22 PERSPECTIVES ON BUSINESS AND ECONOMICS | VOL 41 | 2023 was rejected by the Danish government, a conclusion worth reconsidering (IMF, 2022). Second, authorities can decrease the 80% LTV ratio cap for borrowers above a certain DSTI or DTI threshold(s), a policy that would increase borrowing costs and limit sensitive borrowers’ ability to overburden themselves. In the scenario where overindebted borrowers are allowed to access ARMs, LTV requirements can also be adjusted in addition to the introduction of a mandatory fixed period (IMF, 2022). Third, even though IOMs make it easier to borrow by deferring full amortization payments and lowering debt service costs, they have several downsides. They create credit risk in the scenario where IOM holders are unable to make a deferred payment. Additionally, they expose them to a drop in housing prices should the value of their home drop to the point where its sale is insufficient to cover their mortgage, potentially leading to foreclosure. Since the end of 2020, the portion of IOMs has risen over 10%. Half of all loans given to new homeowners in 2021 deferred amortization, a value exceeding 66% in the urban areas of Copenhagen and Aarhus. To compound matters, about half of IOMs are extended to highly leveraged households with LTV ratios greater than 60% (DNB, 2021). If the goal is to sustainably reduce risk and debt servicing costs among Denmark’s most leveraged households, retroactively reducing the interest-only period is completely counterintuitive. If all households within the ten-year deferred amortization period were to suddenly switch to fully amortized loans, the percentage of those with a DSTI ratio greater than 40% would increase seven times. The ending of a deferred amortization period leads to, on average, a roughly $2000 reduction in consumption. The combination of this amortization-related shock and rising interest rates stands to drastically change the consumption habits of the most sensitive borrowers. Therefore, the optimal solution with respect to IOMs is not to shorten deferred amortization periods or retroactively negate their protections but to make sure their availability is reserved for the most creditworthy of borrowers moving forward (DNB, 2021). Policy makers in Copenhagen and Aarhus have already denied access to IOMs based on household wealth levels, banning those with negative net wealth. First, these restrictions should be extended on a national DTI basis, excluding those above the four-times threshold. Second, these restrictions currently apply only to ARMs and should, for comprehensiveness, be extended to FRMs (IMF, 2022). DTI-based restrictions serve to limit severe leverage among Denmark’s most financially vulnerable population at a fraction of the macroeconomic cost of their alternatives, but they are not free of costs. The newly limited access to financing for the most leveraged Danes could complicate home ownership. As a result, the implementation of these policies should be accompanied by improvements to the Danish rental system in order to make rental housing affordable and accessible for those who may now be unable to purchase a home. Conclusion Policy action to combat Danish overindebtedness has long been delayed. These relatively near-term and targeted policy recommendations address the most financially sensitive citizens, yet the society at large remains vulnerable to the coming age of hawkish monetary policy. Once the expected recession is completed, Danish financial authorities should expand these restrictions to a progressively lower DTI threshold. The implementation of DTI-based borrowing restrictions will be, like other contractionary fiscal policies, unpopular, inconvenient, and economically and socially restrictive. However, the continuation of the current levels of household debt, while not existentially threatening to the economy and its financial system, stand to substantially hinder millions of Danes. With this understanding, it is the regulators’ responsibility to make the difficult decisions—to restrict access to unsafe leverage, protect citizens from their own risky behavior, and ensure the long-term success of the Danish economy and people. References Amaro, S. (2022). Eurozone inflation hits record high of 10.7% as growth slows sharply. CNBC. Baker, S. (2022, September 1). Danish pension fund ATP posts -36.4% return, $8 billion loss in first half of 2022. Pensions & Investments. Bech, S. L., Hviid, S. J., & Mikkelsen, J. G. (2021, November 2). Measuring household interest-rate sensitivity in Denmark. Danish National Bank. Chen, J., Finocchiaro, D., Lindé, J., & Walentin, K. (2020). The costs of macroprudential deleveraging in a liquidity trap. International Monetary Fund. Danske Bank. (2016). Danish covered bond handbook: The handbook of the Danish covered bond market and issuers. Danish National Bank. (n.d.). Denmark’s fixed exchange rate policy. Danish National Bank. (2021, December 2). Financial stability: Increased risks in credit institutions’ housing lending.
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