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Draghi Stimulus Draws Danish Pledge on Limitless Peg Defense

As Mario Draghi tries to pump as much as 1 trillion euros ($ 1.23 trillion) of liquidity into the euro area, a little nation on Europe’s northern rim is preparing its defense of a 30-year-old currency regime.

The unprecedented stimulus push by the European Central Bank president promises to test the euro peg in Denmark, where the benchmark interest rate is already below zero. Should ECB measures weaken the euro, Deputy Governor Per Callesen says there is basically no limit on how far Denmark is willing to go to defend the krone’s peg to Europe’s single currency.

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Denmark, which resorted to negative rates for the first time in July 2012 to fight back a capital influx into its AAA-rated markets, is now bracing itself for the next chapter in uncharted central bank territory. Its experience in 2012 showed that extreme measures will frighten off speculators and underscore credibility in the bank’s policies, Callesen said.

“It doesn’t pay to speculate against the Danish currency,” he said in an interview. “Everybody who has made that attempt over the last 30 years hasn’t been successful.”

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For now, Denmark’s central bank is trying to anticipate how Draghi’s next step will feed through to markets. The ECB is said to be preparing a quantitative easing package to be discussed at the next monetary policy meeting on Jan. 22.

Draghi is trying to boost the ECB’s balance sheet toward early-2012 levels, when it was about 3 trillion euros compared with 2 trillion euros now, through offering long-term loans as well as purchasing covered bonds and asset-backed securities.

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Money Markets

The currency impact will come if Draghi’s measures feed through to money market rates, Callesen said.

Denmark’s central bank cut its deposit rate to minus 0.05 percent in September. Its lending rate is 0.2 percent. The bank targets a krone rate of 7.46038 against the euro with an official tolerance band of 2.25 percent. In practice, the krone has never strayed more than 1 percent from the target since 1999.

The krone traded as low as 7.4393 per euro as of 8:27 a.m. in Copenhagen, its weakest since Nov. 10, based on closing prices.

The Danish central bank will probably cut its deposit rate by 10 basis points before the end of the first quarter, Danske Bank A/S, Denmark’s biggest lender, said on Dec. 5.

“We haven’t tested interest rates below minus 0.2 percent,” Callesen said. “But it remains to be seen if that will ever be necessary.”

To contact the reporter on this story: Peter Levring in Copenhagen at [email protected]

To contact the editors responsible for this story: Jonas Bergman at [email protected] Tasneem Hanfi Brogger, Craig Stirling

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