Danmarks Nationalbank Report and Accounts

2005 10-02-2006 13:59:59 L S B A N K 2 0 5 K N A B D A N M A R D K A T N I O N A Danmarks Nationalbank Report and Accounts

Danmarks Nationalbank Report and Accounts 05 Havnegade 5 DK-1093 Copenhagen K Danmarks Nationalbank Telephone +45 33 63 Telephone Fax +45 33 63 71 03 [email protected] E-mail: www.nationalbanken.dk aab_DK_06.indd 1 Report and Accounts 2005

REPORT AND ACCOUNTS 2005

At the meeting of the Board of Directors held on 20 March 2006 the Board of Governors reported on the activities of Danmarks Nationalbank. The report was noted. Danmarks Nationalbank's accounts for 2005 were submitted by the Board of Governors for adoption on the recommendation of the Committee of Directors. The Board of Directors and the Royal Bank Commissioner accepted the recommendation.

This Report is based on information available up to 2 March 2006.

The small picture on the front cover is a section of the fairy tale coin "The Little Mermaid", which is the second coin in a series of five with fairy tales as their common theme. The motif was designed by the sculptor Tina Maria Nielsen.

Text may be copied from this publication provided that Danmarks Nationalbank is specific- ally stated as the source. Changes to or misrepresentation of the content are not permit- ted.

The Report and Accounts is available on Danmarks Nationalbank's website: www.nationalbanken.dk under Publications and can be ordered by filling in the form on Danmarks Nationalbank's website.

The Report and Accounts 2005 is also available on request from: Danmarks Nationalbank Information Desk Havnegade 5 DK-1093 Copenhagen K Telephone: (+45) 33 63 70 00 (direct) or (+45) 33 63 63 63 Office hours: Monday-Friday 9.00 am-4.00 pm. E-mail: [email protected]

Explanation of symbols: - Magnitude nil 0 Less than one half of unit employed • Category not applicable … Data not available Details may not add because of rounding.

Datagraf, Auning A/S ISSN 1397-520x ISSN (Online) 1398-3849

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Contents

FOREWORD ...... 9

REPORT OF THE BOARD OF GOVERNORS

SUMMARY ...... 13

THE DANISH ECONOMY International background ...... 16 The Danish economy ...... 20 Wage and price trends ...... 24 Credit expansion ...... 26 Economic prospects ...... 27

MONETARY AND EXCHANGE-RATE POLICY The framework of the fixed-exchange-rate policy ...... 29 The ECB's monetary policy ...... 31 The monetary and foreign-exchange policy of Danmarks Nationalbank ...... 32 The money market and the short-term interest rates ...... 37

FINANCIAL MARKETS Interest rates ...... 40 Foreign-exchange markets ...... 44 Stock markets ...... 47

THE DOMESTIC FINANCIAL SYSTEM Banks ...... 51 Mortgage-credit institutes ...... 53 Investment associations ...... 53 Pension companies ...... 54 The bond market ...... 55 Agreement on new capital-adequacy rules in the EU ...... 56 Himmerlandsbanken ...... 57 Memoranda of Understanding ...... 58

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BANKNOTES AND COINS Banknotes and coins in circulation ...... 60 Upgrading of banknotes ...... 61 New banknote series ...... 62 Counterfeit banknotes ...... 62 Fairy tale coins ...... 63 Tower coins ...... 64 2005 coin set ...... 64 Faroese banknote series ...... 65

PAYMENT SYSTEMS Development in payment and settlement systems ...... 67 Oversight ...... 69 Infrastructure for krone-denominated payments ...... 70 Infrastructure for euro-denominated payments ...... 70

INTERNATIONAL MONETARY COOPERATION Period of reflection in the EU ...... 73 Non-EMU member states ...... 74 Future enlargements of the EU ...... 76 The Stability and Growth Pact ...... 76 Discussion of the IMF's future development ...... 80 Debt relief from IMF to poor countries ...... 81 Lending by the IMF ...... 83 The IMF's macroeconomic and financial surveillance of Denmark ... 85

ORGANISATION AND TASKS OF DANMARKS NATIONALBANK Danmarks Nationalbank's objectives and values ...... 87 Danmarks Nationalbank's management ...... 89 Departments ...... 91 Staff ...... 95 Lectures ...... 98 Other initiatives in 2005 ...... 98 Representation on committees, etc...... 101 Representation in international organisations ...... 101 Danmarks Nationalbank's Anniversary Foundation of 1968 ...... 103 Danmarks Nationalbank's guest apartments at Nyhavn 18 ...... 104 The Erik Hoffmeyer Travel Grant Foundation ...... 104

RISK MANAGEMENT Operational risk ...... 105 Danmarks Nationalbank's management of financial risks ...... 106

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DANMARKS NATIONALBANK'S ACCOUNTS FOR THE YEAR 2005

REPORT ON DANMARKS NATIONALBANK'S ACCOUNTS Presentation of Danmarks Nationalbank's accounts ...... 118

APPENDIX

Press releases ...... 136 Danmarks Nationalbank's publications ...... 152 Danish bank holidays other than Saturdays and Sundays ...... 154

APPENDIX OF TABLES ...... 155

Charts

Chart 1 Growth in the gross domestic product, GDP ...... 17 2 Contribution to growth ...... 21 3 The balance of payments ...... 23 4 Wage increases in Denmark and abroad ...... 24 5 Nominal and real effective krone rates ...... 25 6 Increase in consumer prices and IMI ...... 25 7 Growth in lending by banks and mortgage-credit institutes ...... 26 8 Borrowing by households from Danish banks and mortgage-credit institutes ...... 27 9 Krone vis-à-vis euro ...... 30 10 The ECB's interest rates and short-term money-market interest rate in the euro area ...... 31 11 Lending rates of the ECB and Danmarks Nationalbank ... 32 12 Capital imports related to portfolio investments ...... 33 13 Net position of the monetary-policy counterparties vis-à-vis Danmarks Nationalbank ...... 36 14 Interest-rate spreads to the euro area in the money market ...... 37

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Chart 15 The discount rate and the bank's average lending rates ...... 38 16 10-year yields in the USA, the euro area, Japan and the UK ...... 40 17 10-year yield spreads to the euro area ...... 43 18 Credit spreads for bonds from the euro area ...... 43 19 Dollar and yen vis-à-vis euro ...... 45 20 Pound sterling, Norwegian krone and Swedish krona vis-à-vis euro ...... 47 21 Stock indices for the USA, the euro area, the UK and Japan ...... 48 22 Stock indices for Denmark, Sweden and Norway ...... 50 23 Annual growth in deposits and lending ...... 52 24 Assets of investment associations by fund type, year-end ...... 54 25 Premature redemptions of mortgage-credit bonds and bond yields ...... 56 26 Banknotes in circulation ...... 61 27 Counterfeit banknotes found in circulation ...... 62 28 Estimated budget deficit and debt in EU member states in 2005 ...... 79 29 Outstanding IMF lending, year-end ...... 83 30 Gold price and exchange rates ...... 111

Tables in the text

Table 1 Key figures for the Danish economy ...... 20 2 The Danish labour market ...... 23 3 Intervention by Danmarks Nationalbank in the foreign-exchange market ...... 34 4 Lending to residents by mortgage-credit institutes by loan type ...... 53 5 Outstanding volume of listed domestic krone-denominated bonds, nominal value ...... 55 6 Payments in kroner ...... 68 7 Payments in euro ...... 68 8 Staff turnover rate ...... 96

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Table 9 Staff groups ...... 97 10 Interest-rate exposure of Danmarks Nationalbank ...... 108 11 Foreign-exchange exposure of Danmarks Nationalbank ... 109 12 Danmarks Nationalbank's value-at-risk ...... 110 13 Danmarks Nationalbank's loss in stress scenarios, end-2005 ...... 112 14 Total credit exposure on the foreign-exchange reserve and the domestic securities portfolio, etc., end-2005 ...... 114

Boxes

Box 1 The international development in housing prices ...... 22 2 Description of the current-account-limit system ...... 35 3 Danmarks Nationalbank's monetary-policy instruments ... 36 4 Revaluation of the Chinese currency ...... 46 5 Oil and petrol prices and energy-related stocks 2005 ...... 49 6 Fairy tale coins ...... 63 7 Tower coins ...... 64 8 Coin set for children ...... 65 9 The complete Faroese banknote series ...... 66 10 Exchange-rate regimes and target dates for euro area membership for non-EMU member states ...... 75 11 Overview of significant amendments to the Pact ...... 78 12 The IMF's medium-term strategy ...... 81 13 The Multilateral Debt Relief Initiative, MDRI ...... 82 14 Overview of IMF visits to Denmark in 2005 and 2006 ...... 85 15 The Board of Directors of Danmarks Nationalbank, 1 March 2006 ...... 90 16 The Committee of Directors of Danmarks Nationalbank, 1 March 2006 ...... 91

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Appendix of Tables

Table 1 Annual accounts and monthly balance sheets of Danmarks Nationalbank ...... 156 2 Specification of banknotes in circulation ...... 160 3 Specification of coins in circulation ...... 160 4 Loans financing decentralised banknote holdings ...... 161 5 The banks' and mortgage-credit institutes' net position with Danmarks Nationalbank ...... 162 6 Money stock ...... 163 7 The official interest rates of Danmarks Nationalbank .... 164 8 a The official interest rates of the European Central bank ...... 165 8b Eurosystem monetary-policy operations allotted through tenders ...... 165 9 The foreign-exchange reserve ...... 166 10 Denmark's account with the International Monetary Fund ...... 167 11 Central rate and fluctuation band vis-à-vis euro in ERM II ...... 167 12 Exchange rates ...... 168

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Foreword

Danmarks Nationalbank is the central bank of Denmark. Danmarks Nationalbank was established in 1818 and has been a self-governing institution since 1936. The legal basis for Danmarks Nationalbank's activities is the Danmarks Nationalbank Act of 1936, according to which Danmarks Nationalbank's objective is to maintain a safe and secure currency system in Denmark, and to facilitate and regulate the traffic in money and the extension of credit. In its formulation of monetary policy Danmarks Nationalbank is independent of the Folketing (Parliament) and the Government.

The Report and Accounts of Danmarks Nationalbank comprise a presentation and description of Danmarks Nationalbank's Accounts for the year 2005, and the Report of the Board of Governors. The Report of the Board of Governors presents recent trends in the Danish economy, the monetary and foreign-exchange-rate policy and the development in financial and foreign-exchange markets, as well as a review of international monetary cooperation, together with Danmarks Nationalbank's other areas of operation and its organisation.

In the quarterly monetary reviews Danmarks Nationalbank publishes articles on recent trends in a number of areas – including the Danish economy, monetary policy, financial conditions, statistics, banknotes and coins, payment systems, the euro and cooperation within the EU. Articles related to research and development work, often still ongoing, are published electronically as Working Papers. Moreover, Danmarks National- bank assesses the stability of the Danish financial sector in the annual Financial Stability publication.

Copenhagen, 2 March 2006

Nils Bernstein Torben Nielsen Jens Thomsen

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Report of the Board of Governors

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Summary

The economic upswing in Denmark became even stronger in 2005. GDP grew by 3.4 per cent, against 1.9 per cent in 2004. Private consumption rose considerably as a result of higher disposable incomes, low interest rates, new loan products and accelerating housing prices. Housing prices increased by 22 per cent for the full year. Exports and imports rose significantly, and the current-account surplus remained high. At 1.7 per cent, inflation was still low.

The upswing is set to continue in 2006. Growth in private consumption is likely to be high, and if property prices continue to rise this will stimulate consumption further. Residential and non-residential investments will be at a high level, and exports will be positively affected by sound growth in the export markets. Although Danmarks Nationalbank's raising of its interest rates in recent months may to some extent dampen demand, there is still a risk of the economy overheating. If the positive development is to continue, fiscal policy must not contribute to increasing demand.

There was a large government surplus in 2005 as a result of the favourable cyclical development, as well as extraordinarily high revenue from the taxation of pension yields and from oil and gas activities in the North Sea. Growth in government consumption diminished, but at 1.3 per cent still exceeded the government's target. The implementation of the local-government reform in 2006 will require further management of expenditure if the target for government consumption is to be met. Since the surplus is partly of a temporary nature, and as there are increasing capacity problems in the labour market, the surplus should be used solely to reduce government debt.

Unemployment fell significantly during 2005, and by the end of the year was back at the low level seen in 2001. Employment rose by approximately 17,000. Unemployment is expected to decline further. In the construction industry and the financial sector there is already a considerable shortage of labour, and the labour market councils expect more bottlenecks in 2006. So far, accelerating wage increases have not been registered, but the labour market should be monitored closely.

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The strong economy gives scope to expand the workforce, but without labour-market reforms, including measures that take rapid effect, it will be hard to achieve a sustained increase in employment. A solution would be to employ labour from e.g. eastern Europe and Germany. This has helped to ease the pressure on the labour markets in countries such as Ireland, the UK and Norway.

The profits of the Danish banks and mortgage-credit institutes increased substantially again in 2005. The largest banks achieved a return on equity after tax of around 18 per cent, compared to 15 per cent in 2004. This improvement is, among other things, attributable to the favourable cyclical position, which contributed to high growth in lending and a sustained low level of losses, as well as considerable remortgaging activity.

The upswing in the global economy continued in 2005, but at a lower rate than in the preceding year. US growth was sound, while growth in the euro area did not pick up until the 2nd half-year. The high rate of global growth and China's integration into the global economy exerted upward pressure on oil prices, but did not seriously affect the development in prices for other products or in wages.

The Federal Reserve continued to raise the fed funds target rate. It was increased on nine occasions, from 2.25 per cent in January 2005 to 4.50 per cent in January 2006. Against expectations of higher inflationary pressure in the future, the European Central Bank, ECB, raised its key interest rate by 0.25 percentage points in December 2005 and in March 2006, to a total of 2.50 per cent.

Even though monetary policy was tightened in the USA, the US 10-year yield remained by and large unchanged over the year. The equivalent euro area yield fell as a consequence of uncertainty concerning the future development of the European economy. The higher level of interest rates in the USA contributed to strengthening the US dollar against the euro, pound sterling and yen.

The krone remained stable vis-à-vis the euro again in 2005, at a level close to its central rate. Danmarks Nationalbank sold foreign exchange net for around kr. 18 billion in 2005 in connection with intervention to stabilise the exchange rate. The foreign-exchange reserve was kr. 212 billion at the end of 2005, but fell to kr. 182 billion at the end of February 2006 as a result of intervention.

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In response to the ECB's raising of its interest rates, Danmarks National- bank raised its lending rate, discount rate and current-account rate by 0.25 percentage points in December 2005 and in March 2006. In addition, the lending rate was raised by 0.10 percentage points in February 2006 following an outflow of foreign exchange. After the increase on 2 March, the lending rate was 2.75 per cent, while the discount and current- account rates were 2.50 per cent.

Cyprus, Latvia, Malta and Slovakia joined ERM II in 2005, which means that seven of the ten new EU member states are now ERM II participants. The participation of the new currencies does not entail any adjustment of the terms for the Danish krone.

The process to ratify the Constitutional Treaty for the EU was suspended after the Treaty was rejected by referenda in France and the Netherlands in the early summer of 2005. In March 2005 the EU member states agreed on a reform of the Stability and Growth Pact. According to the European Commission's estimate, 11 member states, including five euro area member states, exceeded the Treaty's 3-per-cent limit for government budget deficits in 2005.

By agreement with Denmark, the IMF began an assessment of the Danish financial sector (FSAP), equivalent to the assessments performed in many other member countries. The conclusions are expected to be published in the autumn of 2006.

In 2006, Danmarks Nationalbank will initiate the process to design a new Danish banknote series to replace the existing series from 1997. The first banknote in the new series is expected to be issued in 2009.

To mark the bicentenary of the birth of Hans Christian Andersen, Dan- marks Nationalbank began the issue of a new series of coins with fairy tales as their common theme. In 2005 two fairy tale coins and two tower coins were issued.

Danmarks Nationalbank's accounts for 2005 show a profit of kr. 4.9 billion, compared to kr. 2.8 billion in 2004. This change is due primarily to an increase in value adjustments by kr. 1.9 billion and in other income by kr. 0.8 billion, while net income from interest fell by kr. 0.3 billion. Transfer of kr. 1.2 billion to the Value Adjustment Reserve leaves kr. 3.7 billion for distribution, of which kr. 0.7 billion (20 per cent) is allocated to the General Re- serves and kr. 3.0 billion (80 per cent) is payable to the central government.

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The Danish Economy

In 2005, Denmark achieved the highest economic growth for a number of years. Especially domestic demand made a substantial contribution to growth. At the same time, exports and imports increased considerably, and the current-account surplus remained high. Employment rose, unemployment fell, and the labour market tightened. The rate of wage increase remained subdued, while inflation was pushed up by higher energy prices. The favourable economic development, combined with extraordinarily high revenue from the taxation of pension yields and from oil and gas activities in the North Sea, resulted in a large government surplus. The strong demand entails a risk of the economy overheating. If the positive development is to be maintained, it is essential that fiscal policy does not contribute to increasing demand. The strong economy gives scope to expand the workforce, but without labour-market reforms it will be hard to achieve a sustained increase in employment.

INTERNATIONAL BACKGROUND1

The upswing in the global economy continued in 2005, although at a lower rate than in the preceding year, cf. Chart 1. Growth in the USA and Japan was sound, while the euro area did not begin to pick up until the 2nd half-year. The high global growth increased demand for oil, and at end-2005 the oil price in dollar terms was 50 per cent above the level one year before. The oil price increase exerted upward pressure on global inflation, but this was not fully reflected in prices for other products or in wages, and inflation expectations also remained firm at a low level.

The USA saw a stable upswing in 2005 and GDP grew by 3.5 per cent. As in the preceding years, growth was driven primarily by sound expansion of private consumption and investments. Private consumption, stimulated by job growth and higher housing prices, rose more than real disposable incomes, and the households' savings ratio was negative. The high energy prices did not significantly affect consumption, and car sales

1 For a number of areas, official full-year figures for 2005 were not available at the time of going to press. Unless otherwise stated, estimates from the OECD, Economic Outlook, no. 78, December 2005, are used in these cases.

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GROWTH IN THE GROSS DOMESTIC PRODUCT, GDP Chart 1

Per cent 6

0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Global USA Euro area Denmark

Note: Real growth in GDP. Source: National statistics and IMF.

rose strongly over the summer. The hurricanes in the autumn only briefly dampened activity. Employment continued to rise, and unemployment fell. Wage increases remained subdued. Inflation, measured by the Consumer Price Index, CPI, accelerated as a result of rising oil prices. In 2005, inflation was 3.4 per cent, against 2.7 per cent in 2004. Core inflation, defined as CPI excluding energy and food, declined marginally during the year and was 2.2 per cent in 2005. The Federal Reserve continued to raise the fed funds target rate in in- crements of 0.25 percentage points, from 2.25 per cent in January 2005 to 4.25 per cent at the end of the year, and further to 4.5 per cent in January 2006. The tightening of monetary policy contributed to the dollar's strengthening. Government finances improved in 2005, and the deficit was 3.7 per cent of GDP, compared to 4.7 per cent in 2004. The main underlying factor was higher tax revenue as a consequence of the favourable economic development. Government debt remained unchanged at around 64 per cent of GDP. Imports were boosted by the strong domestic demand, and the total current-account deficit increased to almost 6.5 per cent of GDP in 2005. Strong demand for dollar-denominated financial assets, particularly from countries in eastern Asia and from oil-producing countries, more than

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Viewed over the full year 2005, growth in the euro area was moderate, and GDP increased by 1.3 per cent. In the 1st half-year, the weak economic development seen in 2004 continued, but growth picked up during the 2nd half-year, primarily driven by exports and investments. Exports were underpinned by sound growth in the global economy and weakening of the effective euro rate. Unemployment fell by 0.4 percentage points during 2005, to 8.4 per cent at the end of the year, and employment rose. The high unemployment in the euro area dampens household consumption.

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Inflation, measured by the EU Harmonised Index of Consumer Prices, HICP, was pushed up by the rising oil prices and remained above 2 per cent for most of 2005, and thus above the medium-term target of below 2 per cent set by the European Central Bank, ECB. Core inflation, determined as HICP excluding energy and food, was stable at around 1.5 per cent all year. In December 2005 and in March 2006 the ECB raised its key interest rate by 0.25 percentage points to 2.50 per cent in the light of expectations of higher future inflationary pressure. The government deficit in the euro area overall was 2.9 per cent of GDP in 2005. In many member states, fiscal-policy consolidation is not sufficiently strong – particularly since the sustainability of fiscal policy is under pressure in view of the ageing populations. According to the European Commission, for the fourth consecutive year France and Germany exceeded the 3-per-cent limit stipulated in the EU Treaty, cf. p. 79. At the beginning of 2006, the euro area's economy is recovering, but the strength of the domestic demand is uncertain. Rising consumer and business confidence in e.g. Germany and Italy indicate that the upswing in consumption and investments will gain momentum. Structural reforms are still required, and it is uncertain whether there will be any significant increase in employment. In the UK, GDP grew by 1.8 per cent in 2005, which was less than in the preceding years. The tightening of monetary policy in 2004 brought down the rate of increase in housing prices from a very high level and thus dampened consumption growth. Against this background, the Bank of England in August 2005 lowered its base rate from 4.75 per cent to 4.50 per cent. The government deficit was 3.1 per cent of GDP. The labour market remained tight, and inflation excluding energy rose to 1.6 per cent in 2005, from 1.1 per cent in the preceding year. The upswing in Sweden continued in 2005. GDP grew by 2.7 per cent, driven mainly by strong domestic demand. Exports increased during the 2nd half-year. In spite of the solid level of activity, employment rose only slightly, wage increases were subdued and inflation was low. In June 2005, Sveriges Riksbank lowered its repo rate from 2.00 per cent to 1.50 per cent. The easing of monetary policy contributed to a weakening of the Swedish krona. The repo rate was raised to 1.75 per cent in January 2006, and to 2.00 per cent in February 2006. In Norway, GDP growth was 2.4 per cent in 2005. Growth was mainly domestically driven, but the growth in employment was moderate. Core inflation was stable at around 1 per cent throughout the year which is below the inflation target of 2.5 per cent. Referring to sound economic growth and expectations of higher inflation, Norges Bank raised its sight deposit rate from 1.75 per cent to 2.25 per cent in the 2nd half-year.

