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June 22nd, 2012

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Investors are so disillusioned with the Eurozone that they are willing buy Danish government bonds at negative interest rate, thereby paying to be able to lend the government money.

Normally governments raise money by selling bonds to investors and buying them back with interest after a period of time. But this week the government set a Nordic precedent and sold bonds with a -0.8 percent interest rate, meaning that investors are paying the government to hold their money for the two years that the bonds last.

According to Morten Langer, editor in chief of financial weekly Økonomisk Ugebrev, investor willingness to make a small loss on their investments is a reaction to the euro's ongoing problems.

“Investors are buying protection,” Langer said. “There’s a lot of uncertainty about what is going to happen in the Eurozone and fears that Greece and maybe even Spain will have to exit. So investors are taking their money out of the euro and putting it in countries outside the Eurozone that have sound macroeconomic policy.”

This message was echoed by Jan Storup Nielsen, an analyst at Nordea Markets in Denmark.

"The auction shows yet again that we are this safe haven for financial markets," Nielsen told the Wall Street Journal. "The economy is viewed as having very strong fundamentals. For the government it is a very good thing, because even though our debt is rising we can save a lot of money."

Investors have also been aggressively buying the krone in recent weeks, though Langer added that it was less to do with the state of Denmark’s economy – which is sluggish – and rather the lack of faith in Eurozone countries to solve the currency's problems.

Danish votes rejected the euro in a 1998 referendum. Instead the krone is pegged its currency tightly to it, meaning that if the euro cracks after a Greek or Spainish withdrawal, the krone is not likely to be weakened in the same way.

But the increased investment in the krone is strengthening its value against the euro and placing pressure on the Nationalbanken, the central bank, to maintain the tight peg.

“Just because a peg has been in place a long time doesn’t mean it cannot break it. It just means that it’s cheaper,” Stuart Fiertz, president of Cheyne Capital, a London-based hedge fund, told the Financial Times. “If the euro cracks, the pressure to cut the peg will be overwhelming.”

Danish exports could be hit if the Nationalbanken does break the peg and strengthen the krone.