Morgan Stanley warns that the world is revisiting the “ghosts of the 1930s” as one country after another tries to steal a march on others by devaluing first. Sweden has cut interest rates below zero and launched quantitative easing to fight deflation, becoming the latest Scandinavian state to join Europe’s escalating currency wars. The Riksbank caught markets by surprise, reducing the benchmark lending rate to minus 0.10pc and unveiled its first asset purchases, vowing to take further action at any time to stop the country falling into a deflationary trap.
The bank presented the move as precautionary step due to rising risks of a “poorer outcome abroad” and the crisis in Greece. Janet Henry from HSBC said the measures are clearly a “beggar-thy neighbour” manoeuvre to weaken the krone, the latest such action in a global currency war that does little to tackle the deeper problem of deficient world demand. The move comes as neighbouring Denmark takes ever more drastic steps to stop a flood of money overwhelming its exchange rate peg to the euro and tightening the deflationary noose.
The Danes have cut rates four times to minus 0.75pc in a month to combat fall-out from the European Central Bank’s forthcoming QE. They have even taken the unprecedented step of halting all issuance of government bonds. Jens Nordvig from Nomura said the Danish central bank has spent €32bn so far this year intervening in the exchange markets to defend its euro peg in the Exchange Rate Mechanism, almost 10pc of GDP. “This is the fastest pace of reserve accumulation by the Danish National Bank in its history. There is no doubt that the pressure on the krone is very significant, and that the fight for the peg will be tough,” he said.
Steen Jakobsen from Saxo Bank said a rupture of Denmark’s euro-peg would be dangerous since the country’s private pension system is heavily invested in EMU bonds and assets, yet its liabilities are in Danish krona. “There is a currency mismatch which could leave some of these pension funds technically insolvent. I wager that if push comes to shove, Denmark would rather join the euro than allow a 10pc revaluation. It could happen very fast if things come unhinged in Greece,” he said. The fall-out from QE in Europe has already smashed Switzerland’s currency defences, triggering a 14pc surge in the franc against the euro and threatening to erase the last safety buffer for struggling Swiss exporters.
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