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THE DANISH ECONOMY

The economic upswing in Denmark that set in during 2003 became even stronger in 2005. Compared with the euro area, Denmark is further into the economic cycle. GDP grew by 3.4 per cent, cf. Table 1. Domestic demand made the largest contribution to economic growth, cf. Chart 2. Private consumption was driven by higher disposable incomes, low interest rates, new loan products and accelerating housing prices. Car sales almost reached the record high of 1998. As a result of the consumption growth, the private- sector savings ratio fell. Consumer confidence expanded to a higher level in the autumn than during the upswing in the mid-1990s. Housing prices rose by 22 per cent over the year. This stimulated residential investments, which grew by 13.7 per cent. Equivalent increases in housing prices have been seen in other countries, cf. Box 1. Business investments rose in step with the expansion of capacity utilisa- tion. The growth was especially related to investments in equipment, while the decline in non-residential construction seen in recent years ceased. The private savings surplus declined to 0.1 per cent of GDP in 2005.

KEY FIGURES FOR THE DANISH ECONOMY Table 1

Real growth against the previous year, per cent 2001 2002 2003 2004 2005

Gross domestic product, GDP ...... 0.7 0.5 0.7 1.9 3.4 Private consumption ...... 0.1 1.5 1.6 3.4 3.5 Government consumption and investments ... 2.8 1.5 -0.3 2.2 1.3 Business investments ...... -0.3 0.8 0.4 1.5 6.8 Residential investments ...... -9.3 0.8 11.5 10.5 13.7 Domestic demand, excluding stockbuilding ...... 0.3 1.4 1.3 3.1 4.0 Stockbuilding1 ...... -0.3 0.3 -0.6 0.2 0.1 Domestic demand, total ...... 0.0 1.7 0.6 3.3 4.1 Exports ...... 3.1 4.1 -1.2 2.7 7.9 Imports ...... 1.9 7.5 -1.7 6.4 10.0 Net exports1 ...... 0.7 -1.1 0.1 -1.3 -0.5 Unemployment, per cent of labour force ...... 5.2 5.2 6.2 6.4 5.7 Consumer price index2, percentage growth ... 2.3 2.4 2.0 0.9 1.7 Housing price index3, percentage growth ...... 6.6 2.5 5.4 9.7 21.6 Current account, per cent of GDP ...... 3.1 2.5 3.2 2.3 3.4 Government balance, per cent of GDP ...... 1.2 0.2 -0.1 1.7 3.3 Private savings surplus4, per cent of GDP...... 2.0 2.3 3.3 0.6 0.1

Source: Statistics Denmark. 1 Contribution to growth in GDP. 2 The EU Harmonised Index of Consumer Prices, HICP. 3 Quarterly statistics for prices of single-family and terraced houses published by the Association of Danish Mortgage Banks. 4 Current account minus government budget (rounded).

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CONTRIBUTION TO GROWTH Chart 2

Per cent 4

-1

-2 2001 2002 2003 2004 2005 Net exports Private consumption Government demand Private investments Stockbuilding GDP growth Note: Private investments comprise business and residential investments. The contributions to growth from the individual demand components add up to total GDP growth. Source: Statistics Denmark and own calculations.

The government surplus rose from 1.7 per cent of GDP in 2004 to 3.3 per cent in 2005. The large surplus reflects the favourable economic development, and not least the extraordinarily high revenue from taxation of pension yields and from oil and gas activities in the North Sea. Since the surplus is partly of a temporary nature, and as there are increasing capacity problems in the labour market, the surplus should be used solely to reduce government debt. Growth in government consumption diminished, but at 1.3 per cent still exceeded the government's objective. The implementation of the local-government reform in 2006 will require further management of expenditure if the target for government consumption is to be met. Growth in both exports and imports was substantial. Particularly manufactured exports rose significantly. In contrast to 2004, the surplus on trade in goods excluding energy did not decline in 2005. Improved competitiveness, cf. p. 24, is presumably one factor behind Denmark's gaining market shares in 2005. Import growth was fuelled by strong domestic demand, but also by the considerable imported element in manufactured exports. The current-account surplus totalled kr. 53 billion in 2005, which is kr. 19 billion higher than in 2004, cf. Chart 3. The surplus has been less sensitive to domestic capacity issues than previously, e.g. as a result of the improved terms of trade and rising exports in the shipping sector. The

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THE INTERNATIONAL DEVELOPMENT IN HOUSING PRICES Box 1

In recent years, housing prices have soared in a number of countries, at times by double- digit annual growth rates. This applies to e.g. Denmark, France, Ireland, Norway, Spain, Sweden, the UK and the USA. The households' increasing housing wealth contributes to explaining the rise in consumption in these countries and has presumably been a significant factor behind the current global upswing. The housing market has primarily been driven by the low level of interest rates, but higher disposable incomes and new loan products have also exerted upward pressure on prices. The price increases for housing have been most pronounced in the large cities, where the supply of new building plots is limited. Significant housing price hikes have not been seen in all countries. In Japan, housing prices are still falling as a consequence of a protracted period of deflation, and in Germany housing prices have by and large not risen for the last decade. After a number of years with large housing price increases in the Netherlands, the price development has been relatively moderate since 2002, cf. the Chart. In the UK, where growth in housing prices was previously at a very high level, the tightening of monetary policy in 2004 led to price stabilisation. The tightening of US monetary policy will probably dampen the price development in the USA, but if long- term yields do not rise significantly, prices are hardly likely to fall.

HOUSING PRICE INDEX 1996 = 100 300

280

260

240

220

200

180

160

140

120

100

80 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

USA UK Netherlands Denmark

Note: Quarterly observations. Source: EcoWin and the Association of Danish Mortgage Banks.

balance-of-payments statistics were restructured at the beginning of 2005, making comparisons with previous years subject to some uncertainty. The large current-account surpluses seen in recent years have reduced the external debt, which amounted to 5 per cent of GDP at the end of the 3rd quarter of 2005.

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THE BALANCE OF PAYMENTS Chart 3

Kr. billion 80

-20

-40

-60

-80 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Current account, total Goods Services Interest and transfers, etc.

Note: Current sum of four quarters. Source: Statistics Denmark.

The growth in employment that set in at the beginning of 2004 continued throughout 2005, and the labour market came under pressure. Private-sector employment rose by 20,000, while public-sector employment diminished a little, cf. Table 2. The demand for labour was particularly strong in the service and construction sectors, while employment in manufacturing industry continued to recede. Unemployment

THE DANISH LABOUR MARKET Table 2

1,000 persons, annual averages 2001 2002 2003 2004 2005

Wage and salary earners: Private sector ...... 1,741 1,728 1,708 1,721 1,741 Public sector ...... 824 833 822 817 813 Self-employed ...... 178 182 177 172 173 Total employment ...... 2,743 2,743 2,708 2,710 2,727 Unemployed ...... 145 145 171 176 157 Labour force ...... 2,887 2,888 2,879 2,886 2,884 Activation by job centres ...... 29 28 19 16 19 Transitional allowance ...... 20 16 11 7 4 People under 65 receiving early retirement benefit ...... 111 114 120 127 135 Recipients of leave benefit, including maternity/paternity leave ...... 43 40 42 41 39 Unemployment, per cent of labour force ... 5.2 5.2 6.2 6.4 5.7 Unemployment, EU definition, per cent of labour force ...... 4.5 4.6 5.4 5.5 4.9

Source: Statistics Denmark, Ministry of Finance, Eurostat and own calculations.

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WAGE AND PRICE TRENDS

Seen in relation to the cyclical development, the development in wages was subdued. The rate of wage increase in the private sector was 2.9 per cent for the full year. Since the 2nd quarter of 2004, annual wage increases have been in the range of 3 per cent, compared to around 4 per cent in 1995-2003. Wage increases in manufacturing industry, which is the sector most exposed to competition, were higher than in the euro area for the 10th consecutive year, cf. Chart 4. Danish hourly wage costs are currently among the highest in the world. If Danish enterprises are to be competitive, their product structure must differ from that of low-wage countries, and e.g. be more knowledge-intensive, so that Danish goods and services do not compete directly with output from such countries. A decrease in the effective krone rate improved competitiveness. The krone weakened vis-à-vis a number of currencies, including the US dollar, the pound sterling and the Norwegian krone, but strengthened against the Swedish krona. At the end of 2005, the effective krone rate was approximately 3 per cent below the level at the end of the preceding year, cf. Chart 5.

WAGE INCREASES IN DENMARK AND ABROAD Chart 4

Per cent, year-on-year 6

0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Denmark Euro area Abroad, total

Note: Abroad, total is the countries included in the effective krone rate index. The wage increases are weighted together using the weights of the index. Wage increases in the manufacturing sector. Source: OECD, Statistics Denmark, Confederation of Danish Employers and own calculations.

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NOMINAL AND REAL EFFECTIVE KRONE RATES Chart 5

1980 = 100 112

110

108

106

104

102

100

92 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Nominal Real

Note: The real effective krone rate based on hourly wages in manufacturing industry. The real effective krone rate denotes the development in Danish wages compared in a common currency. Source: OECD, Statistics Denmark, Confederation of Danish Employers and own calculations.

The oil price increases were reflected in inflation in Denmark, which, in HICP terms, was 1.7 per cent in 2005, compared to 0.9 per cent in 2004, cf. Chart 6. Domestic market-determined inflation (IMI), which expresses

INCREASE IN CONSUMER PRICES AND IMI Chart 6

Per cent, year-on-year 5

-1

-2 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Denmark IMI Euro area

Note: IMI is an expression of domestic market-determined inflation in Denmark. Source: Statistics Denmark, Eurostat and own calculations.

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CREDIT EXPANSION

Total lending by banks and mortgage-credit institutes increased in 2005, cf. Chart 7. In December, the annual growth was 15 per cent, against 9 per cent in December 2004. This is not quite as high as the growth in lending seen during the strong upswing in the mid-1980s, but inflation was higher then than today. The increase in lending has gone hand in hand with higher deposits. This is reflected in the development in the money stock, M2, which rose by 15 per cent in 2005 relative to 2004. M2 primarily comprises the deposits with banks of private individuals and business enterprises, as well as their holdings of banknotes and coins. Lending to households grew substantially in 2005 against the background of the escalating housing prices and the low level of interest rates. In recent years the households' interest expenditure has become more sensitive to changes in short-term interest rates as a consequence of the increasing popularity of adjustable-rate loans and bank loans, cf. Chart 8. A proportion of the adjustable-rate loans are capped-rate loans, however, and this type of loan protects borrowers against excessive

GROWTH IN LENDING BY BANKS AND MORTGAGE-CREDIT INSTITUTES Chart 7

Per cent, year-on-year 25

-5 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Note: Total lending to households and the business sector, end of quarter. The most recent observations is from the 4th quarter of 2005. Source: Danmarks Nationalbank.

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BORROWING BY HOUSEHOLDS FROM DANISH BANKS AND MORTGAGE- CREDIT INSTITUTES Chart 8

Kr. billion 1,800

1,600

1,400

1,200

1,000

800

600

400

200

0 2002 2003 2004 2005 Fixed-rate loans Fixed-rate deferred-amortisation loans Adjustable-rate loans Adjustable-rate deferred-amortisation loans Bank loans for housing purposes Other bank loans Note: Year-end. Households include the self-employed. The breakdown by fixed-rate loans, adjustable-rate loans and loans with and without deferred amortisation is partly estimated on the basis of the distribution of mortgage- credit loans by property category and loan type. Fixed-rate loans include index-linked loans. Adjustable-rate loans include capped loans. Source: Danmarks Nationalbank.

increases in interest rates. At the end of 2005, the value of outstanding capped-rate bonds was equivalent to approximately 26 per cent of the total lending at adjustable interest rates by the mortgage-credit institutes.

ECONOMIC PROSPECTS

The cyclical upswing is set to continue in 2006. Growth in private consumption will probably be high and if property prices continue to rise consumption will be stimulated further. The level of residential and business investments will be high, and exports will be stimulated by sound expansion on export markets. However, Danmarks Nationalbank's interest-rate increases in recent months may to some extent dampen demand. Unemployment is expected to decline further, reaching the lowest level for 30 years. In the construction industry and the financial sector there is already a considerable shortage of labour, and the labour market councils expect more bottlenecks in 2006. So far, accelerating wage increases have not been registered, but the labour market should be monitored closely.

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The strong economy gives scope to get more people into employment, but without labour-market reforms, including measures that take rapid effect, it will be hard to achieve a sustained increase in employment. A solution would be to employ labour from e.g. eastern Europe and Germany. This has helped to ease the pressure on the labour markets in countries such as Ireland, the UK and Norway. Increasing the supply of labour can ease the pressure on the labour market and maintain Denmark's competitiveness. The situation does not warrant any easing of fiscal policy. Experience from other countries, including the Netherlands, shows that procyclical fiscal policy may lead to a protracted recession. Consequently, extremely tight management of government expenditure is required. Since the large government budget surplus is partly of a temporary nature, and as there are increasing capacity problems in the labour market, the surplus should only be used to reduce government debt.

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Monetary and Exchange-Rate Policy

Again in 2005, the krone was stable against the euro at a level close to its central rate. Danmarks Nationalbank sold foreign exchange net for around kr. 18 billion in 2005 in connection with intervention to stabilise the krone. The foreign-exchange reserve was kr. 212 billion at the end of 2005. In December 2005 and March 2006, the European Central Bank, ECB, raised its key interest rates. In response to the ECB's interest-rate adjustments, Danmarks Nationalbank raised the lending rate, the discount rate and the interest rate on the current accounts of the monetary-policy counterparties by 0.25 percentage points in December 2005 and by a further 0.25 percentage points in March 2006. In addition, the lending rate was raised by 0.10 percentage points in February 2006 as a consequence of an outflow of foreign exchange. After interest rates were raised on 2 March, the lending rate was 2.75 per cent, while the discount and current-account rates were 2.50 per cent. At the beginning of 2006, Danmarks Nationalbank made a slight adjustment to the framework for the current-account deposits of the monetary-policy counterparties. In 2005 four new member states joined ERM II, the European exchange- rate mechanism. The enlargement of the group of ERM II participants does not entail any adjustment of the terms for the Danish krone.

THE FRAMEWORK OF THE FIXED-EXCHANGE-RATE POLICY

The objective of Denmark's monetary and foreign-exchange policy is to keep the krone stable against the euro. Under normal circumstances the Danish monetary-policy interest rates follow those of the ECB, so that a constant interest-rate spread is maintained. In the event of small fluctuations in the exchange rate, Danmarks Nationalbank can intervene in the foreign-exchange market to buy and sell foreign exchange in order to stabilise the krone. If there is a more prolonged tendency for the krone to strengthen or weaken, Danmarks Nationalbank unilaterally ad- justs its monetary-policy interest rates. Denmark has conducted a fixed-exchange-rate policy since 1982, from 1999 within the framework of ERM II, the European exchange-rate mechanism. ERM II stipulates a fluctuation band for the participating currencies vis-à-vis the euro of +/- 15 per cent around the central rate. As

20-03-2006 11:48:00 Antal sider: 172 Rev. nr. 2 H:\Aarsberetninger\2005\Engelsk\faerdige\Hel.doc Oprettet af Hanne Christensen Report and Accounts 2005 30 a consequence of Denmark's stability-oriented economic policy and the high degree of economic convergence with the euro area, a narrower fluctuation band was agreed when Denmark joined ERM II, whereby the krone may fluctuate by +/- 2.25 per cent around the central rate of kr. 746.038 per 100 euro. For a number of years the krone has been stable at a level close to its central rate, cf. Chart 9. The fixed-exchange-rate policy entails a clear distribution of responsibility for economic policy. Danmarks Nationalbank must ensure the stability of the krone vis-à-vis the euro. The government conducts fiscal policy and other economic policy with the aim of stabilising the economic development in accordance with the requirements of a fixed exchange rate. In 2005, four new member states joined ERM II as part of their preparations to adopt the euro: Cyprus, Latvia and Malta joined in May, while Slovakia joined in November, cf. p. 74. The enlargement of the group of ERM II participants to eight does not entail any adjustment of the terms for the Danish krone. The central rates of the participating currencies are determined solely in relation to the euro. The obligation to intervene if a participating currency reaches one of its fluctuation limits rests exclusively on the central bank of the relevant member state and the ECB.

KRONE VIS-À-VIS EURO Chart 9

Kroner pr. 100 euro 720

730

740

750

760

770 1999 2000 2001 2002 2003 2004 2005

Krone vis-à-vis euro Central rate of the krone Fluctuation band

Note: Daily observations. Reverse scale. Source: Danmarks Nationalbank.

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THE ECB's MONETARY POLICY

The primary objective of the ECB's monetary policy is to maintain price stability. In addition, the monetary policy is to support the general economic policies in the euro area, provided that this does not conflict with the primary objective. The ECB defines price stability as a year-on year increase in the EU Harmonised Index of Consumer Prices, HICP, of below but close to 2 per cent in the medium term. Monetary-policy decisions are based on economic and monetary analyses designed to assess the future risks to price stability. The economic analysis is based on a number of indicators of the real economy and the development in prices, while the monetary analysis among other factors considers growth in lending and the money stock.

Monetary policy in 2005 Consumer prices in the euro area, measured in HICP terms, rose by 2.2 per cent in 2005. The increase was attributable to higher oil prices, which passed through to prices in the autumn especially. Core inflation (HICP excluding energy and food) was around 1.5 per cent in 2005. Eco- nomic activity in the euro area picked up in the 2nd half of 2005, after weak development in the 1st half of the year. At its meeting on 1 December 2005, the Governing Council of the ECB decided to reduce monetary-policy stimulation and raised the minimum bid rate from 2.00 per cent to 2.25 per cent, cf. Chart 10. At its meeting on 2 March 2006,

THE ECB'S INTEREST RATES AND SHORT-TERM MONEY-MARKET INTEREST RATE IN THE EURO AREA Chart 10

Per cent 2.7

2.6

2.5

2.4

2.3

2.2

2.1

2.0

1.9 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb 2005 2006 The ECB's minimum bid rate Marginal rate 3-month money-market interest rate

Note: The last observation for the ECB's marginal rate is 28 February 2006. Source: ECB.

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THE MONETARY AND FOREIGN-EXCHANGE POLICY OF DANMARKS NATIONALBANK

In response to the ECB's decision to raise its minimum bid rate, on 1 De- cember 2005 Danmarks Nationalbank announced that the lending rate would be raised from 2.15 per cent to 2.40 per cent with effect from 2 December, cf. Chart 11. The discount and current-account rates were also raised, from 2.00 per cent to 2.25 per cent. On 17 February 2006, Danmarks Nationalbank raised the lending rate further, to 2.50 per cent. The background was an outflow of foreign exchange in the first weeks of February, among other things as a result of Danish institutional investors' purchases of foreign shares and other securities.

LENDING RATES OF THE ECB AND DANMARKS NATIONALBANK Chart 11

Per cent 6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0 1999 2000 2001 2002 2003 2004 2005

The ECB's minimum bid rate Danmarks Nationalbank's lending rate

Note: Prior to 28 June 2000, the ECB's fixed allotment rate. Source: ECB and Danmarks Nationalbank.

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In response to the ECB's raising of the minimum bid rate, on 2 March 2006 Danmarks Nationalbank raised the lending rate from 2.50 per cent to 2.75 per cent with effect from 3 March. At the same time, the discount rate and the current-account rate were raised from 2.25 per cent to 2.50 per cent. Prior to the raising of interest rates on 2 March, a number of banks and mortgage-credit institutes deposited large amounts to their current accounts with Danmarks Nationalbank. As this meant that the overall limit for current-account deposits was exceeded, kr. 9.1 billion of the total current-account balance was converted to certificates of deposit. The krone was stable vis-à-vis the euro in 2005, cf. Chart 9. In the 1st half-year the krone weakened slightly to a level close to its central rate. Capital flows between Denmark and abroad often entail purchase and sale of foreign exchange against kroner, which can affect the exchange rate in the short term. The krone's weakening in the 1st half of 2005 coincided with an outflow of capital in connection with the insurance and pension sector's purchases of foreign bonds, as well as other sectors' purchases of foreign shares in 2005, cf. Chart 12. In addition, since May 2005 the yield spread between a 10-year Danish government bond and a German government bond with an equivalent term to maturity has mainly been negative. Net purchases of foreign bonds amounted to kr. 105 billion for the full year, while purchases of foreign shares totalled kr. 79 billion. Non-residents purchased Danish bonds for a net kr. 149

CAPITAL IMPORTS RELATED TO PORTFOLIO INVESTMENTS Chart 12

Kr. billion 60

-20

-40

-60 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2004 2005 Net purchases of foreign shares by the insurance and pension sector Net purchases of foreign bonds by the insurance and pension sector Net purchases of foreign shares by other sectors Net purchases of Danish bonds (issued in Danish kroner and foreign exchange) by non-residents Note: Net capital imports are compiled on a net basis. Only selected items are included. Source: Danmarks Nationalbank.

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INTERVENTION BY DANMARKS NATIONALBANK IN THE FOREIGN-EXCHANGE MARKET Table 3

1999 2000 2001 2002 2003 2004 2005 Intervention purchase of foreign exchange, kr. billion ...... 62 21 27 41 25 15 16 Intervention sale of foreign exchange, kr. billion ...... 5 58 4 0 1 28 34 Net intervention purchase of foreign exchange, kr. billion ...... 56 -37 24 41 24 -12 -18 Number of intervention days ...... 65 55 11 35 20 34 35

Note: Compiled by settlement day. Source: Danmarks Nationalbank. billion in 2005, of which kr. 126 billion was denominated in foreign exchange, however. Non-residents' net purchases of Danish krone- denominated bonds may have contributed to supporting the krone. Typically, however, capital flows in connection with Danish bonds have had a smaller impact on the exchange rate than residents' purchases of foreign bonds and shares.1 Direct investments abroad by Danish business enterprises exceeded non-residents' investments in Denmark by approximately kr. 17 billion in 2005. However, there is no direct correlation between the development in the exchange rate and direct investments, among other things since the impact on the exchange rate is often seen when the investment is announced, not when it subsequently takes place. In 2005, Danmarks Nationalbank sold foreign exchange net for around kr. 18 billion in connection with intervention to stabilise the exchange rate, cf. Table 3. After value adjustments, the foreign-exchange reserve was kr. 212 billion at end-2005, but decreased to kr. 182 billion at the end of February 2006 as a result of intervention.

