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Household debt levels soar, but is it a crisis?
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March 2nd, 2014
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Should Denmark be concerned about being a world leader?
Denmark tops the charts in many categories: from being the happiest country to having the most equal income distribution. And for some time now, it has been number one for household debt – a situation that could damage its potential for economic growth. Studies show there is a direct correlation between an increase in household debt and economic growth.
On average, Danes owe their creditors about 310 percent of their incomes – up from 260 percent in 2008. But economically, they are also thriving, and it is normal for debt to rise as living standards increase and there is a shift from saving to spending.
Should we be worried?
Michael Møller, a professor at Copenhagen Business School (CBS), believes there is no need to be worried.
“Denmark is in good shape,” he contended. “Some people will disagree and would like the government to force people to save more, but this number is a sign of a high-functioning market. I see no cause for alarm.”
Møller points out that Denmark´s AAA credit rating is the same as many countries in Europe, and that it can borrow at the same rate as Germany. Additionally, he said, it has low inflation, low interest rates, a peaceful labour market, a current account surplus and is a net creditor to the rest of the world.
Denmark compared with the world
However, Denmark´s household debt level is higher than its Scandinavian neighbours. Sweden has a household debt that measures almost 180 percent – a level the Swedish government and central bank say cannot be permitted to rise. And Norway has recently struggled to create a policy that addresses its 200 percent private debt burden.
Victor Ricciardi, a finance professor at Goucher College in Baltimore, Maryland, contends that there is cause for concern.
“The figure of 310 percent of household debt to income is a very high figure no matter what historical benchmark is applied,” he said.
While Jens Lunde, a business professor at CBS, warned that “the nation can get into a very bad situation if the interest rate increases” and questioned whether Denmark was in “cruise control” and needed to tackle its household debt head-on.
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