Danish Referendum Delivers Vote Against Joining Euro (Update3)

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Thu, 28 Sep 2000, 7:04pm EDT

Danish Referendum Delivers Vote Against Joining Euro (Update3)

By Heidi Christensen

Copenhagen, Sept. 29 (Bloomberg) -- Denmark voted against joining the euro by an unexpectedly wide margin of 53.1 percent to 46.9 percent, a decision that analysts said could undermine confidence in the European currency.

``This is not what we wanted,'' said Danish Prime Minister Poul Nyrup Rasmussen, who has championed the cause of tying the economy to the euro-11 region since announcing the referendum in March. About 87.5 percent of the electorate voted.

The decision to retain the krone could fan resistance in the U.K. and Sweden to closer European integration and weaken the regional currency, which has lost a quarter of its value since its debut. The euro zone, covering 292 million people from Finland to Portugal, embraces Greece in January.

``The markets have already given their verdict on the euro since January 1999 and the Danish people have not spoken only for themselves, but for others throughout Europe who oppose this project,'' said Martin Holmes, chairman of the euro-skeptic Bruges group.

The euro, which has shed a quarter of its value against the dollar and yen since its debut, slipped to 87.91 U.S. cents from 88.34. Central bank officials, which bought euros last Friday to support the currency, have said they'd be prepared to step in again to stem losses.

For Denmark, which would have been the eighth-largest economy in the euro region, the decision will result in even higher borrowing costs for its companies such as ISS A/S. Businesses borrowing kroner on the money market already pay almost 1 percentage point more than their euro counterparts.

Rate Rise Ahead

The krone was little changed close to one-week lows of 7.4630 per euro. Analysts expect the central bank will raise borrowing costs as much as 100 basis points to protect the currency and deter investors from selling Danish assets.

Foreign investors own more than a third of Danish government securities.

``We will respect the decision and we are determined to defend the krone,'' said Nyrup Rasmussen.

The day after Denmark in 1992 rejected the Maastricht treaty, which set the blueprint for forging the common European currency, Danmarks Nationalbank raised its key lending rate by 60 basis points. The rate is currently 5.1 percent. The European Central Bank's refinancing rate is 4.5 percent.

``We'll see the Nationalbank hiking rates by 9 a.m.,'' said Steen Groendahl, senior strategist at Nykredit Markets.

``I'm totally confident that both Danish and foreign buyers will come into the market further down the line if spreads widen.''

As well as increasing lending costs, the vote scuppers the likelihood of the U.K. and Sweden joining the euro anytime soon.

``Sweden will probably take longer to hold a referendum now, and the chances are higher that they will stay out as well,'' said Sander Haaijer, an investment strategist at Effectenbank Stroeve in Amsterdam. ``Ultimately, this goes for Britain as well, although their situation is further out in the future.

Swedish Debate

While neither country has said when it will hold a referendum on the issue, today's vote will discourage U.K. Prime Minister Tony Blair and Swedish Prime Minister Goeran Persson from trying to convince their electorates to ditch the pound and the krona. Opinion polls in both countries show a majority in favor of retaining their national currencies.

``Of course the result will affect our debate initially,'' Persson said in an interview with Rapport television news.

The U.K., the second-largest economy in the 15-nation European Union, faces isolation from taking part in discussions on EU policy. Sweden would have to juggle its six-month EU presidency that starts in January with the knowledge that it's unlikely to hold a referendum on tying its economy to the euro region.

That could raise concern weaker economies such as Greece, the EU's poorest country and with a record of double-digit inflation, will hamper the euro region. Even larger economies such as France, Germany and Italy are yet to achieve sustainable budget balances. Denmark, Sweden and the U.K. all boast budget surpluses.

Small Country

To be sure, adding Denmark to the euro fold would have had a minor effect on the region's gross domestic product. Denmark, with 5.3 million people, would generate 2.6 percent of the area's GDP.

The International Monetary Fund expects the U.S. economy to grow 5.2 percent this year, slowing to 3.2 percent next year. The lender sees EU growth at 3.5 percent this year and 3.4 percent in 2001.