Danmarks Nationalbank's monetary-policy instruments On 2 January 2006, Danmarks Nationalbank adjusted the framework for the current-account deposits of the monetary-policy counterparties. The overall current-account limit was raised from approximately kr. 20 billion to approximately kr. 25 billion. A large part of the increase was attributable to simplification of the system so that the counterparties are now allocated standard limits. This entails that small counterparties are generally allocated higher limits than previously. The raising of the overall current-account limit should also be viewed against the background of the general economic development since the last adjustment of the

1 See Jakob Lage Hansen and Peter Ejler Storgaard, Capital Flows and the Exchange Rate of the Krone, Danmarks Nationalbank, Monetary Review, 2nd Quarter 2005.

20-03-2006 11:48:00 Antal sider: 172 Rev. nr. 2 H:\Aarsberetninger\2005\Engelsk\faerdige\Hel.doc Oprettet af Hanne Christensen Report and Accounts 2005 35 current-account limits in 2003. No counterparties' current-account limits were reduced in connection with the adjustment. The current-account- limit system is described in Box 2. There have been no changes in the other monetary-policy instruments in 2005. Danmarks Nationalbank's monetary-policy instruments are reviewed in Box 3. The extent of monetary-policy lending has increased in recent years. To a high degree the borrowing reflects an increase in the holdings of certificates of deposit of the banks and mortgage-credit institutes, cf. Chart 13. Interest in certificates of deposit has among other things increased in step with an increasing volume of payments related to the refinancing of mortgage-credit loans. Certificates of deposit are

DESCRIPTION OF THE CURRENT-ACCOUNT-LIMIT SYSTEM1 Box 2

In 1999, a ceiling (limit) was introduced for the monetary-policy counterparties' total current-account deposits at the close of the day (i.e. at the close of the monetary- policy day at 3.30 pm). The overall limit is approximately kr. 25 billion, broken down as individual current-account limits for the counterparties. The standard current- account limit for the individual counterparties is kr. 100 million. Counterparties with extensive activity in the money market, which therefore are key contributors to smooth exchange of liquidity, have a supplement to the standard limit. The purpose of the current-account limits is to prevent the build-up of large current-account deposits that may be used for speculation in interest-rate and exchange-rate changes if the krone is under pressure. The current-account limits also contribute to ensuring a well-functioning money market since the counterparties are encouraged to exchange liquidity among themselves. The current-account limits only apply if the counterparties' total current-account deposits exceed the overall limit. In other words, the monetary-policy counterparties may exceed their individual limits, provided that the overall limit is not exceeded. Deposits exceeding the individual limits also accrue interest at the current-account rate for as long as the overall current-account limit is not exceeded. If the overall limit is exceeded at the close of the day, deposits exceeding the individual limits will be converted into certificates of deposit. Conversion is to the certificate with the longest remaining term to maturity. Via extraordinary operations in certificates of deposit, Danmarks Nationalbank contributes to ensuring that the current-account limits do not present a problem in relation to the daily settlement of payments. If there are indications during the day that the current-account deposits at the close of the day will exceed the overall current-account limits, Danmarks Nationalbank normally opens sale of certificates of deposit. This allows the counterparties to adjust their current-account deposits so that the total current-account limit is not exceeded.

1 The current-account limits applying at any time can be seen at Danmarks Nationalbank's website (www.nationalbanken.dk).

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DANMARKS NATIONALBANK'S MONETARY-POLICY INSTRUMENTS1 Box 3

Danmarks Nationalbank makes two facilities available to the banks and mortgage- credit institutes that are monetary-policy counterparties. Firstly, on the last banking day of each week, the counterparties can buy certificates of deposit or raise loans against krone- and euro-denominated government and mortgage-credit bonds as collateral. These transactions normally have a maturity of 14 days, and the relevant interest rates, called respectively the rate of interest on certificates of deposit and the lending rate, are identical. In addition, Danmarks National- bank purchases and sells certificates of deposit as needed, e.g. in connection with fluctuations in central-government payments. Secondly, the counterparties can place funds as overnight current-account deposits. Current-account deposits accrue interest at the current-account rate, which is lower than the rate of interest on certificates of deposit. There is a limit to the counterparties' total current-account deposits, and each counterparty has been allocated a share of the overall current-account limit. The discount rate is a signal rate indicating the overall level of the monetary-policy interest rates. None of the monetary-policy instruments directly accrue interest at the discount rate. Since 1992, when the key principles for the current monetary-policy instruments were introduced, the current-account rate has, however, been identical to the discount rate.

1 For a detailed description of the monetary-policy and foreign-exchange-policy instruments, see Danmarks Nationalbank, Monetary Policy in Denmark, 2nd edition, 2003, and Danmarks Nationalbank's website (www.nationalbanken.dk).

NET POSITION OF THE MONEATRY-POLICY COUNTERPARTIES VIS-À-VIS DANMARKS NATIONALBANK Chart 13

Kr. billion 250

200

150

100

-50

-100

-150 2001 2002 2003 2004 2005

Monetary-policy lending Certificates of deposit Current-account deposits Net position

Source: Danmarks Nationalbank.

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INTEREST-RATE SPREADS TO THE EURO AREA IN THE MONEY MARKET Chart 14

Basis points 16

-2 2004 2005

1 month 2 months 3 months Note: Daily observations. Spread between Cibor and Euribor rates. Source: Danmarks Nationalbank.

part of the liquidity reserve of the banks and mortgage-credit institutes. Danmarks Nationalbank thus contributes liquidity in connection with extraordinary market operations by repurchasing certificates of deposit. Certificates of deposit may also be traded among or mortgaged by the banks and mortgage-credit institutes in order to obtain liquidity via the money market. Since the lending rate and the rate of interest on certificates of deposit are identical, there are no interest costs on borrowing to finance purchase of certificates of deposit.

THE MONEY MARKET AND THE SHORT-TERM INTEREST RATES

In 2005, interest rates in the Danish money market1 generally followed the money-market interest rates of the euro area. The average spread between the short-term Danish money-market interest rates and those of the euro area was around 5 basis points, cf. Chart 14. This was slightly below the spread between Danmarks Nationalbank's lending rate and the ECB's marginal rate. As in previous years, the spread was influenced by the fact that many euro area banks adjusted their balance sheets at

1 The Danish money market is the interbank market for loan agreements and interest-rate derivatives in kroner with a maturity of up to one year.

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THE DISCOUNT RATE AND THE BANKS' AVERAGE LENDING RATES Chart 15

Per cent 12

0 1999 2000 2001 2002 2003 2004 2005

Discount rate Lending, business Lending, households Deposit, business Deposit, households Note: The discount rate is on a daily basis. The other rates are quarterly average rates. The most recent observations are from the 4th quarter of 2005 for average rates and from end-2005 for the discount rate. Source: Danmarks Nationalbank and Statistics Denmark.

year-end. Consequently, the euro-area money-market interest rates rose towards the end of the year as maturities began to extend into the next year.1 However, the effect was less pronounced in 2005 than in 2004. The spread widened in February 2006 after Danmarks Nationalbank raised the lending rate and the rate of interest on certificates of deposit by 0.10 percentage points. The short-term money-market interest rates in the euro area were stable until the end of September. Due to expectations of higher interest rates, the yield curve in the euro money market steepened towards the end of 2005. Cibor (Copenhagen Interbank Offered Rate) is a reference interest rate for uncollateralised krone-denominated lending in the inter-bank market. A number of banks report interest rates to Danmarks National- bank, which calculates and announces Cibor on a daily basis. The rates reported by the individual banks are published by the Danish Bankers Association. In April 2005, the group of banks participating in the fixing of Cibor was extended to include four foreign banks, i.e. a total of 12 banks, and the number of maturities for which Cibor rates are

1 See Kim Abildgren, Jacob Lindewald and Michal Chr. Nielsen, The 10-Year Yield Spread between Denmark and Germany, Danmarks Nationalbank, Monetary Review, 1st Quarter 2005.

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The banks' interest rates Over the year, the banks' average lending rates fell by around 0.4 per cent, while the deposit rates were virtually unchanged, cf. Chart 15. The narrowing of the spread between the lending and deposit rates reflects the increasing volume of loans against real property as collateral, among other factors.

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Financial Markets

Even though monetary policy was tightened in the USA the US 10-year yield remained by and large unchanged over the year. The equivalent euro area yield fell as a consequence of uncertainty concerning the future development of the European economy. The US dollar strengthened vis-à-vis the euro, pound sterling and yen in 2005. Among other things, this reflected the higher level of interest rates in the USA. US stocks increased moderately, while euro area stocks rose substantially, and Japanese stocks rose even more in 2005. As in the preceding two years, the Scandinavian stock markets performed better than the euro area.

INTEREST RATES

The yield on the benchmark 10-year US government bond increased from approximately 4.3 per cent at the beginning of 2005 to approximately 4.4 per cent at end-2005, cf. Chart 16. In the 2nd quarter, the 10- year yield fell, inter alia due to unrest in the market for credit bonds in

10-YEAR YIELDS IN THE USA, THE EURO AREA, JAPAN AND THE UK Chart 16

Per cent 6

0 2003 2004 2005

USA Euro area Japan UK

Note: Weekly observations. For the euro area, the yield on a 10-year German government bond is used. Source: EcoWin.

20-03-2006 11:48:00 Antal sider: 172 Rev. nr. 2 H:\Aarsberetninger\2005\Engelsk\faerdige\Hel.doc Oprettet af Hanne Christensen Report and Accounts 2005 41 the wake of the downgradings of General Motors and Ford, see below. The unrest led to increasing demand for secure government bonds. At the beginning of the 3rd quarter, the tide turned and the yield began to rise, partly in reaction to stronger key indicators and increasing fears of higher inflation as oil prices continued to rise. The Federal Reserve tightened monetary policy on eight occasions in 2005. This raised the fed funds target rate by 2 percentage points in the course of the year, to 4.25 per cent at end-2005. However, this did not have any significant impact on long-term US yields and consequently the yield curve for US government bonds flattened during the year. The spread between the 10- and 2-year yields narrowed by approximately 120 basis points in 2005. The spread continued to narrow and by the end of February 2006 the 10-year yield had fallen below the 2-year yield. In January 2006, the fed funds target rate was raised by a further 0.25 percentage points to 4.50 per cent. In the euro area, the yield on the benchmark 10-year German government bond fell from approximately 3.6 per cent at the beginning of 2005 to approximately 3.3 per cent at end-2005, cf. Chart 16. This led to a widening of the 10-year yield spread to the USA by approximately 50 basis points, to around 110 basis points. The falling yield in the euro area is attributable to uncertainty regarding future economic growth, among other factors. Towards the end of the year there were clearer indications of an upswing. This strengthened the expectations of future inflationary pressure, which contributed to the decision by the European Central Bank, ECB, to raise its key interest rate by 0.25 percentage points in December 2005 and by a further 0.25 percentage points in March 2006. Even though US monetary policy was tightened repeatedly, long-term yields in the USA and in the euro area are still considered to be low. The background includes globalisation effects, low and stable inflation expectations and purchases of government bonds by pension funds and Asian central banks.1 The yield on the benchmark 10-year Japanese government bond remained relatively stable in 2005. At the end of the year, the 10-year yield was approximately 1.5 per cent, cf. Chart 16. The discount rate remained unchanged at 0.1 per cent in 2005, and was last adjusted in 2001. In the UK, the yield on the benchmark 10-year government bond fell from approximately 4.5 per cent at the beginning of 2005 to approximately 4.1 per cent at the end of the year, cf. Chart 16. In the 4th quarter, the 10-year yield was lower than the 10-year US yield, among

1 See Allan Bødskov Andersen, John Hydeskov and Michael Sand, Why Are Long-Term US Yields Low?, Danmarks Nationalbank, Monetary Review, 4th Quarter 2005.

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1 In some respects, the new rules are similar to the "traffic lights" that the Danish Financial Supervisory Authority operates with. The rules governing the Swedish pension and life insurance sector entered into force on 1 January 2006 and leads to an increase in the demand for long-term bonds on the part of the pension and life insurance companies.

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10-YEAR YIELD SPREADS TO THE EURO AREA Chart 17

Basis points 160

140

120

100

-20 2003 2004 2005

Denmark Sweden Norway UK

Note: Weekly observations. For the euro area, the yield on a 10-year German government bond is used. Source: EcoWin.

Credit spreads, i.e. the spread between the yields on, respectively, corporate and mortgage-credit bonds and a secure government bond, have narrowed considerably in recent years, cf. Chart 18. This is attributable among other factors to the falling level of interest rates and thus lower

CREDIT SPREADS FOR BONDS FROM THE EURO AREA Chart 18

Basis points 200

180

160

140

120

100

0 2003 2004 2005

AAA AA A BBB

Note: Aggregate index of liquid euro-denominated bonds. Source: J.P. Morgan and EcoWin.

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FOREIGN-EXCHANGE MARKETS

The US dollar strengthened in 2005 in spite of sustained large balance- of-payments and government budget deficits. Altogether, the dollar strengthened by approximately 11 per cent vis-à-vis the euro and the yen, and by approximately 8 per cent against the pound sterling. At the end of 2005, the exchange rate was 1.19 dollars per euro, and it remained at around this level at the beginning of 2006, cf. Chart 19. The strengthening of the dollar in 2005 should, inter alia, be viewed against the background of the continued tightening of monetary policy in the USA, which has led to a generally higher level of interest rates in the USA than in the euro area and Japan. The uncertainty concerning the economic development in the euro area, and the rejection of the EU's Constitutional Treaty in France and the Netherlands in the early summer, may also have contributed to the dollar's strengthening vis-à- vis the euro. At the end of July, the People's Bank of China announced that it would adjust its fixed-exchange-rate policy vis-à-vis the dollar. This entailed revaluation of the renminbi by 2 per cent against the dollar, cf. Box 4. Subsequently, the dollar weakened marginally against the major currencies for a brief period. This weakening was, among other things, a result of uncertainty concerning China's future strategy in relation to its dollar stock in the foreign-exchange reserve. Viewed over the full year, the Japanese yen remained unchanged against the euro. At the close of 2005, the exchange rate was 139 yen per euro, cf. Chart 19. The relative parities of the two currencies were, however, volatile during the year.

1 General Motors and Ford are among the largest issuers of corporate bonds. Combined, the two companies have an outstanding bond volume of approximately 320 billion dollars, equivalent to approximately 10 per cent of the total outstanding volume of corporate bonds in the USA.

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DOLLAR AND YEN VIS-À-VIS EURO Chart 19

Dollars per euro Yen per euro 1.45 145

1.40 140

1.35 135

1.30 130

1.25 125

1.20 120

1.15 115

1.10 110

1.05 105

1.00 100 2003 2004 2005 Dollars Yen (right-hand axis)

Note: Weekly observations. Source: EcoWin.

In the 1st half of 2005, the pound sterling strengthened by approximately 6 per cent against the euro, cf. Chart 20. The situation reversed in the 2nd half-year, and sterling weakened briefly, while the development in the rest of the year was relatively stable. Over the full year sterling appreciated by approximately 3 per cent, to 0.69 pounds sterling per euro at the end of 2005. The Swedish krona weakened by approximately 4 per cent vis-à-vis the euro in 2005, cf. Chart 20. The falling currency in the 1st half-year was e.g. attributable to less positive growth prospects. During May 2005 there were also mounting expectations that Sveriges Riksbank would lower its repo rate. These expectations were fulfilled in June, when the repo rate was lowered by 0.5 percentage points. Towards the end of the year, the krona strengthened against the euro, which in part reflected growing expectations that Sveriges Riksbank would raise the repo rate. In January 2006 the rate was increased to 1.75 per cent, and in February 2006 to 2.00 per cent. At the end of 2005, the exchange rate was 9.43 Swedish kronor per euro. As the price of oil continued to rise throughout 2005, the Norwegian krone strengthened vis-à-vis the euro, and by the end of the year it had appreciated by approximately 3 per cent to 8.01 Norwegian kroner per euro. Strong economic growth and Norges Bank's raising of the sight deposit rate on two occasions contributed to the strengthening of the

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REVALUATION OF THE CHINESE CURRENCY Box 4

On 21 July 2005, the People's Bank of China announced that it would adjust the fixed- exchange-rate policy vis-à-vis the US dollar in favour of a managed float based on a basket of currencies. The four principal currencies in the reference basket are the dollar, the euro, the yen and the South Korean won. The weights of the individual currencies are determined on the basis of bilateral trade shares, the currency structure of the external debt (interest payments), direct foreign investments (dividends) and the currency structure for current transfers (includes e.g. development aid). Under the new system, the People's Bank of China fixes a bilateral exchange rate on a daily basis. The exchange rate is calculated on the basis of the closing rates for the currencies in the reference basket on the preceding trading day. The day-to-day fluctuation band for the Chinese renminbi vis-à-vis the dollar has been set at +/- 0.3 per cent. The day-to-day fluctuation band in relation to the other currencies in the reference basket is +/- 1.5 per cent. On the transition to the new exchange-rate regime, the central rate was fixed at 8.11 renminbi per dollar, equivalent to revaluation by 2 per cent, cf. the Chart (left). The day-to-day fluctuations after the change of currency regime have been small, typically below +/- 0.05 per cent. The total appreciation vis-à-vis the dollar since 22 July 2005 has been just below 1 per cent. In the period from 1994 – when China replaced a double exchange-rate system with a system based on a single exchange rate – until 1997, the renminbi appreciated by approximately 5 per cent vis-à-vis the dollar. From 1994 China by and large maintained a fixed-exchange-rate policy against the dollar, keeping the exchange rate constant at 8.28 renminbi per dollar since 1998, cf. the Chart (left). The People's Bank of China uses intervention as a means of managing the exchange rate of the renminbi, which has contributed to a rapidly expanding foreign-exchange reserve in recent years, cf. the Chart (right). However, the liberalisation of China's foreign-exchange policy in July has not led the People's Bank of China to stabilise the reserve. On the contrary, it has continued to rise and amounted to approximately 819 billion dollars at end-2005.

RENMINBI VIS-À-VIS DOLLAR AND THE DEVELOPMENT IN CHINAS FOREIGN-EXCHANGE RESERVE

Renminbi per dollar Dollar billion 8.0 900

8.1 800

8.2 700 600 8.3 500 8.4 400 8.5 300 8.6 200 8.7 100 8.8 0 1994 199719961995 2001200019991998 20032002 2004 2005 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Renminbi China's foreign-exchange reserve

Note: Reverse axis for left-hand Chart. Source: EcoWin.

Norwegian krone. At the end of the year, the krone weakened slightly against the euro, e.g. reflecting lower oil prices and the ECB's raising of its key interest rate.

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POUND STERLING, NORWEGIAN KRONE AND SWEDISH KRONA VIS-À-VIS EURO Chart 20

Swedish kronor and Norwegian kroner per euro Pounds sterling per euro 10.0 0.82

9.5 0.78

9.0 0.74

8.5 0.70

8.0 0.66

7.5 0.62

7.0 0.58 2003 2004 2005

Swedish kronor Norwegian kroner Pounds sterling (right-hand axis)

Note: Weekly observations. Source: EcoWin.

STOCK MARKETS

The global stock markets rose overall in 2005, but with considerable individual variations, cf. Chart 21. US stocks increased moderately, while euro area stocks rose substantially, and Japanese stocks rose even more – at a rate unsurpassed since 1986. High demand for energy, and global oil production close to its capacity limit led to rising oil prices in 2005, which was clearly reflected in the global stock markets, cf. Box 5. Up to the end of the 3rd quarter, US stock markets were influenced by the tightening of monetary policy, the strengthening of the dollar and higher energy prices, which flattened the price trend for US stocks. The downgrading of the large US conglomerates General Motors and Ford, cf. above, also contributed to keeping US stock prices down. However, sustained high economic activity and rising employment helped to prevent stock prices from falling, and towards the end of the year the broad US stock index, S&P 500, edged upwards. Over the full year the index increased by a total of 3 per cent. From the beginning of 2005, euro area stock prices were under pressure from the weak economy. From May stock prices rose considerably, however, e.g. as a result of the low interest rates. In addition, the

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STOCK INDICES FOR THE USA, THE EURO AREA, THE UK AND JAPAN Chart 21

January 2005 = 100 150

140

130

120

110

100

60 2003 2004 2005

S&P 500 (USA) S&P Euro (euro area) Nikkei 225 (Japan) FTSE 100 (UK)

Note: Weekly observations. Source: Bloomberg.

weakening of the euro vis-à-vis the dollar improved competitiveness. The stock index for the euro area, S&P Euro, rose by 23 per cent in 2005. The Japanese stock index, Nikkei 225, remained virtually unchanged in the 1st half of 2005, but then rose very strongly, primarily reflecting more positive economic prospects. More than 90 per cent of the Nikkei stocks rose, and 10 per cent of the companies more than doubled their value during the year. Overall, Nikkei 225 rose by 40 per cent over the year. British stocks have generally been affected by the same factors as in the euro area, but with the major difference that UK companies again in 2005 faced higher investment costs as a result of higher interest rates. Economic growth in the UK generally diminished in 2005, but nonetheless the FTSE 100 rose by 17 per cent over the year. The Scandinavian stock markets matched the positive development in euro area stock prices in 2005, cf. Chart 22. As in the preceding two years, the Scandinavian stock markets performed better than the euro area. The increase in the Danish OMXC20 index – previously the KFX index – was primarily attributable to the key A.P. Moller – Maersk stocks, which accounted for just below one third of the increase. Danske Bank and TDC also contributed to the positive development, and virtually all

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OIL AND PETROL PRICES AND ENERGY-RELATED STOCKS 2005 Box 5

The rising oil price influenced the global stock markets in 2005. The impact on energy- related stocks was positive, while other stocks were mainly negatively affected, although to a lesser extent than expected in the market. The oil price rose from a level of just under 45 dollars per barrel at the beginning of the year to 70 dollars per barrel at end-August, i.e. an increase by more than 50 per cent in eight months. This was the highest nominal level ever and the highest real level since 1981. In the autumn the oil price dropped back to below 60 dollars, but has subsequently risen moderately, cf. the Chart.

