Denmark is Victorious Defending the Krone: IMF

Welcome to scenic--and financially secure--Denmark.

I don't know what to make of this news for reasons I can briefly explain: The IMF has been among the international organizations at the forefront of liberalizing exchange rates. That is, changing the world's remaining fixed exchange rate regimes into floating ones has been part of its longstanding advocacy since flexible rates supposedly work better in adjusting to global economic conditions and in dealing with economic shocks. On a paper concerning exchange rates, IMF orthodox is pretty much summed up when the authors ask how, when and how fast countries should adopt flexible exchange rates without questioning "whether."

It is this with some consternation that the IMF reports Denmark's success in warding off speculation that it would follow Switzerland in abandoning a currency peg that had become too expensive in holding down the value of their respective currencies against the euro. It's almost like Dick Cheney lauding the lifting of sanctions on Iran. Sure, the IMF may suggest that it dislikes currency speculators betting against currencies, but the speculators' desired outcomes--replacement with a floating rate regime--is welcome. Go figure, then, when the IMF now says that the Danes have become one of the fortunate few to have faced down these vile, faceless speculators:

Three months after Denmark became the target of a speculative attack against its currency regime, the International Monetary Fund says the country’s central bank has gained credibility after forcefully fighting back the onslaught. Policy makers “did a good job of making it clear that the peg would stand and making it clear that it would be unprofitable to speculate against it,” Thomas Dorsey, the IMF’s mission chief to Denmark, said in an interview. “Having for a generation-plus maintained the peg against pressure in both directions, they gain credibility each time and they did it again this time around.”

It’s a rare example of monetary authorities prevailing against the market. Conjecture that Denmark’s euro peg might break spread after Switzerland abandoned its ties to the single currency on Jan. 15. In the ensuing weeks, Denmark cut its main deposit rate to minus 0.75 percent and raised currency reserves by $40 billion to about 40 percent of gross domestic product to deter investors from hoarding kroner.

“It’s impressive how quickly the pressure abated,” Dorsey said. “It seemed to turn off like a light switch, just like it turned on.” Denmark’s currency regime can also withstand structural pressures coming from the country’s bulging current account surplus and a pension industry with a growing need to cover its liabilities, according to the IMF.

So the Danish krone has beaten back speculators. Then again, this feat is not quite remarkable when you have a current account surplus of, oh, 6.3%. 6.3%! What were these speculators thinking of?

The current account surplus, which reached 6.3 percent of GDP last year, is “reasonable” given the “current circumstances,” Dorsey said. “We don’t see anything unusual going on in the economy that would justify a change in the exchange rate assessment, though we would like to see a departure from the past, with growth picking up.” The IMF estimates that the current account surplus will shrink relative to the economy, and account for just 4.5 percent of Danish GDP in 2020 as output grows.

Still, you have to wonder why the IMF seems to regard this development positively when the IMF orthodoxy remains fixed exchange rates = bad, floating exchange rates = good.