If the larger, richer Northern economies remain outside the euro region, the EU is unlikely to garner much support to include Eastern European countries that are still rebuilding their economies after years of communist rule. And to the north, oil- rich Norway remains divided about whether to join the bloc, even before today's decision by its Danish cousins.

Rejection will ``delay the whole expansion process in the European Union,'' said Tomas Jelf, currency strategist at Lehman Brothers International.

Danish Markets

Danish two-year bond yields fell to 5.72 percent from 5.79 percent. They have yielded more than 10-year debt since May amid concern rejection will prompt the central bank to raise borrowing costs to shield the krone.

The two-year spread to Germany, currently 65 basis points, will widen to 82 basis points in case of a no, according to a survey of 48 Danish and foreign investors by Greens for Nykredit Markets. As many as 79 percent of investors set up their positions two days before the referendum. About 35 percent will change their portfolios as soon as Friday, the survey said.

Whereas resistance to the euro is confined to the right wing in the U.K. and to the Left and Social Democratic parties in Sweden, Danish opposition cut across the political spectrum.

The vote reflected concern Denmark's welfare state faces erosion and that Brussels would force the country to abandon its tax-financed pension system. The EU's eight-month boycott of Austria over the inclusion of the far-right Freedom Party in government also cost pro-euro votes, as the move was construed as meddling in a small nation's domestic affairs.

``The Danish people has said enough is enough,'' said Pia Kjaersgaard, leader of the Danish People's Party.

http://quote.bloomberg.com/fgcgi.cgi?ptitle=Top%20Financial%20News&s1=blk&tp=ad_topright_topfin&T=markets_bfgcgi_content99.ht&s2=blk&bt=blk&s=AOdPLBhY3RGFuaXNo

-- Carl Jenkins (Somewherepress@aol.com), September 28, 2000

Answers

Thursday, 28 September, 2000, 21:12 GMT 22:12 UK Euro slides after Danish 'no'

The euro slid on foreign exchange markets after Denmark voted to reject adopting the currency. The euro stuck at $0.8770, $0.70 cents down on its US close on Wednesday, as Danes voted in a referendum to stick by their historic crowns

Denmark's Prime Minister Rasmussen, who had supported the switch conceded defeat in euro referendum by 21.00GMT.

The euro had traded in a tight range around $0.8830 for most of Thursday.

But a steep decline in the euro looked unlikely despite the no'' vote, said traders, who believe the result is already discounted in the currency's value, and are wary of intervention by central banks.

Central banks from European countries, the US, Jpana and Canada last week released some of their foregin exchange reserves to buy euros, taking the currency well clear of its lows of less than $0.85.

Shaky confidence

Trade in the single currency has been nervous since the intervention - the first since the euro was launched in January 1999.

Analysts have said the possibility of fresh support, from the European Central Bank or elsewhere, would keep the markets from challenging the euro aggressively in the immediate future.

"There is no point in intervening if you are not going to continue intervening...It is a long-term project," Mr Miller said.

But some analysts have questioned whether the euro's recovery would be sustained, saying investors would need better reasons to buy the currency than central bank action alone.

The central banks' intervention received the tacit endorsement of the International Monetary Fund, which is meeting in Prague against a background of angry protests over globalisation.

IMF managing director Horst Kvhler, who had earlier suggested the euro was seriously undervalued, said that tracking currency movements was a key part of his organisation's role.

http://news.bbc.co.uk/hi/english/business/newsid_947000/947295.stm

-- Martin Thompson (mthom1927@aol.com), September 28, 2000.


This should put new selling pressure on the Euro.

-- Wayward (wayward@webtv.net), September 28, 2000.

Oh-oh! This is not good for the euro, either near term or long term. The British will probably stay out, too, now.

-- Billiver (billiver@aol.com), September 28, 2000.

What I still don't quite understand is how is all of this going to effect us?

I hope a good, explanatory piece on this subject pops up one day soon.

-- QMan (qman@c-zone.net), September 28, 2000.


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