OIL AND PETROL PRICES AND US ENERGY-RELATED STOCKS January 2005 = 100 225

200

175

150

125

100

50 2003 2004 2005

Oil Petrol US energy-related stocks

Note: Weekly observations. Oil and petrol are the shortest generic futures contracts, i.e. the price of oil and petrol for delivery in one month. Source: Bloomberg.

The primary reason for the increase is sustained high demand for oil, e.g. from China, which imports much of its consumption. The low investments in the oil sector in recent years also began to influence price formation, since production capacity was close to its upper limit. Moreover, the number of speculative investors increased as more investment banks and hedge funds sought arbitrage opportunities in the market. Several temporary factors, e.g. resumption of Iran's nuclear programme and Hurricanes Katrina and Rita in the Mexican Gulf, also exerted upward price pressure in some intervals. Particularly the hurricanes had significant impacts on petrol prices, which increased considerably on some days by, respectively, 20 per cent during Katrina and 14 per cent during Rita. Even though petrol prices fell during the autumn the overall increase in 2005 was 60 per cent. Energy-related stocks in both the USA and the euro area benefited from the higher energy prices in 2005, which in both cases rose by approximately 30 per cent. These were the sectors in S&P 500 and S&P Euro that saw the highest increases. Energy- related stocks are included with a weight of only 9 per cent in the S&P 500, but are the primary reason for the overall increase in the US stock markets 2005.

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STOCK INDICES FOR DENMARK, SWEDEN AND NORWAY Chart 22

January 2005 = 100 160

150

140

130

120

110

100

40 2003 2004 2005

OMXC20 (Denmark) OMX (Sweden) OBX (Norway)

Note: Weekly observations. Source: Bloomberg. companies appreciated during the year. The overall index rose by approximately 37 per cent over the year, making 2005 the Danish stock market's best year since 1997. All stocks rose in the Swedish OMX index, and for the third consecutive year the electronics enterprise LM Ericsson made the most positive contribution to the index. Norwegian shares benefited mainly from the higher oil prices, and particularly Statoil and Norsk Hydro contributed to the increase in the OBX index over the year.

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The Domestic Financial System1

The substantial increase in the banks' profits continued in 2005, driven by considerable growth in lending and historically low losses. The very low losses are attributable to the favourable economic situation, but also to the introduction of new accounting rules in 2005. The earnings of the mortgage-credit institutes continued to rise in 2005, as a result of such factors as significant remortgaging activity and sustained high growth in lending. Favourable market conditions have led to positive, and increasing, returns, which has strengthened the assets of investments associations and the earnings of pension companies. In 2005, the EU reached political agreement on the proposed directive for new capital-adequacy rules, known as Basel II. The banking supervisory authorities, central banks and finance ministries of the European Union in 2005 concluded a memorandum of understanding (MoU) on cooperation in financial crisis situations. The Danish authorities have also entered into an MoU on financial supervision, supplemented by a bilateral MoU between the Danish Financial Supervisory Authority and Danmarks Nationalbank.

BANKS

The banks improved their total profit after tax in 2005 against 2004. The increase in the banks' revenue in 2005 was a result of substantial lending growth, a sustained low level of losses and higher income from fees. The largest banks achieved a return on equity after tax of around 18 per cent, compared to 15 per cent in 2004. Total lending by the banks amounted to kr. 1,095 billion at the end of 2005, compared to kr. 860 billion at end-2004. Lending growth is driven by the favourable economic situation, combined with low interest rates, which stimulates borrowing demand. The strong growth in the banks' lending to households seen in recent years is to a large extent attribute- able to increased lending for home financing on terms equivalent to mortgage credit, i.e. variable-rate loans, long maturities and in some cases deferred amortisation. The loans are granted against real property as

1 For a more detailed review and analysis of the financial system and its framework conditions, see Danmarks Nationalbank, Financial Stability, which is expected to be published on 23 May 2006.

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ANNUAL GROWTH IN DEPOSITS AND LENDING Chart 23

Per cent 25

0 2001 2002 2003 2004 2005 Growth in banks' deposits Growth in banks' lending Growth in mortgage-credit institutes' lending

Note: Deposits from and lending to residents in the non-financial sector intermediated by banks and mortgage-credit institutes located in Denmark, i.e. the head offices of Danish banks and mortgage-credit institutes and branches and subsidiaries of foreign banking and credit institutions. Source: Danmarks Nationalbank.

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In 2005, write-down on lending was reduced from an already very low level as a consequence of the favourable economic development and the new accounting rules.

MORTGAGE-CREDIT INSTITUTES

The mortgage-credit institutes improved their total profit after tax in 2005 compared to 2004. The improved earnings are attributable to significant remortgaging activity and high growth in lending, cf. Chart 23. Total lending by mortgage-credit institutes amounted to kr. 1,663 billion at end-2005, against kr. 1,488 billion at end-2004. Net new lending rose by kr. 75 billion to kr. 163 billion in 2005. Adjustable-rate loans accounted for a large share of the growth in lending. Adjustable-rate loans comprised 49 per cent of mortgage-credit lending at end-2005, cf. Table 4. Loans with short fixed-interest periods of up to and including 1 year, make up 71 per cent of the adjustable-rate loans. Deferred-amortisation loans continued to win ground in 2005, and there was also considerable remortgaging of existing loans to deferred- amortisation loans. Deferred-amortisation mortgage-credit loans as a ratio of total lending thus rose from 16 per cent at end-2004 to 26 per cent at end-2005. The increase was more or less equally distributed on fixed-rate and adjustable-rate loans.

INVESTMENT ASSOCIATIONS

At end-2005, investment associations managed total assets of kr. 724 billion, which is an increase of 40 per cent compared to 2004. Two thirds of the increase is attributable to net payments received, while the remainder stems from investment returns. In relative terms equity funds grew the most due to rising stock prices. At year-end, 36 per cent of the

LENDING TO RESIDENTS BY MORTGAGE-CREDIT INSTITUTES BY LOAN TYPE Table 4

Per cent of total lending, year end 2003 2004 2005

Fixed-rate loans ...... 57.1 49.6 45.7 of which deferred-amortisation ...... 1.2 5.0 18.2 Adjustable-rate loans ...... 35.8 44.1 49.0 of which deferred-amortisation ...... 13.4 29.8 35.2 of which fixed-interest period ≤ 1 year .... 50.1 57.7 70.8 Index-linked loans ...... 7.1 6.4 5.3

Note: Lending by mortgage-credit institutes excluding lending to Monetary Financial Institutions, MFIs. Source: Danmarks Nationalbank.

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ASSETS OF INVESTMENT ASSOCIATIONS BY FUND TYPE, YEAR-END Chart 24

Kr. billion 800

700

600

500

400

300

200

100

0 2001 2002 2003 2004 2005

Danish bonds Danish shares Foreign bonds Foreign shares Mixed funds

Source: Danmarks Nationalbank. assets of investment associations were placed in shares, 50 per cent in bonds and the rest in mixed funds, cf. Chart 24. At the end of 2005, private investors held 35 per cent of the investment certificates issued. The share held by pension companies remained more or less unchanged at 30 per cent. The new legislation on hedge associations, which came into force on 1 July 2005, makes it possible to set up hedge associations in Denmark. Hedge associations are the Danish equivalent of hedge funds1. At the end of 2005, a small number of associations had applied to the Danish Financial Supervisory Authority for approval as hedge associations.

PENSION COMPANIES

Based on the market development and the financial statements presented, life insurance companies and professional pension funds, herein- after pension companies, are generally assessed to have achieved positive investment returns in 2005. Significantly rising share prices in Europe, modest increases in US stock market prices and relatively stable market conditions are expected to have contributed positively to earnings in this

1 There is no clear definition of a hedge fund, but the term generally covers investment funds that are not subject to regulation by the authorities in relation to either choice of strategy or risk profile. Unlike investment associations, the Danish hedge associations will not be subject to limitation of their options to gear or sell short in the market. See also Jesper Ulriksen Thuesen, Hedge Funds in Denmark and Internationally, Danmarks Nationalbank, Monetary Review, 1st Quarter 2005.

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THE BOND MARKET

The total outstanding volume of listed krone-denominated bonds was kr. 2,748 billion at end-2005, representing an increase by 8 per cent on 2004, cf. Table 5. The volume of outstanding government bonds fell by kr. 95 billion, while the volume of mortgage-credit bonds rose by kr. 283 billion. In 2005, premature redemptions of Danish mortgage-credit bonds reached a record-high level of kr. 543 billion, an increase by kr. 233 billion from the preceding year. The increase should be viewed against the background of the falling interest rates, cf. Chart 25. Bond yields continued to fall in 2005, from an already low level, cf. p. 42, and the minimum coupon rate was lowered from 3 per cent in the 1st half to 2 per cent in the 2nd half of 2005. The minimum coupon rate for the 1st half of 2006 remains unchanged at 2 per cent.

Trading in Danish government securities Danish government securities are traded via electronic trading platforms with various types of price quotation, and in the OTC market. A large part of the electronic trading in Danish government securities takes place on the electronic trading platform MTSDenmark. Government bonds have been issued and traded on MTSDenmark since November 2003, and in 2005 trading in Danish Treasury bills was also introduced.

OUTSTANDING VOLUME OF LISTED DOMESTIC KRONE-DENOMINATED BONDS, NOMINAL VALUE Table 5

Kr. billion 2004 2005

Government bonds, etc...... 630 535 Mortgage-credit bonds ...... 1,806 2,089 Other bonds ...... 116 125

Total ...... 2,552 2,748

Anm.: Both old and new mortgage-credit bonds are included in the statement of the outstanding volume of mortgage- credit bonds, and the figure is thus affected by the refinancing activity. As of December 2005, the value of refinanced krone-denominated mortgage-credit bonds is estimated at kr. 383 billion. Government bonds, etc. also include Treasury notes and Treasury bills. Source: Danmarks Nationalbank.

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PREMATURE REDEMPTIONS OF MORTGAGE-CREDIT BONDS AND BOND YIELDS Chart 25

Kr. billion Per cent 160 14

140 12

120 10

100 8 80 6 60

4 40

20 2

0 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Premature redemptions (left-hand axis) 10-year government-bond yield 30-year mortgage-credit-bond yield Note: The benchmark 30-year mortgage-credit bond is the series priced below par in which bond loans are typically issued. A switch to a new series takes place when a suitable outstanding volume has been reached. The yield on the benchmark 30-year mortgage-credit bond is not a precise indicator of when it is favourable to remortgage. Source: Danmarks Nationalbank.

In 2005, average daily turnover on MTSDenmark reached almost kr. 2 billion. Besides MTSDenmark, Danish government securities are traded on other electronic trading platforms such as TradeWeb, BloombergBondtrader and BondVision. In addition, a price-quoting scheme has been established at the Copenhagen Stock Exchange. This gives small investors access to a transparent and efficient market for trading in Danish government securities.

AGREEMENT ON NEW CAPITAL-ADEQUACY RULES IN THE EU

In Denmark, a bill to implement the directive on new capital-adequacy rules, known as Basel II, was submitted for consultation in February 2006. The bill is expected to be introduced in the Folketing (Parliament) in the spring. In the autumn of 2005, the EU reached political agreement on the proposed directive on new capital-adequacy rules. The new directive entails amendments to the existing Banking and Capital-Adequacy Directives and complies with the Basel Committee's revised recommendations for an international capital adequacy framework. Basel II is a further development of the existing capital-adequacy rules, which are observed in more than 100 countries worldwide. The aim is for capital requirements

20-03-2006 11:48:00 Antal sider: 172 Rev. nr. 2 H:\Aarsberetninger\2005\Engelsk\faerdige\Hel.doc Oprettet af Hanne Christensen Report and Accounts 2005 57 to better reflect the risks incurred by the individual credit institutions in the course of their business. The directive in its final version is expected to be published during 2006, and will then be formally adopted by the EU Council of Ministers1. The directive is to be transposed into national legislation of the member states effective from the beginning of 2007. However, up to the end of 2007 it will still be possible for credit institutions to apply the existing rules. The most advanced methods for calculation of the minimum capital requirement cannot be applied before 1 January 2008. The new capital-adequacy framework is thus in place. The more technical aspects will be determined by the European Commission after consultation with the European Banking Committee (EBC). To ensure a well-functioning market, also in the financial area, it is important to ensure uniform implementation of the directive, and to work towards convergence in its practical enforcement by the supervisory authorities. Much of this work is vested in the Committee of European Banking Supervisors, (CEBS), where for more than two years the national supervisory authorities and central banks have been preparing common guidelines, standards and recommendations, etc.

HIMMERLANDSBANKEN

Together with a number of banks (the Guarantee Consortium) Danmarks Nationalbank provided a guarantee of maximum kr. 150 million in connection with the compulsory winding-up of Himmerlandsbanken in Au- gust 1993. Danmarks Nationalbank's share was kr. 90 million. The purpose of the guarantee was to cover certain concrete exposures that were not taken over by Spar Nord in connection with its assumption of most of the assets and liabilities from Himmerlandsbanken, and also to cover unbooked guarantees or compensation claims on the Himmerlandsbanken winding-up estate. The purpose of the guarantee was not to cover the share capital or subordinate capital. In addition to the maximum guarantee of kr. 150 million, Danmarks Nationalbank provided an unlimited guarantee for unbooked liabilities. Claims accepted as simple claims on the winding-up estate will be subject to the guarantees of the Guarantee Consortium or Danmarks Nationalbank. In April 2005, the estate being wound up lost the "bond case" at the Danish Supreme Court, which thus upheld the previous rulings by the court of Hobro and the Danish Western High Court. The ruling ordered

1 A preliminary version of the Directive, document number 12890/05, is available at the website of the Council of the European Union, http://ue.eu.int.

20-03-2006 11:48:00 Antal sider: 172 Rev. nr. 2 H:\Aarsberetninger\2005\Engelsk\faerdige\Hel.doc Oprettet af Hanne Christensen Report and Accounts 2005 58 the estate to acknowledge that the subordinate capital originally subscribed to as supplementary capital in the form of bonds in 1991 was to be recognised as a simple claim on the estate being wound up. This meant that the bonds were comprised by the Guarantee Consortium's guarantee. After the ruling, Danmarks Nationalbank attached importance to initiating the procedures required to ensure that eligible claims under the guarantee were met as soon as possible. Against this background a unani- mous Guarantee Consortium decided to disburse payments to bondholders via VP Securities Services. In this way, the claims of all bondholders were honoured according to the same principles. Disbursement took place on 5 July 2005. It is expected that the estate will be finally wound up in the 1st half of 2006, after which the guarantees can be released. Danmarks National- bank's contribution to the winding-up of Himmerlandsbanken will here- after amount to approximately kr. 90 million, including the winding-up costs. This is by and large equivalent to Danmarks Nationalbank's share of the guarantee furnished by the Guarantee Consortium. A provision for the guarantee commitment of kr. 90 million was made when it was entered into in 1993. Consequently, the settlement of the estate is not expected to have any significant impact on Danmarks Nationalbank's accounts for 2006.

MEMORANDA OF UNDERSTANDING

In 2005, Danmarks Nationalbank concluded several Memoranda of Under- standing (MoU). A MoU is a declaration of intent and is not legally bind- ing. On 1 July 2005, the banking supervisory authorities, central banks and finance ministries of the European Union agreed on a Memorandum of Understanding on cooperation in financial crisis situations.1 The MoU relates to principles and procedures for exchange of information between authorities within the EU in the event of a financial crisis where there is a risk that the crisis will spread to several member states and also be of a systemic nature. To further strengthen cross-border cooperation between the authorities, the MoU also includes such issues as contingency planning, stress tests and crisis exercises. In the spring of 2005, a Memorandum of Understanding concerning financial supervision was concluded between Danmarks Nationalbank, the Danish Ministry of Finance, the Danish Ministry of Economic and Business Affairs and the Danish Financial Supervisory Authority. The MoU

1 A press release on the MoU is available at CEBS' website, www.c-ebs.org.

20-03-2006 11:48:00 Antal sider: 172 Rev. nr. 2 H:\Aarsberetninger\2005\Engelsk\faerdige\Hel.doc Oprettet af Hanne Christensen Report and Accounts 2005 59 confirms the existing informal and pragmatic cooperation on maintaining financial stability and, if required, coordinating the handling of financial crises by the parties to the MoU. Responsibility for the cooperation is anchored in a Coordination Committee on Financial Stability made up of representatives of all four authorities. Under the MoU concerning financial supervision, Danmarks National- bank and the Danish Financial Supervisory Authority have concluded a separate Memorandum of Understanding.1 This MoU is to contribute to transparency in relation to the cooperation, and contribute to a clearer division of tasks, easier administration and exchange of knowledge and information between the two parties. The MoU comprises three sub- agreements on, respectively, the stability of the financial system, financial statistics, and payment systems and clearing centres.

1 Both Memoranda of Understanding are available at www.nationalbanken.dk.

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Banknotes and Coins

Cash circulation increased by 8.1 per cent in 2005, which can be assumed to be a result of high growth in private consumption. The total cash circulation was kr. 55.5 billion at year-end. In 2006, Danmarks Nationalbank will initiate the process to design a new Danish banknote series to replace the existing series from 1997. In 2005, Danmarks Nationalbank introduced a new, more secure 50-krone banknote and a new Faroese 1,000-krone banknote. To mark the bicentenary of the birth of Hans Christian Andersen, Dan- marks Nationalbank commenced the issue of a new series of coins with fairy tales as their common theme. In 2005, the first two coins in the series, with motifs from "The Ugly Duckling" and "The Little Mermaid", were issued. Two new tower coins, with the motifs of Landet Church on the island of Tåsinge and Nólsoy Lighthouse in the Faroe Islands, were issued in 2005, and in February 2006 they were followed by a tower coin depicting Gråsten Palace Tower.

BANKNOTES AND COINS IN CIRCULATION

The value of banknotes and coins in circulation was kr. 55.5 billion at end- 2005. This is an increase by 8.1 per cent from 2004.1 The large increase can be assumed to be a result of high growth in private consumption. The number of 500-krone banknotes has increased substantially in recent years and now constitutes 16 per cent of total banknotes in circulation. The increase in the circulation of 500-krone banknotes may be a consequence of the increasing volume of banknotes circulated via ATMs. The circulation of 200-krone banknotes has also increased considerably in recent years, while the circulation of 100-krone banknotes is by and large unchanged compared to 2000, cf. Chart 26. However, 100-krone banknotes still constitute the largest share, 39 per cent, of total banknotes in circulation. The total circulation of banknotes rose by 8.4 per cent in 2005, to kr. 50.4 billion at year-end.

1 As in Tables 2 and 3 in the Appendix of Tables on p. 160, the circulation is stated exclusive of commemorative coins, the circulation of Faroese banknotes and certain older banknotes, and therefore deviates from the figure stated on Danmarks Nationalbank's balance sheet.

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BANKNOTES IN CIRCULATION Chart 26

Index, 2000 = 100 140

135

130

125

120

115

110

105

100

95 2000 2001 2002 2003 2004 2005

50-krone banknote 100-krone banknote 200-krone banknote 500-krone banknote 1,000-krone banknote Source: Danmarks Nationalbank.

The circulation of coins increased by 5.6 per cent to kr. 5.2 billion at the end of 2005. Especially the circulation of 20-krone coins has increased. Pursuant to the Danmarks Nationalbank Act of 1936 the circulation of banknotes must be covered by Danmarks Nationalbank's holdings of gold and other assets. Since September 1939 an exemption from the gold coverage provision has been granted. The circulation is covered by other assets.

UPGRADING OF BANKNOTES

A more secure 50-krone banknote with a hologram and fluorescent colours was issued in August 2005. This marked the conclusion of the upgrading of Danish banknotes which Danmarks Nationalbank commenced in 2002. All Danish banknotes have now been upgraded with a hologram and fluorescent colours. These security features make the banknotes more difficult to counterfeit, as well as making it easier to distinguish a genuine from a counterfeit banknote. The motifs on the banknotes are unchanged, and the old banknotes remain legal tender, but will be gradually withdrawn from circulation.

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NEW BANKNOTE SERIES

In 2006, Danmarks Nationalbank will initiate the process to design a new Danish banknote series to replace the existing series from 1997. Danmarks Nationalbank will invite a number of artists to prepare design proposals for the new banknote series. The chosen design is expected to be announced in the late summer of 2006, and the first banknote in the new series is planned to be issued in 2009. In current years a number of countries are introducing new and better security features on their banknotes. In order to keep up with techno- logical advances and to make it ever more difficult to counterfeit banknotes, Danmarks Nationalbank has begun work on a new banknote series. Further upgrading of the present banknote series would be at the ex- pense of aesthetics, and multiple changes to the same banknote series can create uncertainty regarding the characteristics of an authentic banknote. Consequently, major enhancements of banknote security are best communicated in conjunction with the issue of a new banknote series.

COUNTERFEIT BANKNOTES

In 2005, 442 counterfeit banknotes were found in circulation, cf. Chart 27. This is a considerable decrease compared to the preceding three years when more than 1,000 counterfeit banknotes were removed from

COUNTERFEIT BANKNOTES FOUND IN CIRCULATION Chart 27

Number of banknotes 1,600

1,400

1,200

1,000

800

600

400

200

0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

50-krone banknote 100-krone banknote 200-krone banknote 500-krone banknote 1,000-krone banknote Source: Danmarks Nationalbank.

