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28 Nov 2018 – Insights

Danish households are resilient despite record debt levels

Danish households have one of the highest gross debt levels in the world. However, that is only one side of the equation, explains Danske Bank’s private economist Louise Aggerstrøm Hansen.

Standing at 280 per cent of net disposable incomes, no other OECD has more indebted households than Denmark. However, that is only one side of the equation, as high debt levels are balanced by large assets.

In fact, Danish households’ financial assets alone are more than twice the size of their financial liabilities. 

Thus, the large debt is not a consequence of overconsumption by Danish households. It should be seen in the light of the significant build-up of both financial and non-financial assets that has taken place in recent decades – notably pension savings.

Louise Aggerstrøm Hansen

Private economist, Danske Bank

No need to be debt free
Since the late 1980s, Danes have built substantial pension assets, assets that ensure that the vast majority do not need to be debt free when leaving the labour market. Pension savings are personal but typically mandatory in Denmark. The mandatory savings contributions have been increased significantly since the late 1980s when the pension system was reformed. The savings rate is typically 10-15% of gross income. 

Unique og flexible mortage system
The large balance sheet for Danish households should also be viewed in light of the low-cost flexible mortgage system. These are factors largely unique to the Denmark, which might also explain why it tends to attract some international attention. 

Substantial financial assets and liabilities make the Danish economy more interest rate sensitive than other countries. This allows monetary policies to pass through more effectively – a good thing, if interest rates are in line with the Danish business cycle – a problem if they are not.





Economic shock – then what?
Another disadvantage of the significant assets and liabilities is that the assets are to some extent illiquid. This means that if households are hit by an economic shock, they may have difficulty in adapting their household finances, as pension assets are less liquid than e.g. housing liabilities.

However, If we exclude pension savings from households’ assets, net assets are still positive but the level is close to zero.