence of such trauma in Denmark. Conversely central banks might find the Danes’ approach tempting. Suggesting negative rates may deserve to move from taboo to the standard monetary policy toolbox, Denmark is mostly free of the distortions economic theory tells us to expect. The takeaway may be that negative rates can work—but only for some purposes and perhaps only if you’re Denmark.

“It’s not the catastrophe that some people would have thought. But you’re playing with fire,” says Erik Nielsen, a Dane and the global chief economist at UniCredit.

While the Danes have been ambivalent toward the European Union and in a 2000 referendum rejected joining the euro, the biggest trading partner for Denmark is Germany.

From 1982 to 1999, the krone – Denmark’s currency, was pegged against the deutsche mark and to the euro thereafter. It is crucial for the Danish economy that its Central Bank maintains the peg. Threatening to push the krone out of its trading band, investors seeking a safe haven piled cash into Denmark as the European debt crisis reached one of its periodic crescendos in 2012. Therefore to reduce the country’s appeal to hot money, there was just one way to go – down, as the benchmark deposit rate was already at 0.05 percent. Hence the aim of the negative rates in Denmark was to drive away speculations unlike Japan where it has been used to spur inflation.

When Lars Rohde took over as the governor of Danmarks National bank, the deposit rate was -0.1 percent; it now stands at -0.65 percent. The peg must be protected, and negative rates are doing that without great disruption, say Rohde.

He says that the central bank “will do whatever it takes to defend the peg”.

“There’s no sharp, disruptive movement when you pass below zero. It’s just working like very low interest rates,” he adds.

(Adapted from Bloomberg)

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