20-03-2006 11:48:00 Antal sider: 172 Rev. nr. 2 H:\Aarsberetninger\2005\Engelsk\faerdige\Hel.doc Oprettet af Hanne Christensen Report and Accounts 2005 63 circulation every year. The number of counterfeit banknotes in 2005 was at the lowest level since 1997. Part of the explanation may be that Danmarks Nationalbank has enhanced the security of the banknotes, so that a large proportion of the banknotes now in circulation have holo- grams and fluorescent colours. The new security features make it more difficult to counterfeit banknotes and easier to distinguish a genuine from a counterfeit banknote. Only few attempts to copy the new security features have been de- tected. The 100-krone and 500-krone banknotes are still the banknotes most frequently counterfeited.

FAIRY TALE COINS

In 2005, Danmarks Nationalbank introduced a new series of thematic coins with motifs from Hans Christian Andersen's fairy tales, and the first two coins in the series of five were issued. The motifs for the first two coins, "The Ugly Duckling" and "The Little Mermaid" were designed by, respectively, the sculptors Hans Pauli Olsen and Tina Maria Nielsen. The fairy tale coins are presented in Box 6. The portrait of the Queen on the obverse of the coins is by the sculptor Professor Mogens Møller. The fairy tale coins are issued as 10-krone coins in three different editions – a gold coin, a fine silver coin and an ordinary 10-krone coin. The gold and silver coins are issued to cater for the collector's market. The prices of these coins exceed their face value. All fairy tale coins are legal tender and can be exchanged at Danmarks Nationalbank at face value. The gold coins with "The Ugly Duckling" and "The Little Mermaid" are issued in maximum editions of 7,000 and 6,000, the silver coins in maximum editions of 75,000 and 60,000, while the ordinary 10-krone coins are each issued in an edition of 1.2 million. The next fairy tale coin will be issued in the spring of 2006.

FAIRY TALE COINS Box 6

Issued Issued 31 March 2005 20 October 2005

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TOWER COINS Box 7

Issued Issued Issued 28 January 2005 15 September 2005 15 February 2006

TOWER COINS

Danmarks Nationalbank issued two more 20-krone coins with Danish towers as the motif on the reverse in January and September 2005. The motif for the sixth coin in the series, designed by the sculptor Øivind Nygaard, is the tower of Landet Church on the island of Tåsinge. The seventh coin, depicting Nólsoy Lighthouse in the Faroe Islands, was designed by the Faroese sculptor Hans Pauli Olsen. The eighth coin in the tower series was issued in February 2006. Its motif of the tower of Gråsten Palace was designed by the sculptor and graphic artist Sys Hindsbo. The obverse of the tower coins shows a profile of the Queen. The tower coins are presented in Box 7. The three tower coins were each issued in an edition of 1.2 million.

2005 COIN SET

The Royal Mint's 2005 Coin Set was again issued in two editions, an ordinary edition and a proof edition. The coins in the ordinary coin set are minted with two strokes, which is one more than the ordinary coins in circulation. The coins in the proof edition are minted with three strokes. The medal in the 2005 Coin Set is a copy of the medal awarded to Olfert Fischer and his men after the Battle of Copenhagen in 1801, in which they defended Copenhagen against the British navy. The ordinary and proof editions are issued in maximum 31,000 and 3,500 sets, respectively.

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COIN SET FOR CHILDREN Box 8

In February 2006, The Royal Mint for the first time issued a coin set especially for children. The children's coin set includes the year's coins minted with two strokes and a silver medal. The medal has space for engraving a child's name. The motif for the medal is by the illustrator Cato Thau-Jensen, who also designed the folder in which the coins are mounted, cf. Box 8.

FAROESE BANKNOTE SERIES

A new Faroese 1,000-krone banknote was issued in September 2005. This completes the Faroese banknotes series that was introduced in 2001. The primary motifs on the new Faroese banknotes are inspired by Faroese fauna, while the motifs on the reverse are reproductions of watercolours of Faroese landscapes. The primary motif on the new 1,000-krone banknote is a purple sandpiper, and behind it a watercolour of a flock of birds is reproduced. The motif on the reverse is a watercolour of the view from the island of Sandoy. The Faroese artist Zacharias Heinesen painted the watercolours for the banknote series, which is presented in Box 9.

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THE COMPLETE FAROESE BANKNOTE SERIES Box 9

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Payment Systems

The number and value of krone-denominated payments made via Dan- marks Nationalbank's payment system, Kronos, increased in 2005. Settle- ment of krone-denominated payments in CLS Bank, the international foreign-exchange settlement system, has increased considerably. In March 2006 Danmarks Nationalbank's responsibility for oversight of systemically important payment systems was enshrined in the Danish Securities Trading Act. It is planned for Denmark to join the new pan-European payment system, Target2, in May 2008. Target2 will replace the euro module of Kronos, and the Sumclearing and VP Settlement will be modified to settle euro-denominated payments via Target2.

DEVELOPMENT IN PAYMENT AND SETTLEMENT SYSTEMS

The Danish payments infrastructure comprises several systemically important payment and settlement systems, i.e. systems that are important in relation to financial stability. These systems settle various types of transactions in kroner and euro. Danmarks Nationalbank acts as settlement bank for the systems, since settlement takes place via accounts at Danmarks Nationalbank. Tables 6 and 7 show the transaction volumes in these systems in, respectively, kroner and euro.1 Kronos is Danmarks Nationalbank's system2 for settlement of payments in kroner and euro. The value and number of krone-denominated payments via Kronos increased in 2005. Kronos is the Danish part of the pan- European euro payment system, Target. The number and value of euro- denominated payments transmitted via Kronos increased considerably in 2005 after weaker development in the preceding year. Around half of the Danish euro-denominated payments are transmitted to Germany. The transaction volume in the overall Target system continued to rise in 2005. The Sumclearing is the Danish retail payment system for settlement of Dankort (debit card) transactions, credit transfers, Betalingsservice (direct debit), etc. The Sumclearing transaction volume rose in 2005. The Sum-

1 For a detailed description of the Danish payment and settlement systems and Danmarks National- bank's role in this connection, see Danmarks Nationalbank, Payment Systems in Denmark, 2005. 2 Kronos is an RTGS (real-time gross settlement) system that is primarily used for individual and instant settlement of large payments.

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PAYMENTS IN KRONER1 Table 6

2003 2004 2005

Kronos Number of transactions, '000 ...... 647 631 664 Value of transactions, kr. billion ...... 56,888 53,040 60,633 Sumclearing Number of transactions, '000 ...... 986,537 1,088,030 1,120,807 Value of transactions, kr. billion ...... 4,242 4,421 5,027 VP settlement Number of trading transactions, '000 ...... 6,215 7,348 10,182 Value of trading transactions, kr. billion ..... 26,327 27,951 25,198 CLS Bank Number of trades settled, '000 ...... 20 86 129 Number of trades settled, kr. billion ...... 5,097 19,812 31,333 FUTOP settlement Number of contracts, '000 ...... 771 704 994

Note: For CLS Bank, the figures do not cover the full year 2003, since the Danish krone did not join CLS until 8 Septem- ber 2003. Source: Danish Bankers Association, VP Securities Services, Copenhagen Stock Exchange, CLS Bank and own calculations. 1 Figures for 2003 and 2004 have been revised in relation to Report and Accounts, 2004.

clearing is also used for settlement of a small, but growing number of euro-denominated credit transfers. VP Securities Services (VP) settles securities transactions and other transactions related to securities. The number of krone-denominated transact- tions settled via VP rose substantially in 2005, while the total transaction value decreased. On the other hand, the number of euro-denominated transactions fell, but their total value increased.

PAYMENTS IN EURO Table 7

2003 2004 2005

Target – all participating member states Number of transactions, '000 ...... 66,608 69,213 76,151 Value of transactions, euro billion ...... 420,749 443,993 488,901 Of which Danish participants1 Number of transactions, '000 ...... 102.6 92.0 105.8 Value of transactions, euro billion ...... 3,208 3,278 3,774 Sumclearing Number of transactions, '000 ...... 92.1 148.1 182.6 Value of transactions, euro billion ...... 1.4 2.0 2.7 VP settlement Number of trading transactions, '000 ...... 3.6 10.7 6.1 Value of trading transactions, euro billion ... 16.5 19.9 22.6

Source: ECB, Danish Bankers Association and VP Securities Services. 1 Figures for 2004 have been revised in relation to Report and Accounts, 2004.

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CLS Bank is an international system for settlement of foreign-exchange transactions in 15 currencies, including Danish kroner. Settlement of transactions in kroner rose significantly in 2005. Among other things, this reflects that an increasing number of banks use CLS for settlement of their foreign-exchange transactions. FUTOP settlement comprises clearing and settlement of trading in futures and options in Danish kroner.1 The number of contracts rose considerably in 2005, partly as a result of increased activity on the part of foreign participants.

OVERSIGHT

Danmarks Nationalbank oversees systemically important payment and securities settlement systems in Denmark. The objective is to contribute to a secure and effective payments infrastructure and thus to minimise the potential risk that problems in payment and securities settlement systems jeopardise financial stability. Oversight by Danmarks National- bank comprises Kronos, the Sumclearing and VP settlement, in the last- mentioned case in cooperation with the Danish Financial Supervisory Authority. The ongoing oversight activities are described in the publication Financial Stability, while reports on the individual systems are published on Danmarks Nationalbank's website. In order to distinguish more clearly between the tasks of Danmarks Nationalbank and the Danish Financial Supervisory Authority in relation to systemically important payment systems, in March 2006 Danmarks Nationalbank's responsibility for oversight was enshrined in the Danish Securities Trading Act. The amendment to the Act will be followed by a revision of the Memorandum of Understanding (MoU) relating to this area between Danmarks Nationalbank and the Danish Financial Super- visory Authority, cf. p. 58. The MoU is to ensure a clear delineation of the elements of the payments infrastructure that are subject to oversight, as well as an appropriate division of work and exchange of information. In November 2005, Kronos, the Sumclearing and VP Settlement were reviewed by the IMF as part of its assessment of the financial system in Denmark, cf. p. 85. The IMF's assessment of the Danish payments infrastructure will be published in the autumn of 2006.

1 In the 2nd half of 2005, trading, clearing and settlement of Danish futures and options gradually mi- grated to the Stockholm Stock Exchange. This is a consequence of the merger of the Copenhagen Stock Exchange into the OMX Group.

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INFRASTRUCTURE FOR KRONE-DENOMINATED PAYMENTS

Dankort with chip In 2004, all holders of a Dankort or Visa/Dankort received a new card with both a chip and a magnetic strip. The new card replaced the old card with a magnetic strip only. A chip card is considerably more difficult to counterfeit than a card which only has a magnetic strip. The chip Dankort has had many technical teething problems, including long response times when the chip is read. This has led many retailers to block use of the chip in their terminals, so that only the magnetic strip can be used. At present the chip is only used in approximately 2 per cent of all Dankort transactions. The banks have launched a project aimed at solving the chip Dankort problems in order to encourage chip-based payments. The work will be undertaken by PBS in dialogue with retailers and their organisations.

New settlement cycle in VP In order to enhance interaction between the Danish and international securities markets, in June 2005 VP introduced a new settlement cycle, VP60, for securities transactions in Danish kroner. VP60 takes effect at noon, which is now the final deadline for settlement of transactions in kroner. The introduction of VP60 extended the Danish settlement day by 1.5 hours. At the same time, the link from Euroclear, the international central securities depository, to VP was upgraded, so that securities can be transferred in real time, i.e. without any delay, between a participant's securities account in VP and Euroclear.

INFRASTRUCTURE FOR EURO-DENOMINATED PAYMENTS

Retail payments in Europe In 2005, the European banks continued to develop a common infrastructure for retail payments in euro. The objective is to create a Single Euro Payments Area (SEPA), in which there is no distinction between national and cross-border payments. In 2005 the banks developed a common set of rules for credit transfers, direct debit and payment cards. According to the roadmap for SEPA, the banks must offer these payment services as from 2008. The establishment of SEPA will contribute to reducing the costs of cross-border retail payments within the EU and support the development of the single market for goods and services. In December 2005, the European Commission presented a proposal for a directive on retail payments in the EU (New Legal Framework). The directive is to harmonise the national rules for retail payments in the EU,

20-03-2006 11:48:00 Antal sider: 172 Rev. nr. 2 H:\Aarsberetninger\2005\Engelsk\faerdige\Hel.doc Oprettet af Hanne Christensen Report and Accounts 2005 71 thereby supporting the development of SEPA. It is the intention of the European Commission that the directive cover both national and cross- border payments, not only in euro but in all currencies. Also in December 2005, the EU Council of Ministers achieved political agreement on the Regulation on information on the payer accompany- ing transfers of funds. The regulation implements an international recommendation to combat the financing of terrorism.1 The essence of the regulation is that in future transfers of funds must be accompanied by information enabling the payer to be identified. Transfers of funds within the EU must include information on the payer's account number, while transfers between EU member states and other countries must also include information on the payer's name and address.

Target2 The development of a new pan-European system, Target22, for settlement of euro-denominated payments continued in 2005. The central banks of Germany, Italy and France, which are jointly to develop and operate Target2, have now completed the functional and technical specifications for the system. In mid-2005 it proved necessary to postpone the implementation of Target2. Furthermore, it was decided that member states will migrate from the existing Target to Target2 in three groups, since it is deemed to be too risky, technically and operationally, for all member states to join the system at the same time. The postponement entails that the first member states will migrate to Target2 in November 2007, while Den- mark will join the system in May 2008 as part of the final group. At the same time, Denmark has decided to reorganise its payments infrastructure for euro-denominated payments. This implies that the Kronos euro module will be replaced by Target2, and that the Sumclearing and VP Settlement will be modified to settle euro-denominated payments via Target2. The link to the Sumclearing and VP Settlement will be established via a special interface in Target2. This allows a choice of different settlement models, including models that allow VP Settlement and the Sumclearing in euro to continue according to the same principles as applied today. For the participants it is an advantage that multiple systems settle euro-denominated payments via Target2, since a participant will in principle be able to settle all positions via a single account, thereby using

1 Special Recommendation VII from the Financial Action Task Force (FATF) on money laundering and the financing of terrorism, which has been adopted by all EU member states. 2 Target2 is an RTGS (real-time gross settlement) system. For a general description of Target2, see Danmarks Nationalbank, Payment Systems in Denmark, 2005.

20-03-2006 11:48:00 Antal sider: 172 Rev. nr. 2 H:\Aarsberetninger\2005\Engelsk\faerdige\Hel.doc Oprettet af Hanne Christensen Report and Accounts 2005 72 its liquidity more efficiently. Danmarks Nationalbank will coordinate the Danish migration to Target2. Sveriges Riksbank and the Bank of England have announced that they do not wish to participate in Target2. This does not affect Danmarks Nationalbank's decision to participate, one reason being that Denmark has a different banking structure to Sweden and the UK. Only few of the current 30 participants in the euro-denominated settlement have the option to settle euro-denominated payments and gain access to intraday liquidity in euro via branches/subsidiaries in the euro area. In Sweden and the UK, on the other hand, most participants in euro-denominated settlement are represented in the euro area.

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International Monetary Cooperation

The process to ratify the Constitutional Treaty for the EU was suspended after the Treaty was rejected by referenda in France and the Nether- lands in the early summer of 2005. Cyprus, Latvia, Malta and Slovakia joined ERM II in 2005, so that seven of the ten new EU member states are now ERM II participants. The Accession Treaty with Bulgaria and Romania was signed in April 2005 with a view to EU membership in 2007. In October, accession negotiations were opened with Turkey and Croatia. In March 2005, the EU member states agreed on a reform of the Sta- bility and Growth Pact. According to estimates by the European Commis- sion 11 member states, including five euro area member states, exceeded the Treaty's 3-per-cent limit for government budget deficits in 2005. The IMF adopted guidelines for 100 per cent debt relief to Heavily In- debted Poor Countries. The total lending by the IMF was halved as a result of premature redemptions by the largest borrowers. By agreement with Denmark, the IMF began an assessment of the Danish financial sector (FSAP), equivalent to the assessments performed in many other member countries.

PERIOD OF REFLECTION IN THE EU

After a number of years when the EU moved forward, with the establishment of EMU, accession of many new member states, and preparation of a Constitutional Treaty, 2005 was characterised by uncertainty and a slowdown in development. Agreement was reached on a reform of the Stability and Growth Pact, and after intense negotiations the EU heads of state or government, at the meeting of the European Council on 15-16 December 2005, agreed on the long-term framework for the EU's budget, i.e. the Financial Perspectives 2007-13. However, the process to ratify the Constitutional Treaty, which had been adopted at the meeting of the European Council in June 2004 after several years' pre- paratory work, was suspended after rejection of the Constitutional Treaty in two referenda, in France and the Netherlands, in respectively May and June 2005. At the subsequent meeting of the European Council on 16-17 June 2005 the heads of state or government therefore declared a period of reflection. The pause for reflection is to be used for a broad debate on the future of Europe. Against this background, the European

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Council will decide in the 1st half of 2006 how to proceed. The Constitu- tional Treaty cannot enter into force until ratified by all EU member states. A few member states chose to continue the ratification process after the declaration of the period of reflection, while a number of member states – including Denmark – postponed ratification indefinite- ly. The Constitutional Treaty would have only a limited impact on economic and monetary policy in the EU since the existing framework for economic policy cooperation is by and large maintained.1

NON-EMU MEMBER STATES

The ten member states that joined the EU in May 2004 have an obligation to adopt the euro at some time in the future. During 2005, several of these member states made progress towards complying with the EU Treaty's convergence criteria, which are the conditions for adopting the euro. The convergence criteria include a requirement to participate in the EU's Exchange-Rate Mechanism, ERM II, without serious tensions for at least two years. Seven of the ten new EU member states are now ERM II participants. Estonia, Lithuania and Slovenia joined ERM II in June 2004, Latvia, Malta and Cyprus in May 2005 and, most recently, Slovakia in November 2005, cf. Box 10. All these member states have agreed on standard fluctuation bands for their respective currencies of +/- 15 per cent around the central rate. Denmark, which has participated in ERM II since 1999, has a special agreement on a narrower fluctuation band of +/- 2.25 per cent. The fluctuation bands and central rates have in all cases been determined by agreement between the applicant and the euro area member states, the European Central Bank (ECB) and the non-euro area member states already participating in ERM II. Latvia has made a unilateral commitment to a narrower fluctuation band, Malta a commitment to keep the lira at its central rate, and Lithuania and Estonia have maintained their currency boards2 as unilateral obligations within the framework of ERM II, cf. Box 10. For most of the member states, joining ERM II has not en-

1 For a more detailed review of the overall framework for the Constitutional Treaty and the provisions on economic and monetary cooperation, see Tina Winther Frandsen, The EU Constitutional Treaty and EMU, Danmarks Nationalbank, Monetary Review, 4th Quarter 2004. 2 A currency board is the most extensive type of fixed-exchange-rate policy, whereby there is general access to free, unrestricted exchange of currency to and from an anchor currency at a fixed rate of exchange. Monetary policy in countries with currency boards assumes that domestic base money is fully covered by foreign-exchange reserves and gold. For a more detailed description of currency boards, see Ulrik Bie and Niels Peter Hahnemann, Currency Boards, Danmarks Nationalbank, Monet- ary Review, 2nd Quarter 2000.

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EXCHANGE-RATE REGIMES AND TARGET DATES FOR EURO AREA MEMBERSHIP FOR NON-EMU MEMBER STATES Box 10

Target date for Membership of euro area Present exchange-rate regime ERM II membership

Member states participating in ERM II

Cyprus ...... Fluctuation band of +/- 15 per cent 2 May 2005 1 January 2008 Denmark ... Fluctuation band of +/- 2.25 per cent 1 January 1999 Not determined Estonia ...... Currency board 28 June 2004 1 January 2007 Latvia ...... Fluctuation band of +/- 1 per cent 2 May 2005 1 January 2008 Lithuania .. Currency board 28 June 2004 1 January 2007 Malta ...... Fluctuation band of +/- 0 per cent 2 May 2005 1 January 2008 Slovakia .... Fluctuation band of +/- 15 per cent 28 November 2005 1 January 2009 Slovenia .... Fluctuation band of +/- 15 per cent 28 June 2004 1 January 2007

Member states not participating in ERM II Czech Republic .... Managed float with euro as reference - 2010 Hungary .... Pegged to euro with a fluctuation band of +/- 15 per cent - 2010 Poland ...... Free float - Not determined Sweden ..... Free float - Not determined UK ...... Free float - Not determined

Note: The fluctuation band in ERM II is +/- 15 per cent. However, Denmark has a special agreement on a fluctuation band of +/- 2.25 per cent. Estonia, Latvia, Lithuania and Malta have entered into unilateral obligations concerning narrower fluctuation bands or currency boards. Source: European Commission and ECB. tailed significant changes in their exchange-rate policies, and their participation in ERM II has been without tensions. In addition to participating in ERM II for two years, member states wishing to adopt the euro must meet the requirements concerning the government budget deficit, government debt, inflation and long-term interest rates.1 At least biennially the European Commission and the ECB prepare convergence reports to assess compliance with the criteria by 11 of the 13 member states that have not adopted the euro. Denmark and the UK have treaty-bound derogations and need therefore only be assessed at their own request. The next convergence reports are to be prepared in 2006. These reports will show whether Estonia, Lithuania and Slovenia, all of which will have participated in ERM II for two years at the end of June 2006, fulfil the criteria and can thus join the euro area as planned on 1 January 2007, cf. Box 10. Compliance with the inflation cri-

1 These are the economic convergence criteria. The member states must also comply with a number of legislative requirements.

20-03-2006 11:48:00 Antal sider: 172 Rev. nr. 2 H:\Aarsberetninger\2005\Engelsk\faerdige\Hel.doc Oprettet af Hanne Christensen Report and Accounts 2005 76 terion may prove to be difficult, particularly for Estonia. In 2005, inflation in Estonia was 4.1 per cent, e.g. as a consequence of high oil prices. In Estonia, as in most of the other new EU member states, energy is relatively important in the calculation of inflation. The other economic convergence criteria are expected to be met by the three member states. Most of the new EU member states plan to introduce euro banknotes and coins when they join the euro area. In this respect they differ from the existing euro area member states, which did not introduce euro banknotes and coins until January 2002, after a three-year transitional period in which the euro only existed as a unit of account.1 As regards practical preparations, the new EU member states are at different stages. In November 2005, the European Commission assessed that there was a general need to speed up preparations if the member states are to introduce the euro as planned.

