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Denmark willing to use capital controls, says advisor


Denmark's central bank is willing to use extreme measures including capital controls to defend its currency peg to the euro, which it considers a "holy" policy, said the head of the Economic Council, a body that advises the government.

Since the Swiss National Bank stunned the market by scrapping its cap on the franc on January 15 there has been upward pressure on the crown as some speculators believe Denmark could be next to change its currency regime.

But Hans Jorgen Whitta-Jacobsen said it was a fallacy to draw parallels with the three-year-old Swiss franc cap because Denmark's central bank had other means available to defend the peg "to the last drop of blood".

"If it takes restrictions on free capital movement for a period to defend the fixed exchange rate, I assess that the central bank would be willing to go that far," Whitta-Jacobsen said.

But he said the central bank's current tools - rate cuts and interventions - should be enough to defend the peg, the cornerstone of Danish monetary policy since the crown was tied to the German mark in 1982.

"I believe it can use the tools it has already used to an unimaginably higher degree, and that would probably be enough," the professor said in an interview on Thursday at Copenhagen University.

If that is not enough, the next step for the central bank would be to buy Danish securities in the market and if that were still not enough it could resort to tougher methods to defend the peg policy which he described as sacred.

Freya Ingrid Morales | Bloomberg | Getty Images

"It is even more holy than free capital movement," he said, adding however that he does not guide or confer with the central bank.

He said the bank also had tools that would impose costs on speculators, although he declined to give details on them.

Whitta-Jacobsen's comments come two weeks after central bank governor Lars Rohde told Reuters the bank would do "whatever it takes" to protect its fixed currency policy.

The Swiss National Bank scrapped its cap shortly before the European Central Bank announced a stimulus program that would have put more pressure on the franc. The SNB built up foreign currency reserves worth 80 percent of the country's gross domestic product by selling francs.

Denmark's central bank spent an unprecedented 106 billion crowns on intervention in January, boosting its reserves to a record high 564 billion crowns.

Analysts say that represents around 30 percent of Danish GDP. Whitta-Jacobsen said that if the peg were to be dropped, the crown could appreciate 10 percent, leading to a loss of 50,000 to 100,000 jobs in the country. Moreover, people would lose faith in central bank policy, which would make it more costly to keep future monetary targets.

He said the buildup in reserves in Denmark had far less risk than for Switzerland because the peg is permanent, so the central bank can buy back crowns at the same value to the euro at which it sold them.

"In the meantime, the central bank will be able to print crowns for free, so to speak, and earn interest on them."

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