As the European Central Bank (ECB) finally gets started on its large-scale bond buyback strategy, many countries that have pegged their currencies to the euro have faced the prospect of drastically dwindling values. While the Swiss government abandoned plans to tie the Swiss franc to the euro in light of the Quantitative Easing, Denmark policy leaders have insisted they will maintain their own pegging.
Further rounds of bond buybacks in the Eurozone could heighten the pressure on the country to scrap its ties with the euro
In an effort to maintain the pegging but avoid a rapid devaluation of the krone has seen the Nationalbank cut interest rates four times during the last three weeks. The rate on bank deposits now sits at – 0.75 percent, a record low for any global economy.
Lars Rohde, the Nationalbank’s governor, told the FT that such a strategy could go on indefinitely. “The main message is that we are ready to do whatever it takes to defend the peg. We have unlimited access to Danish krone and we have no restrictions on our balance sheet.”
However, while Rohde seems insistent on Denmark maintaining the pegging, further rounds of bond buybacks in the Eurozone could heighten the pressure on the country to scrap its ties with the euro. Some analysts believe it might be inevitable, with BNY Mellon currency strategist Neil Mellor telling The Wall Street Journal he felt the bank will “ultimately have to break the peg.”
Ever since 1982, Denmark’s central bank has pegged the krone to the dominant European currency – initially the German deutschemark, before following the euro. A referendum in 2000 over whether to adopt the euro was rejected by Danish voters, but that has not prevented the two currencies maintaining a close link ever since.
The news comes just weeks after ECB Governor Mario Draghi got his wish to start a massive round of quantitative easing that has amounted to €1.1trn worth of bond buying. However, it has not been without a few caveats to placate German opposition, with much of the risk of the quantitative easing being maintained in individual states.