FUTURE ENLARGEMENTS OF THE EU

The Accession Treaty with Bulgaria and Romania was signed in April 2005, with a view to the two member states' EU membership in 2007. In its report from October 2005, the European Commission assessed that the two countries had made substantial progress during the preceding year, but that a number of challenges still lie ahead if they are to be ready to join the EU in 2007 as planned. EU membership may therefore be postponed until 2008. The EU's relations with the candidate countries Turkey and Croatia entered a new phase in October 2005 when accession negotiations were opened. The negotiations are likely to be protracted, particularly those with Turkey. Negotiations with Turkey are not expected to be concluded until approximately ten years after their opening, at the earliest. Macedonia became an official candidate country in December 2005, but no date has yet been set for the opening of accession negotiations.

THE STABILITY AND GROWTH PACT

In recent years, fiscal-policy cooperation within the EU has been characterised by the member states' difficulties in fulfilling the provisions of the EU Treaty and the Stability and Growth Pact relating to government budget deficits and debt. The problems culminated in 2004, when the European Commission brought an action before the European Court of Justice following the decision by the Ecofin Council concerning the

1 Greece, which joined the euro area on 1 January 2001, had a shorter transitional period, however.

20-03-2006 11:48:00 Antal sider: 172 Rev. nr. 2 H:\Aarsberetninger\2005\Engelsk\faerdige\Hel.doc Oprettet af Hanne Christensen Report and Accounts 2005 77 excessive deficits of Germany and France. In practice this decision meant that the excessive deficit procedure was held in abeyance for these two member states.1 This left fiscal-policy cooperation in a deadlock and triggered a debate on a reform of the Pact. In March 2005, agreement was reached on adjustment of the rules of the Stability and Growth Pact. The reform appears to have paved the way for resolving the deadlock and for the rules again to be enforced with sufficient political support. The necessity of this is emphasised by the Euro- pean Commission's autumn forecast, which paints a dismal picture of the budgetary situation in Europe.

2005 reform of the Stability and Growth Pact The rules of the Treaty establishing the European Community, including its key prohibition of "excessive deficits" have not been changed with the reform of the Pact.2 In principle, a deficit exceeding 3 per cent of GDP is defined as excessive. The Stability and Growth Pact expands and specifies these fundamental rules under the Treaty. The purpose is to contribute to preventing excessive deficits, and also to lay down a more detailed procedure for correcting excessive deficits. The 2005 reform was a compromise, mainly aimed at strengthening the preventive elements of the Pact and increasing flexibility in the excessive deficit procedure, particularly in low-growth situations, cf. Box 11. In terms of the preventive arm of the Pact, the reform has entailed tightening of the requirement to pursue a medium-term objective of government budgets that are close to balance or in surplus. In the event of low potential growth and high government debt, the requirement of the medium-term objective is increased. In principle, member states that diverge from their medium-term objectives must adjust their cyclically adjusted deficit by at least 0.5 per cent of GDP per annum.3 This will entail enhanced consolidation of the nominal budget balance during upswings, and more limited consolidation when economic growth is below potential. In addition, major structural reforms may be taken into

1 See Danmarks Nationalbank, Report and Accounts, 2004, pp. 80-81. 2 While the prohibition applies to all EU member states except the UK, which is subject to a special derogation for as long as it does not participate in the euro, under the EU Treaty only the euro area member states can be ordered to take measures to reduce their excessive deficits and can be subject to sanctions. 3 The government budget balance is affected by a number of factors which do not directly relate to fiscal policy, including in particular the cyclical position. Compilation of the balance adjusted for cyclical developments, i.e. a cyclically adjusted balance, therefore gives a more true and fair view of the actual fiscal-policy development. However, the cyclically adjusted balance always includes some degree of estimation and is therefore subject to uncertainty. If further adjustment is made for one-off measures, etc. the structural balance is achieved. For a further discussion of the issues relating to compilation of cyclically adjusted budgets, reference is made to Allan Bødskov Andersen, Cyclically Adjusted Government Budget Balances, Danmarks Nationalbank, Monetary Review, 3rd Quarter 2002.

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OVERVIEW OF SIGNIFICANT AMENDMENTS TO THE PACT Box 11

Preventive arm of the Pact Corrective arm of the Pact • Differentation of member states' • Relaxation of the exemption provi- medium-term budget objectives on sions concerning the excessive deficit the basis of government debt, poten- procedure, which now enter into tial growth and fiscal-policy sustain- force in the event of negative growth ability or a sustained period of low growth • One-off measures are no longer in- in relation to the potential cluded in the calculation of the bud- • Specification of "all other relevant get adjustment factors", to be taken into account in a • Higher nominal budget adjustment in balanced overall assessment of a bud- "good times" than in "bad times" get deficit • The minimum adjustment requirement • Extension of deadlines under the pro- comprises not only euro area member cedure states, but also ERM II member states • Possibility of new deadlines in the • Expenses that have long-term cost- event of unforeseen adverse eco- reducing effects are to be taken into nomic events account

Note: For a more detailed review of the 2005 reform of the Stability and Growth Pact, see Thomas Haugaard Jensen and Jens Anton Kjærgaard Larsen, The Stability and Growth Pact – Status in 2005, Danmarks Nationalbank, Monetary Review, 3rd Quarter 2005.

account if they improve the long-term sustainability of the fiscal policy. Such measures include costs of pension reforms. The reform of the corrective arm of the Stability and Growth Pact has facilitated access to exemptions from the excessive deficit procedure in the event that the 3-per-cent limit has been exceeded. Under the Treaty's excessive deficit procedure, a member state's budget deficit may exceed the 3-per-cent limit, provided that the circumstances are exceptional and temporary and the deficit remains close to the 3-per-cent limit. Under the reform, a breach is exceptional when GDP growth is negative or has been below its potential level for a protracted period. Previously, the requirement was an annual decrease in GDP of at least 0.75 per cent. The reform entails that a balanced overall economic assessment must be performed, taking into account all relevant factors related to exceeding the 3-per- cent limit. As a new element, "all other relevant factors" have been specified, and the member state in question may point to factors to be considered. Consequently, a number of country-specific factors such as potential growth, fiscal-policy consolidation efforts, structural-policy measures, etc, may be included in the assessment. The duration of the excessive deficit procedure has also become more flexible since the deadline for correction of an excessive deficit may in special circumstances be extended from one to two years. In addition,

20-03-2006 11:48:00 Antal sider: 172 Rev. nr. 2 H:\Aarsberetninger\2005\Engelsk\faerdige\Hel.doc Oprettet af Hanne Christensen Report and Accounts 2005 79 the deadlines given may be extended in the event of unforeseen adverse economic events, provided that the member state in question has introduced fiscal-policy tightening measures as recommended. The significance of the reform of the Pact in 2005 cannot be assessed yet, since it will depend on how the new rules are applied in practice. However, the rules have become more complex, which marks a departure from the original concept of a simple set of rules. The increased access to exemptions can impede strict enforcement of the excessive deficit procedure.

The budget situation 2005 – status According to the European Commission's autumn forecast from No- vember 2005, the budget deficit in the euro area is expected to increase to 2.9 per cent, from 2.7 per cent in 2004. For the EU overall, an increase from 2.6 to 2.7 per cent is expected. The European Commission expects 11 member states to exceed the Treaty's 3-per-cent limit in 2005, cf. Chart 28, including five euro area member states – France, Greece, Italy, Portugal and Germany – all of which are subject to the excessive deficit procedure. The procedure was initiated for Italy and Portugal in 2005, in both cases under the rules of the reformed Stability and Growth Pact. The European Com-

ESTIMATED BUDGET DEFICIT AND DEBT IN EU MEMBER STATES IN 2005 Chart 28

Hungary Portugal 6

Italy Slovakia Germany Malta P 4 Poland France Czech Republic UK Greece Luxembourg Cyprus 2 Netherlands Lithuania Austria Slovenia Latvia Ireland 0 Spain Belgium

Sweden Estonia Finland -2 Budget deficit as a percentage ofBudget a percentage GD deficit as Denmark -4 0 20406080100120 Debt as a percentage of GDP

Note: Member states indicated in blue comply with the 3-per-cent limit for budget deficits stipulated in the Treaty, as well as the 60-per-cent limit for government debt. Negative figures indicate a government budget surplus. Source: The European Commission's autumn forecast 2005.

20-03-2006 11:48:00 Antal sider: 172 Rev. nr. 2 H:\Aarsberetninger\2005\Engelsk\faerdige\Hel.doc Oprettet af Hanne Christensen Report and Accounts 2005 80 mission regarded neither Italy's nor Portugal's deficit as temporary or exceptional, and "other relevant factors" were therefore not included in the assessment of the excessive deficit. For Italy, 2007 was set as the deadline for correction of the deficit, while Portugal has been given until 2008. Greece was the first member state to be given notice to take measures to reduce its budget deficit. The deadline was postponed by one year until 2006. The excessive deficit in the Netherlands was corrected in 2004, one year ahead of the deadline. The excessive deficit procedure was therefore abrogated in 2005 when the budget deficit for 2004 was found to have been 2.3 per cent of GDP. For Ger- many and France, 2005 was the deadline for correction of their excessive deficits. According to the European Commission's autumn forecast, both member states still exceeded the 3-per-cent limit in 2005, and consequently the procedure is expected to be resumed for these two member states in 2006. Among the new member states, Cyprus brought its deficit below the 3-per-cent limit in 2005, while Hungary on the other hand adjusted its budget deficit for 2005 substantially upwards. As a result, the Ecofin Council decided in November 2005 that Hungary had not lived up to the Council decisions from March to improve the budget.1

DISCUSSION OF THE IMF's FUTURE DEVELOPMENT

The strategic development of the International Monetary Fund, IMF, was a major topic at the meetings of the International Monetary and Finan- cial Committee, IMFC2, in the spring and autumn of 2005. The objective was to specify the role of the IMF in a globalised world with increasing capital flows and growing economic influence among the emerging economies, and in relation to the efforts of the poorest member countries to reach the UN's millennium development targets by 20153, cf. Box 12. One of the focus areas is to increase the influence of some of the Asian emerging economies in the IMF, since their economic progress has not been reflected in correspondingly greater influence. Unless this is ensured, there is a risk that the countries will view IMF membership as less relevant. At the same time, a number of countries wish to strengthen the influence of the developing countries.

1 For non-euro area member states, the provisions relating to notice and sanctions under the excessive deficit procedure do not apply. This means that the Ecofin Council can only recommend that these member states take effective measures to prevent excessive deficits, and repeat such recommendations. 2 See the description of the IMF's decision-making structure at Danmarks Nationalbank's website. 3 The UN's millennium development targets relate to reducing poverty, improving health, etc. in developing countries by 2015.

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THE IMF's MEDIUM-TERM STRATEGY Box 12

In the spring of 2004, the G8 countries discussed a strategy for the development of the IMF in connection with the 60th anniversary of the Bretton Woods institutions. At the annual meeting in 2005, the IMFC approved the preparation of a medium-term strategy by the IMF. Ongoing efforts will concentrate on: • Focusing and streamlining economic surveillance of member countries with a global perspective in the analyses • Discussing the IMF's potential role as a provider of emergency loans to prevent crises. In addition, the role of the IMF in solving economic crises should be considered • Increasing flexibility in relation to the IMF's instruments for low-income countries, supplemented with specific analyses of the fulfilment of the UN's millennium development targets, and reducing bureaucratic procedures. The IMF's technical assistance should be integrated to a greater extent with other efforts in relation to the recipient country • Equipping the IMF better for advising member countries in connection with liberalisation of their capital balances • Setting priorities for the IMF's tasks within a three-year budget framework. At the same time, the revenue base should be reassessed in view of lower lending, e.g. through more active investment of quota funds • Streamlining the organisation, including changing the salary system, improving internal risk management and ensuring efficient division of responsibilities in relation to the World Bank • Ensuring appropriate quotas and influence for IMF member countries

DEBT RELIEF FROM IMF TO POOR COUNTRIES

In November, the Executive Board of the IMF adopted the implementation modalities for the Multilateral Debt Relief Initiative to cancel 100 per cent of the claims on a number of poor countries, cf. Box 13. The Ini- tiative is to be seen as part of the efforts to reach the UN's millennium development targets and was initially prompted by a proposal made by the G8 finance ministers in June 2005. In addition, the IMF has adopted two new facilities for low-income countries at the initiative of the G8 countries. Poor countries with balance-of-payments problems as a result of sudden external events can now raise loans with concessional financing, the Exogenous Shocks Fa- cility, ESF. Finally, a new type of programme with no attached lending facility, the Policy Support Instrument, PSI, has been created. Approval of a two-year PSI for Nigeria in October enabled the achievement of a debt rescheduling agreement that Nigeria had concluded with the Paris Club group of western creditor countries.

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THE MULTILATERAL DEBT RELIEF INITIATIVE, MDRI Box 13

In principle, the Multilateral Debt Relief Initiative entails 100 per cent debt relief from the IMF, the World Bank and the African Development Bank. The Initiative is aimed at countries that have obtained or will obtain partial debt relief under the Heavily Indebt- ed Poor Countries, HIPC, facility. So far, 18 countries have obtained final HIPC debt relief, but in total up to 41 countries may in principle be comprised by the HIPC initiative. From the IMF's point of view, implementation of MDRI means that other member countries with annual per capita income of 380 dollars or less may also be eligible. The reason is that the use of IMF resources requires uniform treatment of member countries. The countries in question are relieved of their debt to the IMF at end-2004, less subsequent paid redemptions, however. To obtain debt relief, the member countries must have serviced their loans from the IMF and comply with certain minimum requirements for macroeconomic policy, poverty reduction and government debt management. In December 2005, the Executive Board of the IMF assessed that 19 countries fulfilled the conditions for immediate debt relief at the beginning of 2006.1 The total debt relief to these countries will amount to around SDR 2.3 billion (approximately 3.3 billion dollars). The total cost of MDRI to the IMF may reach approximately five billion dollars, depending on which countries qualify for debt relief. This can be expected to amount to approximately 10 per cent of the total costs of MDRI from the IMF, the World Bank and the African Development Bank. In general, financing must be obtained via a reasonable distribution of costs. As far as the IMF is concerned it should mainly be achieved within the existing framework, but with a special arrangement for such countries as the Sudan, Somalia and Liberia, which have very large outstanding debt with the IMF. For this purpose the IMF has established three trust funds2: • MDRI-I comprises e.g. funds from the IMF's general resources that can be used for debt relief to countries with per capita income of 380 dollars or less. • MDRI-II comprises e.g. (previously paid up) bilateral funds that can be used for debt relief to countries with per capita income of more than 380 dollars, that have obtained or will obtain partial debt relief under the HIPC initiative. • The ESF trust fund will comprise funds for financing concessional loans under ESF (the Exogenous Shocks Facility).

Denmark has regularly contributed to concessional loans under the Poverty Reduction and Growth Facility, PRGF, and in December Denmark accepted that Danish contributions may also be used for the new debt relief initiative. In 2000, Danmarks Nationalbank granted a government-guaranteed loan of SDR 100 million for the financing of lending under the PRGF.3 It is primarily this type of loan that will now be subject to debt relief and financed via the MDRI trust funds. In December, Denmark accepted premature redemptions of Danmarks Nationalbank's loan. Following the debt relief to the 19 countries, SDR 31.9 million has been repaid to Danmarks Nationalbank.

1 17 of these countries have previously obtained final debt relief under the HIPC initiative (Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda and Zambia), while two of the countries do not participate in the HIPC initiative (Cambodia and Tajikistan). 2 For the Multilateral Debt Relief Initiative to enter into force, amendment of the trust fund for the Poverty Reduc- tion and Growth Facility, PRGF, had to be accepted by all contributors. Denmark accepted the necessary amendments on 13 December 2005. 3 See Danmarks Nationalbank, Report and Accounts, 2003, p. 87.

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LENDING BY THE IMF

During the past year, the IMF's total lending has been more than halved, cf. Chart 29. Two of the three largest creditor countries – Argentina and Brazil – have paid off their remaining debt to the IMF ahead of schedule, while the third country, Turkey, has redeemed SDR 3.6 billion. Finally, Russia has settled its account with the IMF. The IMF's outstanding claims under general resources totalled kr. 257 billion (approximately SDR 28 billion) at end-2005, of which Denmark's contribution to financing the loans was kr. 1.9 billion. This outstanding represented approximately 13 per cent of the members' total quotas, which is the lowest level for 25 years. The premature redemptions of the remaining debt reduce the IMF's income from interest, which accentuates the problem concerning the IMF's future income basis, cf. Box 12. Argentina's government decided to use an increase in its foreign- exchange reserve to redeem the remainder of its IMF debt of SDR 6.9 billion (approximately 10 billion dollars). The increase in the foreign- exchange reserve is attributable to e.g. higher commodity prices and a competitive export sector, factors which have contributed to rising export revenue. The relationship between the IMF and Argentina has been strained and the Argentinean authorities have threatened to stop servicing Argentina's debt to the IMF.

OUTSTANDING IMF LENDING, YEAR-END Chart 29

SDR billion 80

0 2001 2002 2003 2004 2005

Other lending PRGF, etc. Indonesia Russia Turkey Brazil Argentina

Note: Outstanding lending in 2005 has been adjusted for Argentina's repayment on 4 January 2006, as well as debt relief to 19 Heavily Indebted Poor Countries on 6 January 2006, cf. Box 13. Source: IMF.

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In Brazil an increasing foreign-exchange reserve has enabled premature redemption of its debt to the IMF after the expiry of the borrowing programme in March. The development in the foreign-exchange reserve is e.g. attributable to an increasing surplus on the current account of the balance of payments, as well as stability-oriented macroeconomic policy, which has contributed to restoring confidence in the economy. In July, Brazil paid off the fourth of its debt that accrued interest at the highest rate, while the remaining SDR 10.8 billion (approximately 16 billion dollars) was repaid in December. The last redemptions were scheduled for 2007. With annual growth of approximately 5 per cent, the economic restor- ation of Turkey continued in 2005, but a current-account deficit of approximately 6 per cent of GDP entails that the external balance is still fragile. In May a new 3-year stand-by agreement for SDR 6.7 billion (approximately 10 billion dollars) was concluded. At the core of the new programme is continuation of the tight fiscal policy, as well as intentions to introduce a number of structural reforms, including a new banking act with strengthened supervision, further measures in preparation for privatisation, and increased flexibility in the labour market. The oil price increases in recent years enabled premature redemption by Russia – one of the world's major oil exporters – of the remaining approximately SDR 2 billion (approximately 3 billion dollars) of its debt to the IMF in January 2005. The last instalment was not due until 2008. In addition, in the summer of 2005 Russia paid off 15 billion dollars of its debt to the Paris Club.

Iraq has concluded a stand-by agreement with the IMF In December 2005, Iraq concluded a stand-by agreement with the IMF for SDR 475.4 million (approximately 685 million dollars). This agreement is to be viewed as a continuation of the post-conflict assistance that was adopted in September 2004 as a prerequisite for the implementation of phase two of the Paris Club agreement on debt relief to Iraq.1 Economic growth in Iraq in 2005 is estimated at approximately 2.5 per cent. As a result of the rise in oil prices, the budget deficit is lower than expected, and the foreign-exchange reserve has been increasing. In general, the Iraqi authorities have succeeded in promoting overall macroeconomic stability in the face of extremely difficult conditions. A number of the reforms agreed with the IMF have, however, been implemented at a slower rate than envisaged.

1 See Danmarks Nationalbank, Report and Accounts, 2004, pp. 85-86.

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OVERVIEW OF IMF VISITS TO DENMARK IN 2005 AND 2006 Box 14

Preliminary FSAP visit to Denmark • Meetings with relevant national authorities and organisations • Introductory discussions between national authorities and the IMF regarding stress tests and international standards

Visit by IMF Deputy Managing Director Agustín Carstens • Meetings with, inter alia, Danmarks Nationalbank, the Ministry of Finance and the Economic Council

Preparation of Article IV consultation • Meetings with Danmarks Nationalbank, the Ministry of Finance and the Economic Council, the Danish Welfare Commission, the Danish Globalisation Council and the Danish Financial Supervisory Authority

First FSAP mission to Denmark • Review of the standards concerning banking supervision, insurance, and payment and securities settlement systems • Determination of framework for stress tests • Meetings with authorities, organisations and other institutions

Special FSAP mission to Denmark • Review of the standard concerning anti-money laundering and combating the financing of terrorism

Second FSAP mission to Denmark • Review of results of stress tests • Provisional conclusions on stability in the financial system

Article IV consultation with Denmark • Discussion of conclusions regarding FSAP • Review of the Danish economy

Aug Sep Oct Nov Feb/Mar May Jun 2005 2005 2005 2005 2006 2006 2006

THE IMF's MACROECONOMIC AND FINANCIAL SURVEILLANCE OF DENMARK

Traditionally, the IMF has focused on macroeconomic surveillance, but in recent years financial surveillance has been given higher priority in view of the financial crises in Asia in 1997-98. At the core of financial surveillance is the Financial Sector Assessment Program, FSAP1. The Program is voluntary, but most IMF members, including Denmark, have announced that they would like an FSAP. Normally, the IMF sends a mission to Denmark every other year, but during 2005 and 2006 the IMF is expected to visit Denmark seven times in all, since this time its surveillance also includes FSAP. An extensive FSAP mission in November 2005 included almost 100 meetings between the IMF and relevant Danish authorities, organisations and financial institutions to give the IMF an overview of the financial sector. The FSAP seeks to disclose strengths and weaknesses in the financial systems in order to assess financial stability. In this context Danmarks Nationalbank

1 For a more detailed review of FSAP, see Gitte Wallin Pedersen, Review of the Financial System in Denmark, Danmarks Nationalbank, Monetary Review, 3rd Quarter 2005.

20-03-2006 11:48:00 Antal sider: 172 Rev. nr. 2 H:\Aarsberetninger\2005\Engelsk\faerdige\Hel.doc Oprettet af Hanne Christensen Report and Accounts 2005 86 performs stress tests to show how macroeconomic shocks affect the financial systems.1 The Danish Financial Supervisory Authority and specific financial institutions also participate in the stress tests. The IMF furthermore reviews international standards in four areas. The Danish Financial Supervisory Authority holds the main responsibility for the standards relating to banking supervision, insurance, and anti-money laundering and combating the financing of terrorism, while Danmarks Nationalbank holds the main responsibility for the standard relating to payment and securities settlement systems. The IMF conducts its FSAP up to an Article IV consultation, which is the key element of the IMF's surveillance of macroeconomic conditions in member countries. The next Article IV consultation in Denmark is expected to take place in June 2006, when the conclusions of the FSAP will also be discussed. The schedules for the FSAP and the Article IV consultation are outlined in Box 14. The conclusions are expected to be published in autumn 2006.

1 See Danmarks Nationalbank's annual publication Financial Stability.

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Organisation and Tasks of Danmarks Nationalbank

At the end of 2005 Danmarks Nationalbank had 552 employees, equivalent to 516 full-time positions.

DANMARKS NATIONALBANK'S OBJECTIVES AND VALUES

Danmarks Nationalbank has a number of objectives and values, which are the guidelines for its day-to-day activities. Both the objectives and the values have been drawn up in close cooperation between management and employees, and they form the basis for the individual departments' work on objectives and action plans. No changes were made to the objectives and values in 2005.

Objectives The overall objectives of Danmarks Nationalbank as an independent and credible institution are: • To ensure a stable krone. • To ensure efficient and secure production and distribution of banknotes and coins of high quality. • To contribute to efficiency and stability in the payment and clearing systems and in the financial markets. • To act as banker to the central government. • To prepare reliable and relevant financial statistics. • To prepare and communicate credible standpoints on economic and financial issues with relation to Danmarks Nationalbank's objectives. • To maintain its financial strength by means of consolidation and risk management.

Values • While safeguarding its traditions, Danmarks Nationalbank shall actively renew itself and adapt to trends in society and to the requirements of the surrounding world. Danmarks Nationalbank shall protect its credibility by not only displaying professional competence, managerial skills and sound judgement, but also by maintaining an organisation which lives up to the principles Danmarks Nationalbank considers to be significant to society's development: efficiency, cost awareness and

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readiness for change. Focusing on its primary tasks, on an ongoing basis Danmarks Nationalbank shall set priorities for its work. In brief: We shall display professional competence and exert sound judgement, and ourselves live up to the principles we consider to be important to society. • Danmarks Nationalbank shall be an attractive workplace capable of at- tracting, motivating and retaining well-qualified employees and offer- ing them working conditions which ensure balance between work and leisure. Key qualifications are initiative, commitment, adaptability and a willingness and ability to cooperate across professional barriers, and with other areas of the organisation. All employees must have the necessary training and/or education to handle their tasks. It is a joint responsibility to ensure that everyone is trained and developed in preparation for new tasks. In brief: It is important to Danmarks Nationalbank that all employees display professional competence, show initiative and an ability to cooperate, and can adapt to change. • Danmarks Nationalbank shall be service-oriented in terms of both the external relations of line functions, and the internal relations of staff functions with the rest of the bank. Teamwork and project work within each unit and between departments is encouraged. In cooperation with the employees, managers shall set priorities for tasks, define targets and ensure the necessary responsibility sharing and communication, thereby limiting the need for detailed supervision. This gives employees the widest possible scope to define their own working methods, solve tasks and take decisions themselves to the greatest extent possible. In brief: Managers shall motivate employees, set priorities, delegate responsibility and encourage teamwork. • Danmarks Nationalbank's relations with the financial sector are based on market-oriented solutions, and the costs to the sector and to Danmarks Nationalbank must be weighed against the value to society of the system or requirement. The underlying principle for systems and requirements relating to the credit institutions shall be equal treatment irrespective of size, geographical location and national affiliation. In brief: Relations with the financial sector shall be based on market- oriented solutions and relevance to society. • In relations with public authorities and players in the financial system, and in international cooperation, Danmarks Nationalbank shall seek influence and express attitudes which are in line with Danmarks National- bank's objectives. In relations with the public Danmarks Nationalbank shall, via the media and otherwise, ensure an understanding of the decisions relating to Danmarks Nationalbank's own tasks. With regard

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to financial conditions or economic policy in general, Danmarks Nation- albank shall comment on these issues if they are of material importance to its implementation of monetary and foreign-exchange policy, or to the efficiency and stability of the financial markets. In brief: Danmarks Nationalbank shall participate actively in national and international cooperation and shall communicate its policies in a clear and transparent way.

DANMARKS NATIONALBANK'S MANAGEMENT

The Royal Bank Commissioner The Royal Bank Commissioner is the formal link between the Govern- ment and Danmarks Nationalbank. The Minister for Economic and Business Affairs Mr Bendt Bendtsen is the Royal Bank Commissioner.

Board of Directors The Board of Directors has 25 members, of whom eight are elected by the Folketing (Parliament) from among its members, and two are appointed by the Minister for Economic and Business Affairs who is the Royal Bank Commissioner. The other 15 members, who must have in- depth knowledge of business conditions, are elected by the Board of Directors and should represent different geographical areas and pro- fessions, including wage-earners. Meetings are normally held once in each quarter. The Board of Directors has organisational tasks and must approve the annual accounts. The Board of Directors of Danmarks Nationalbank as of 1 March 2006 is shown in Box 15. Changes in the Board of Directors are stated in the press releases on p. 137-138.

The Committee of Directors The Committee of Directors has seven members. The two members of the Board of Directors appointed by the Minister for Economic and Busi- ness Affairs are permanent members. On the election of the other five members of the Committee of Directors, it is customary for the Board of Directors to elect two MPs representing the government and the op- position parties, respectively. The Committee of Directors usually meets ten times a year. The Committee of Directors of Danmarks Nationalbank as of 1 March 2006 is shown in Box 16.

The Board of Governors The Board of Governors has three members. The governors are charged with the day-to-day management of Danmarks Nationalbank and hold sole responsibility for the formulation and ongoing adjustment of

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THE BOARD OF DIRECTORS OF DANMARKS NATIONALBANK, 1 MARCH 2006 Box 15

Chairman: Hans E. Zeuthen, Professor Deputy Chairman: Helle Bechgaard, Director

Elected by the Folketing for the period ending 31 March 2006: Elisabeth Arnold, MP Pia Christmas-Møller, MP Kristian Thulesen Dahl, MP Svend Erik Hovmand, MP Henrik Sass Larsen, MP Jens Rohde, MP Villy Søvndal, MP Helle Thorning-Schmidt, MP

Appointed by the Minister for Economic and Business Affairs for the period ending 31 March 2006: Michael Dithmer, Permanent Secretary, Ministry of Economic and Business Affairs Michael Lunn, Permanent Secretary, Ministry of Justice

Elected by the Board of Directors for the period ending 31 March: Johannes Fløystrup Jensen, Director 2006 Kirsten Nissen, Trade Union President 2006 Finn Thorgrimson, Former President of the Trade Union Federation 2006 Jette W. Knudsen, Director 2007 Kjeld Larsen, Farmer 2007 Kirsten Nielsen, Former Council President 2007 Søren Bjerre-Nielsen, Group President 2008 Niels Boserup, Managing Director 2008 Knud Koch-Jensen, Engineer 2008 Niels Due Jensen, Group Chairman 2009 Jens Rostrup-Nielsen, Director, R & D Division 2009 Hans E. Zeuthen, Professor 2009 Helle Bechgaard, Director 2010 Niels Fog, Merchant 2010 Kirsten Stallknecht, Former President for the ICN 2010

monetary policy. As Governor by Royal Appointment Mr Nils Bernstein is Chairman of the Board of Governors. Mr Nils Bernstein succeeded Ms Bodil Nyboe Andersen, who retired at the end of October 2005.1 The two other members, who are appointed by the Board of Directors on the recommendation of the Committee of Directors, are Mr Torben Nielsen and Mr Jens Thomsen.

1 On 24 June 2005, the Danish government nominated the then Permanent Secretary of State in the Prime Minister's Office, Nils Bernstein, as the new Governor by Royal Appointment and Chairman of the Board of Governors of Danmarks Nationalbank.

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THE COMMITTEE OF DIRECTORS OF DANMARKS NATIONALBANK, 1 MARCH 2006 Box 16

Chairman: Hans E. Zeuthen, Professor Deputy Chairman: Michael Dithmer, Permanent Secretary, Ministry of Economic and Business Affairs

Elected by the Board of Directors for the period ending 31 March 2006: Søren Bjerre-Nielsen, Group President Kirsten Nissen, Trade Union President Jens Rohde, MP Helle Thorning-Schmidt, MP Hans E. Zeuthen, Professor

Auditors The Minister for Economic and Business Affairs appoints two state- authorised public accountants as the external auditors of Danmarks Na- tionalbank for one year at a time. State-Authorised Public Accountant Mr Svend Ørjan Jensen and State-Authorised Public Accountant Ms Mona Blønd have been reappointed until 31 March 2007.

DEPARTMENTS

Danmarks Nationalbank has 15 departments, cf. the organisation chart on p. 94. The tasks of the individual departments are as follows: • Accounting manages and monitors the accounts of customers (credit institutions, the central government, central banks, etc.) and the settlement of payments in the financial sector. It undertakes settlement and bookkeeping of transactions concerning Danmarks National- bank's foreign-exchange and bond portfolios, and the central-government debt. It also undertakes Danmarks Nationalbank's payroll administration and prepares its accounts, budgets and statistical reporting. Government Debt Accounting undertakes bookkeeping and control of domestic and foreign government debt, as well as the Social Pension Fund, on behalf of the Ministry of Finance. In addition, it prepares financial statements of the development in and distribution of central- government debt, as well as the size of current payments.

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• Banking Services supplies banknotes to the banks in Denmark, in the Faroe Islands and in Greenland. This takes place via cash depots established by agreement with banks. Worn banknotes are returned to Banking Services for control of authenticity and destruction. • The Banknote Printing Works manufactures Danish and Faroese banknotes, and is thus responsible for the design of the banknotes, the production of printing plates and ink, and the actual printing of the banknotes, as well as quality control, cutting out and packaging. The Banknote Printing Works also participates in international cooperation on improving the security of banknotes. • Economics analyses monetary and foreign-exchange policy issues as well as macroeconomic development in Denmark, the EU and other industrialised countries. The department undertakes research in these areas. The economic model of the Danish economy, "Mona", has been developed by the department for analysis of inter alia cyclical trends. Economics edits Danmarks Nationalbank's quarterly Monetary Review. • Facility Services is responsible for the administration and maintenance of Danmarks Nationalbank's properties and for internal services. • Financial Markets' responsibilities are managing, monitoring and analysing Danmarks Nationalbank's portfolios, assessing and analysing the development in the financial sector and in financial stability in Den- mark, and preparing outline strategies and analyses of government debt policy. Financial Markets publishes Danish Government Borrow- ing and Debt and Financial Stability. • Internal Audit undertakes the audit of Danmarks Nationalbank's procedures, internal control environment and control measures, IT use and risk-management procedures. In cooperation with the appointed external auditors, it audits Danmarks Nationalbank's annual accounts. In addition, it audits Danmarks Nationalbank's Pension Fund subject to winding up and various foundations. Finally, in cooperation with the National Audit Office of Denmark it also audits the Guarantee Fund for Depositors and Investors, the Social Pension Fund, the High-Technology Foundation, the Financing Fund and government debt management. • International Relations is responsible for relations with international economic policy organisations, including the European Central Bank, ECB, and the International Monetary Fund, IMF. • IT is responsible for the use of IT at Danmarks Nationalbank, including its IT strategy. The tasks include operation and development of Dan- marks Nationalbank's LAN, application development, and the purchasing and management of Danmarks Nationalbank's hardware and soft- ware. IT also handles Danmarks Nationalbank's relations with Bankernes EDB Central, BEC.

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• Market Operations undertakes tasks relating to monitoring and analysis of market developments, e.g. the implementation of foreign-exchange, monetary and liquidity policy, including intervention in the foreign- exchange and money markets. It is responsible for the administration of Danmarks Nationalbank's portfolios, comprising the foreign-exchange reserve and the bond portfolio. In connection with the implementation of government debt policy, it undertakes domestic and foreign borrowing for the central government. • Payment Systems handles policy issues relating to payment systems, including securities settlement. It cooperates with owners and operators of the Danish retail payment and settlement systems and monitors these systems. It also develops and maintains Danmarks Nationalbank's payment system for large krone- and euro-denominated payments. • Personnel and Organisation is responsible for personnel policy and staff and organisational development, the planning of security measures, issues relating to operational risk, internal control procedures, supervision and contingency plans for business continuity, as well as coordination of the annual budget and planning process. • The Royal Mint manufactures Danish coins and supplies banks in Den- mark, the Faroe Islands and Greenland with coins. In addition to ordinary coins in circulation, commemorative coins, thematic coins, coin sets and medals are also manufactured. • The Secretariat undertakes general secretariat functions for the Board of Governors, the Committee of Directors and the Board of Directors and is responsible for external and internal communication, including relations with the press, and Danmarks Nationalbank's website, intra- net and lectures. The Information Desk responds to general external enquiries. The Secretariat also comprises Danmarks Nationalbank's central archives and library. Legal Affairs handles general legal issues, including EU law. The Secretariat edits Danmarks Nationalbank's Re- port and Accounts. • Statistics compiles, prepares and distributes financial statistics, including statistics for the financial sector, financial sector accounts, compilation of the financial items of the balance of payments and Denmark's foreign debt and direct investments. Statistics are published electronically via the Internet.

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Report and Accounts 2005 94

ORGANISATION CHART 1 MARCH 2006

Board of Directors Accounting 25 members Director, Chief Accountant Henrik Larsen Head of Division Internal Audit Jan Thorndal Committee of Directors Chief Auditor 7 members Jan Birkedal Government Debt Accounting Head of Division Viggo Sørensen*) Board of Governors Secretariat Head of Secretariat Karsten Biltoft Governor by Royal Appointment, Chairman Head of Division Banking Services Winnie Jakobsen Nils Bernstein Chief Cashier Lars Gerrild Sørensen Legal Affairs Head of Division Kirsten Rohde Jensen Governor Torben Nielsen Banknote Printing Works Director, General Manager Economics Ejner Petersen Governor Assistant Governor, Head of Head of Division Jens Thomsen Economics Anne-Mette Thorsen Anders Møller Christensen Reimann Head of Division Head of Division Christian Ølgaard Leif Yde

Financial Markets Facility Services Head of Financial Markets Hugo Frey Jensen Head of Facility Services Head of Risk Management Erik Lundgreen Ib Hansen Head of Government Debt Management Ove Sten Jensen IT Head of Financial Institutions Head of IT Jens Lundager Søren Lundsby Hansen

Statistics International Relations Head of Statistics Director, Head of Payment Systems Jens Dalsgaard International Relations Head of Payment Systems Head of Division Kai Aaen Hansen Kristian Kjeldsen Bent Christiansen Head of Division Niels Bartholdy

Personnel and The Royal Mint Organisation General Manager Market Operations Head of Personnel and Laust Grove Head of Market Operations Organisation Jesper Berg Flemming Farup Head of Division Head of Division Frank Nielsen John Larsen Head of Division Erik Pedersen

*) Viggo Sørensen, Head of Division, is also Head of the Secretariat for The Guarantee Fund for Depositors and Investors.

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STAFF

Staffing structure At the close of 2005, Danmarks Nationalbank had 552 employees, equivalent to 516 full-time positions. Employees in part-time positions constituted 13 per cent of the staff. Danmarks Nationalbank employed 24 student assistants at the close of 2005, most of whom were pursuing studies in economics. In addition, 3 employees are preparing PhDs. The bank also employs 4 apprentices within the areas of clerical work, media graphics and structural carpen- try. The proportion of employees who are immigrants or descendents thereof from non-western countries1 is 2.2 per cent. The highest per- centages are seen in the staff groups academic staff (0.9 per cent) and IT/clerical staff (0.9 per cent). In 2005, the staff turnover rate was 13 per cent2, cf. Table 8. A total of 55 new employees joined the bank, while 72 left in 2005. One third of the latter group left as a result of restructuring of work processes and staff reduction at the Banknote Printing Works in 2004. By far the ma- jority of those who left did so voluntarily or under a severance scheme. The staffing structure of Danmarks Nationalbank has changed in recent years, and the proportion of academic staff has risen substantially, cf. Table 9. The changed staffing structure reflects ongoing rationalisation among non-academic staff groups, as well as the fact, as seen in other business enterprises, that work tasks have become increasingly complex and thus require a higher level of education. The group of female aca- demics with more than five years' seniority is growing. Among the academic staff, 32 per cent are women. Overall, women accounted for 43 per cent of the staff in 2005. The proportion of women has been declining slightly in recent years, which may be attributable to ongoing rationalisation of clerical staff and bank staff, which are the areas where most women have traditionally been employed. The proportion of women in managerial positions3 is 12 per cent, while 8 per cent of senior managers4 are women. Seniority and the average age of employees fell by 0.5 years in 2005. The average seniority is 12.9 years, and the average age is 42.2 years. At approximately 20 per cent, the proportion of employees with at least 25

1 Non-western countries are countries outside the EU, the Nordic region, the USA, Canada, Australia, New Zealand, Andorra, Liechtenstein, Monaco, San Marino, Switzerland and the Vatican. 2 Calculated as the number who left the bank as a ratio of the average number of employees in 2005. 3 Defined as at least Assistant Head of Division. 4 Defined as members of the Board of Governors and the senior manager group (Heads of Divisions/ Departments, Directors and Assistant Governors).

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STAFF TURNOVER RATE Table 8

Per cent 2000 2001 2002 2003 2004 2005

Staff turnover rate ...... 11.0 6.8 9.2 6.7 10.4 13.0 years' seniority remains high. For employees in senior managerial positions, the average age is 50.5 years, and their average seniority at the bank is 21.4 years.

Staff development and education Great importance is attached to the ongoing professional and personal development of the staff. This is achieved via the day-to-day work, internal and external courses, further and supplementary education (e.g. the graduate diploma in business administration), internal job rotation and various leave-of-absence schemes, including leave to work for international financial organisations. The bank's expenditure on education was kr. 10.6 million in 2005, which is an increase by kr. 1.7 million compared with the preceding year. Overall, it is equivalent to 4.3 per cent of the payroll costs in 2005. Edu- cational spending was distributed on approximately 75 per cent of the staff1. For courses held during working hours, the average employee participated in 2.2 courses with a total duration of approximately five course days. 25 employees changed jobs in 2005 after applying for posts advertised internally. At the close of the year, 12 employees had taken leave to work for international financial organisations. In 2005, Danmarks Nationalbank began to apply Assessment Center as an employee development tool with a view to assessing the managerial potential of certain employees. External consultants undertake the assessments, which conclude with a personal report for the employee, and possibly subsequent coaching sessions with an HR consultant.

Recruitment In 2005, 26 external job advertisements2 were posted, resulting in 750 ap- plications, 99 interviews with candidates and 40 profile tests for 37 positions filled. Candidates for temporary positions, including jobs as student assistants, are not required to take tests. Compared to 2004, there were fewer applicants for by and large the same number of vacancies. The low-

1 Defined as all staff employed by Danmarks Nationalbank during 2005. 2 Student assistants are not included in the figures.

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STAFF GROUPS Table 9

2001 2002 2003 2004 2005

Per Per Per Per Per Year-end Number cent Number cent Number cent Number cent Number cent

Academic staff ...130 23 149 27 153 28 165 31 173 33 Bank staff ...... 128 23 122 22 116 21 104 19 96 19 IT-/clerical staff ...114 21 111 20 104 19 98 18 92 18 Service staff ...... 92 16 90 16 86 16 86 16 84 16 Craftsmen/ technicians ...... 94 17 87 15 85 16 83 16 71 14

Total ...... 558 100 559 100 544 100 536 100 516 100

Note: Number of employees converted to full-time positions.

er number of applicants is, inter alia, attributable to the fact that Dan- marks Nationalbank employed an external recruitment agency to fill some positions. In 2005, Danmarks Nationalbank participated in several career fairs as part of its stronger, targeted effort to recruit new staff from relevant fields of further and higher education and from relevant educational institutions.

Absence due to illness In 2005, absence due to illness was an average of 7.7 days per staff member, which is an increase compared to 2004 (7.1 days). The rise is primarily attributable to a few cases of long-term illness. If these cases are disre- garded, absence due to illness has declined from 6.1 days to 5.8 days per staff member.

Salary and employment conditions In 2005, Danmarks Nationalbank negotiated the collective agreements with the Staff Association of Danmarks Nationalbank, which comprises most of the bank's employees, and with senior managers. The agreements run for three years and are subject to negotiation in 2008. Among other things, the collective agreement with the Staff Association allows for individual agreements with certain staff groups concerning general allow- ances instead of timesheet entry, as well as the option for all employees to conclude agreements on salary packages (gross salary schemes) regarding ADSL and telephony.

Internal rules for purchase and sale of financial shares As from 1 April 2005, the governors and senior managers of Danmarks Nationalbank, as well as employees in departments that may have access

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LECTURES

Lectures are an important part of Danmarks Nationalbank's targeted and proactive strategy to communicate its policies and tasks. The governors and senior managers give lectures at different venues in Denmark and in connection with events at Danmarks Nationalbank. In addition, many lectures are given at Danmarks Nationalbank by a "lecture team" of younger employees. A major target group is students in upper secondary school and at commercial colleges with some knowledge of economics, since Danmarks Nationalbank wishes to stimulate their interest in economics and increase familiarity with the tasks of Danmarks Nationalbank. The number of lectures in this category increased from 31 in 2000 to 116 in 2005. More than 3,000 people thus attended lectures at Danmarks Nationalbank in 2005.

OTHER INITIATIVES IN 2005

Renovation of the roof of Danmarks Nationalbank At the beginning of 2005, Danmarks Nationalbank called for tenders for the ongoing task of renovating the roof of Danmarks Nationalbank. The project is expected to be completed in mid-2006.

Conference on communication within ERM II for the new EU member states In September 2005, Danmarks Nationalbank held a conference for the new EU member states in order to share experience regarding communication within ERM II. Danmarks Nationalbank has extensive experience of sharing information and communicating within the framework of the fixed-exchange-rate policy. The conference included a review of Dan- marks Nationalbank's communication policy vis-à-vis the press, market participants and the general public. Latvia and Hungary also contributed presentations concerning their communication policy.

Workshop on securities lending In November 2005, Danmarks Nationalbank held a workshop on securities lending for representatives of 15 central banks, who discussed theoretical,

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Danmarks Nationalbank issued "Payment Systems in Denmark" In July 2005, Danmarks Nationalbank issued the publication "Payment Systems in Denmark". Danmarks Nationalbank oversees payment and securities settlement systems of importance to financial stability and considers it important to make available a comprehensive description of the systems and the payments infrastructure. The publication contains a general description of payment and settlement systems and the role of central banks in this context. Danmarks Nationalbank's role in relation to payment systems and the Danish payments infrastructure is described in detail, while selected international payment and settlement systems are presented on a more general basis. Finally, Danmarks Nationalbank's oversight of important payment and settlement systems is described.

Financial sector continuity Danmarks Nationalbank and the Danish Financial Supervisory Authority have conducted an initial analysis of the need for continuity planning for the financial sector in Denmark. Such planning will be aimed at increasing the resilience of the sector so that the sector as such will be able to continue critical business processes after an operational incident. Focus will therefore be on services that are time critical, involve large sums of money and are of significant importance to behaviour in the financial markets. Financial sector continuity planning does not replace the financial enterprises' own business continuity planning. Danmarks National- bank will undertake coordination of the ongoing work.

Restructuring of Danish Ship Finance as a limited liability company On 17 January 2005, Danish Ship Finance, the Danish Ministry of Economic and Business Affairs and Danmarks Nationalbank concluded an agreement on the restructuring of Danish Ship Finance as a limited liability company. The Board of Representatives of Danish Ship Finance and the Committee of Directors of Danmarks Nationalbank approved the agreement, and the necessary legislative amendment has been adopted by the Folketing (Parliament). Danmarks Nationalbank purchased shares in Danish Ship Finance A/S for nominally kr. 63 million at a market value of kr. 231 million. These shares cannot be sold for at least five years. See the press release on pp. 149-150.

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Danmarks Nationalbank's sale of shares in Grønlandsbanken At the beginning of 2005, Danmarks Nationalbank sold its entire shareholding in Grønlandsbanken A/S to the Greenland Home Rule, cf. the stock-exchange announcement of 20 January 2005. The transferred shareholding constituted 13.7 per cent of the share capital of Grøn- landsbanken A/S. The Danish Financial Supervisory Authority approved the Greenland Home Rule as the purchaser of the shares. The ownership and voting rights relating to the shares therefore passed to the Greenland Home Rule on 15 February 2005. See the press release on p. 150.

Danmarks Nationalbank's sale of shares in Bella Center In April 2005, Danmarks Nationalbank sold its shares in Bella Center A/S. At the same time, three other large shareholders – the Danish government, Danske Bank and Nordea – sold their shares. Danmarks Nationalbank had been a shareholder of Bella Center A/S since its foundation in July 1964. At that time it was seen as an important task for society to establish an exhibition centre in the vicinity of Copenhagen, and Danmarks Nationalbank therefore subscribed to shares for nominally kr. 1 million, equivalent to approximately 11 per cent of the share capital of Bella Center A/S. After a number of subsequent capital injections, Danmarks Nationalbank's nominal shareholding at the beginning of 2005 was kr. 17.3 million, constituting 13.3 per cent of the total share capital. The reasons for selling Danmarks Nationalbank's shares included that ownership of an exhibition and conference centre is not deemed to be a natural part of Danmarks Nationalbank's activities, and that the Danish Ministry of Finance wished to sell the government's shares.

Acquisition of Dankort A/S and PBS International by PBS On 1 December 2005, PBS Holding A/S, in which Danmarks Nationalbank holds an interest of 17.7 per cent of the shares, acquired Dankort A/S. The latter company, which was established in 2001, acquired the rights to the Dankort (debit card) and the role of administrator of the rules and licences. In addition, PBS Holding A/S has acquired the shares of PBS In- ternational as from 1 January 2006. The primary activity of this company is to sell acceptance agreements for a number of international payment cards. PBS International was established in 2003 in connection with a demerger of PBS into a number of independent companies.

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REPRESENTATION ON COMMITTEES, ETC.

As of 1 March 2006 Danmarks Nationalbank is represented on the following committees, etc.: • Bankernes EDB Central (BEC) Governor Torben Nielsen is an observer on the Board of Directors • Danish Ship Finance A/S Governor Jens Thomsen is a member of the Board of Directors • The Financial Business Council Governor Jens Thomsen is a member, and Jens Lundager, Head of Div- ision, is an alternate member • The Economic Council Governor Jens Thomsen is a member • The Danish Securities Council Hugo Frey Jensen, Head of Financial Markets, is a member, and Birgitte Bundgaard Madsen, Adviser, is an alternate member • Industriens Realkreditfond Danmarks Nationalbank has appointed Professor Michael Møller to the Board of Directors • PBS Holding A/S and PBS A/S Governor Torben Nielsen is a member of the Board of Directors, and Kristian Kjeldsen, Head of Division, is an alternate member • Managing Committee for the Social Pension Fund Ove Sten Jensen, Head of Division, is a member • VP Securities Services Governor Torben Nielsen is the Vice Chairman of the Board of Directors

REPRESENTATION IN INTERNATIONAL ORGANISATIONS

As part of the international foreign-exchange and monetary-policy cooperation Danmarks Nationalbank participates in a number of committees, sub-committees and working groups, of which the most significant are:

The European Union, EU • The Committee of European Banking Supervisors Jens Lundager, Head of Division (with Flemming Nytoft Rasmussen, Deputy Director, Financial Supervisory Authority) • The Economic and Financial Committee Governor Jens Thomsen (with Per Callesen, Deputy Secretary, Ministry of Finance). Niels Bartholdy, Head of Division, is an alternate member (with Steen Lohmann Poulsen, Head of Division, Ministry of Finance)

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• The Economic Policy Committee Christian Ølgaard, Head of Division, is an alternate member of the Com- mittee (with Niels Kleis Frederiksen, Head of Division, Ministry of Finance. Helge Sigurd Næss Schmidt, Head of Division, Ministry of Finance, and Birgitte Anker, Head of Division, Ministry of Economic and Business Affairs are members) • Economic and Financial Committee Group on EU Government Bills and Bonds Governor Jens Thomsen is Chairman, and Ove Sten Jensen, Head of Division, is a member (with Michael Wiemann, Head of Section, Minis- try of Finance) • The Working Group of Mint Directors Laust Grove, General Manager, the Royal Mint, and Johanne Dinesen Riishøj, Head of Section

The European Central Bank, ECB • The General Council Governor Nils Bernstein

Danmarks Nationalbank participates partly in the following ECB committees where EU central banks outside the euro area have access: • Banking Supervision Committee Hugo Frey Jensen, Head of Financial Markets (with Flemming Nytoft Rasmussen, Deputy Director, Financial Supervisory Authority) • Payments Systems Committee Kristian Kjeldsen, Head of Division, and Allan Damm Christensen, As- sistant Head of Division • Legal Committee Kirsten Rohde Jensen, Head of Division • Monetary Policy Committee Anders Møller Christensen, Assistant Governor • Information Technology Committee Søren Lundsby Hansen, Head of IT, and Johan Sebastian Gabel, Ad- viser • Eurosystem/ESCB Communications Committee Karsten Biltoft, Head of Secretariat, and Winnie Jakobsen, Head of Division • International Relations Committee Governor Jens Thomsen and Kai Aaen Hansen, Director, Head of Inter- national Relations • Market Operations Committee Frank Nielsen, Head of Division

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• Accounting Committee Henrik Larsen, Director, and Lisbeth Sundin, Assistant Head of Division • Internal Auditors Committee Jan Birkedal, Chief Auditor, and Brian Skovbo Hansen, Head of Section • Banknote Committee Tage Heering, Head of Division • Statistics Committee Jens Dalsgaard, Head of Statistics, and Tom Christensen, Assistant Head of Division

The International Monetary Fund, IMF • Board of Governors Governor Nils Bernstein is a member. (Christian Kettel Thomsen, Per- manent Secretary, Ministry of Finance, is an alternate member) • The Nordic/Baltic Monetary and Financial Committee Governor Jens Thomsen (with Per Callesen, Deputy Secretary, Ministry of Finance) Gitte Wallin Pedersen, Adviser, is a member of the Group of Alternate Members (with Charlotte Hougaard Møller, Head of Section, Ministry of Finance)

Organisation for Economic Cooperation and Development, OECD • The Economic Policy Committee Governor Jens Thomsen (with Per Callesen, Deputy Secretary, Ministry of Finance and Ulrik Nødgaard, Deputy Permanent Secretary, Ministry of Economic and Business Affairs)

DANMARKS NATIONALBANK'S ANNIVERSARY FOUNDATION OF 1968

Danmarks Nationalbank's Anniversary Foundation was established in connection with the bank's 150th anniversary in 1968, when kr. 15 million was given to the Foundation. This sum has been supplemented several times, and the paid-up capital, which is placed in bonds, amounted to kr. 85 million at the end of 2005. The Foundation primarily supports decorative art, architecture and design, but also music, dance and theatre. When considering applica- tions, the Board of the Foundation attaches great importance to quality as well as support to new and future-oriented artistic projects. On 1 March 2006, the Board of the Foundation comprised former Gov- ernor Bodil Nyboe Andersen (Chairman), Professor Hans E. Zeuthen (Deputy Chairman), the architect Merete Ahnfeldt-Mollerup, the ceramic artist Karen Bennicke, director Lars Eskesen, and Karoline Prien Kjeldsen,

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Permanent Secretary, the Danish Ministry of Culture. Danmarks National- bank's Committee of Directors has appointed Governor Nils Bernstein as new Chairman of the Foundation as from 1 April 2006. He replaces Bodil Nyboe Andersen, who retires from the Board of the Foundation. The Board meets four times a year to award grants. In 2005, 1,250 ap- plications were considered and 177 grants totalling kr. 4.9 million were awarded. In October 2005 the Foundation awarded an honorary grant of kr. 100,000 to the designer Ole Palsby in connection with the opening of an exhibition at the Danish Museum of Art and Design.

DANMARKS NATIONALBANK'S GUEST APARTMENTS AT NYHAVN 18

Danmarks Nationalbank has seven guest apartments at Nyhavn 18 which are made available to foreign scientists and artists. Residence in the guest apartments is free and granted for periods of three to twelve months. In 2005 the guest apartments were allocated to nine visitors. The committee formed to advise on the allocation of the apartments consists of Professor Ole Feldbæk (Chairman), Dr. Else Marie Bukdahl and Professor Søren-Peter Fuchs Olesen.

THE ERIK HOFFMEYER TRAVEL GRANT FOUNDATION

In 2005 the Board of the Erik Hoffmeyer Travel Grant Foundation awarded two travel grants of kr. 35,000 each to editor, PhD Lasse Horne Kjældgaard, the Society for Danish Language and Literature, and to the glass artist Armen Georgens. The Erik Hoffmeyer Travel Grant Foundation was established by the Board of Directors of Danmarks Nationalbank in 1995 as a tribute to former governor Erik Hoffmeyer for 30 years' outstanding service as Chair- man of Danmarks Nationalbank's Board of Governors. The Board of the Travel Grant Foundation comprises Professor Hans E. Zeuthen (Chairman), former Governor Erik Hoffmeyer and former Chief Rabbi Bent Melchior.

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Risk Management

Danmarks Nationalbank applies a model for operational risk management. In 2005, work continued to reduce the probability and potential consequences of operational incidents at Danmarks Nationalbank. No significant operational incidents with a negative impact on the reputation or finances of Danmarks Nationalbank have occurred. Danmarks Nationalbank's financial risks mainly comprise market risks. The bank is exposed to the development in interest rates, exchange rates and the gold price. Danmarks Nationalbank's market risk, measured as Value-at-Risk, was kr. 2.4 billion at the end of 2005 and by and large unchanged in relation to end-2004. The risk on the gold stock has, however, increased due to rising gold prices. This increase is to some extent set off by a decline in the bank's interest-rate risk. Danmarks Nationalbank's credit risk is very limited. The bank seeks to completely avoid credit losses by solely having claims on counterparties with high credit standing and by requiring collateral to a significant extent.

OPERATIONAL RISK

Operational risk is the risk of financial loss resulting from inadequate or failed internal processes, people and systems, or from external events. Loss of reputation is also a key concern for Danmarks Nationalbank so that this aspect is also taken into account when assessing operational risk. Danmarks Nationalbank's model for operational risk management is based on the principles for sound management of operational risk issued by the Bank for International Settlements. The model comprises standards for assessment of operational risk, preparation of procedures, physical security and IT security, as well as business continuity planning. The model is based solely on a qualitative standard. Operational risk management comprises analyses of various risk scenarios, ongoing management reporting on potential threats and incidents, and assessments of whether the model's requirements are observed within the organisation. The introduction of measures to counter relevant threats should be viewed in relation to the criticality of the business activities to the bank. It is assessed that no significant operational incidents with a negative impact on the reputation or finances of Danmarks Nationalbank occurred in 2005.

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Risk assessments and procedures The risk assessment model contributes to identifying and assessing operational risk for given business areas, products, processes or systems. A risk assessment includes an estimate of the probability of an incident occur- ring, and of its potential impact. The risk assessments will be gradually extended until all relevant issues have been taken into account. For instance, risk assessments have been prepared for operation of the IT department's back-up system, physical access control and hand-held terminals. In 2005, Market Operations held a workshop to highlight the risks/ threats that may arise in various phases of the trading process, establish measures to cover these risks and threats, and identify any residual risks. Subsequently an activity plan has been prepared for the improvement of existing and the introduction of new measures. In connection with the implementation of a number of organisational changes and restructuring of work routines at the Banknote Printing Works, in 2005 a new risk assessment was performed. This mapping of the risk scenario was the basis for various adjustments to the technical and ad- ministrative measures.

Physical security and IT security A review of the policies for physical security and IT security did not give rise to any adjustments. Danmarks Nationalbank's IT security management is based on ISO 17799, the international code of practice for information security management. ISO 17799 is in accordance with DS 484, which is the manda- tory security standard for Danish government institutions, and consequently it is assessed that Danmarks Nationalbank complies with the government's IT security management requirements. In relation to IT security, the separation of the Internet and the LAN was strengthened via the introduction of a more robust firewall design.

DANMARKS NATIONALBANK'S MANAGEMENT OF FINANCIAL RISKS

Danmarks Nationalbank's financial result is dependent on several uncertain- ties; especially the development in a number of financial markets, but also counterparties' ability and willingness to meet their payment obligations. To a certain extent, Danmarks Nationalbank's financial risks are a result of its role as monetary authority, which includes managing the monetary and foreign-exchange policy, issuing banknotes and coins and functioning as banker to the banks and to the central government. The risks arising from the role as monetary authority are unavoidable. For example, it is

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Market risk Market risk is the risk of suffering a loss as a consequence of price fluctuations in the financial markets. For Danmarks Nationalbank, the risk factors primarily comprise interest rates, but also exchange rates and the gold price. In the assessment of the risk factors' impact on Danmarks National- bank's financial result it is important to draw a distinction between exposure and risk. Exposure is the extent to which a loss is incurred on a given change in a specific risk factor. The interest-rate exposure is expressed as the krone duration, stating the loss in kroner on an increase in the level of interest rates by 1 percentage point. The foreign-exchange exposure can be expressed as the change in market value in kroner on a 1-per-cent change in the exchange rate. On compiling the risk, the probability of loss is evaluated by combining exposure with the probability of a change in the risk factor concerned. One of the methods for assessing interest-rate and exchange-rate risk is calculation of Value-at-Risk, VaR, which can be interpreted as the maximum loss under normal market conditions. In addition to VaR, stress scenarios are used that measure losses under extremely unfavourable market conditions.

Interest-rate exposure and risk A part of Danmarks Nationalbank's assets are fixed-rate bonds, while its liabilities are primarily floating-rate liabilities. Consequently, Danmarks

1 Danmarks Nationalbank's financial risks and management thereof are described in Danmarks National- bank, Financial Management at Danmarks Nationalbank, 2004.

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INTEREST-RATE EXPOSURE OF DANMARKS NATIONALBANK Table 10

Capital loss in kr. billion on a general 1-per-cent increase in interest rates End-2004 End-2005

Kroner ...... 0.6 0.7 Euro ...... 0.6 0.5 Pounds sterling ...... 0.1 0.1 Dollars ...... 0.3 0.4 Swedish kronor ...... 0.1 0.1

Total ...... 1.8 1.8

Nationalbank will incur a capital loss in the event of an increase in interest rates. Experience shows that in the long term fixed-rate bonds yield higher returns than placements at floating rates. Over an extended period, Danmarks Nationalbank is therefore expected to increase its return by as- suming a certain interest-rate risk. At the close of 2005, the loss would have been kr. 1.8 billion on a 1- per-cent increase in the general level of interest rates, cf. Table 10. The bond portfolio is placed in several markets. The exposure to Danish interest rates is attributable to the portfolio of Danish government, mortgage-credit and Ship Finance bonds. The exposure to foreign interest rates is primarily attributable to the placement of a part of the foreign- exchange reserve in foreign bonds. Spreading the interest-rate exposure over different markets and maturity segments contributes to reducing the interest-rate risk.

Foreign-exchange exposure and risk Danmarks Nationalbank holds considerable foreign-exchange assets, first and foremost the foreign-exchange reserve, which serves as an intervention reserve. Danmarks Nationalbank obtains an exchange-rate gain when the krone weakens since the krone value of foreign-exchange assets hereby increases. Similarly, an exchange-rate loss is incurred when the krone strengthens. At the close of 2005 the market value of foreign-exchange outstandings totalled kr. 216 billion, cf. Table 11. Danmarks Nationalbank will thus incur a loss of kr. 2.16 billion if the krone strengthens by 1 per cent. History shows that from time to time exchange-rate fluctuations can result in substantial losses. Against this background Danmarks Nationalbank has chosen to keep the foreign-exchange risk at a low level. This is achieved by forward sale of dollars, pounds sterling and Swedish kronor against euro. The foreign-exchange exposure to non-euro currencies is thus converted to euro. For example, at the close of 2005 Danmarks Nationalbank held sterling assets for kr. 11 billion, but had also sold sterling forward for

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FOREIGN-EXCHANGE EXPOSURE OF DANMARKS NATIONALBANK Table 11

End-2005

End-2004 Forward Market value in kr. billion total Placements Gold contracts Total

Euro ...... 217 160 - 51 210 Pounds sterling ...... 0 11 - -11 0 Dollars ...... 5 31 7 -32 6 Swedish kronor ...... 0 8 - -8 0

Total ...... 223 209 7 0 216

Note: Negative amounts indicate that Danmarks Nationalbank holds a liability when the foreign currency increases in value. The value of SDR is distributed on the respective currencies: euro, pound sterling and dollar. The weightings of the currencies in SDR were altered as of 1 January 2006, cf. Appendix of Tables, Table 12. kr. 11 billion, cf. Table 11. The sterling exposure was thus eliminated. As the Table shows, Danmarks Nationalbank has retained a minor dollar exposure in order to be able to intervene in dollars, and to diversify risk. The conversion of foreign-exchange exposure to euro exposure is the key element of the management of Danmarks Nationalbank's foreign- exchange risk. In a historical perspective this strategy has reduced the foreign-exchange risk considerably as a result of the fixed-exchange-rate policy vis-à-vis the euro. This strategy also implies that the interest-rate exposure can be spread over different markets irrespective of any inherent foreign-exchange risk. Danmarks Nationalbank is exposed to the development in the gold price in view of its gold stock of kr. 7 billion. Gold is typically quoted in dollars and consequently contributes to the dollar exposure, cf. Table 11. When the foreign-exchange exposure is converted from dollars to euro, the gold stock's dollar exposure is taken into account on equal terms with the other dollar-denominated assets. Danmarks Nationalbank holds the gold stock at a constant level. Virtually all of the gold stock is physically placed in foreign central banks. A part of the stock is lent to banks with a high credit rating. The interest on gold lending is paid in gold, and gold interest is sold on an ongoing basis. The interest on gold was very low (0.1 per cent) in 2005, and thus did not match even a limited risk. Consequent- ly, no gold was lent in 2005.

Measuring market risk Danmarks Nationalbank uses various measures to evaluate market risk. Individually these measures give an indication of Danmarks National- bank's risks, and together they illustrate its risk profile. The overall risk level reflects an assessment of the expected yield in relation to a number of different risk measures. The methods for measuring Danmarks Nation- albank's risks are subject to constant development.

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DANMARKS NATIONALBANK'S VALUE-AT-RISK Table 12

Kr. billion during a year with a probability of 95 per cent End-2004 End-2005

Interest-rate risk ...... 1.7 1 1.6 Exchange-rate risk ...... 1.2 1.3 Gold ...... 1.1 1.9 Reduction due to diversification ...... -1.5 1 -2.3

Total ...... 2.5 2.4

Note: VaR with a horizon of one year and a probability of 95 per cent. 1 The breakdown on interest-rate risk and diversification for 2004 is revised in relation to Report and Accounts, 2004.

Value-at-Risk Danmarks Nationalbank's market risk is e.g. measured by Value-at-Risk, VaR. This risk measure combines the financial exposures with an estimate of the typical volatility in the market conditions, taking into account the covariation between the various risk factors. At end-2005, Danmarks Nationalbank's VaR1 was calculated at kr. 2.4 billion, compared to kr. 2.5 billion at end-2004, cf. Table 12. The result indicates that in 2006, with a probability of 95 per cent, Danmarks National- bank will not incur a loss exceeding kr. 2.4 billion. Equivalently, the result states that with a probability of 5 per cent Danmarks Nationalbank will experience a capital loss exceeding kr. 2.4 billion. VaR does not indicate the size of this potential loss. The sum of the contributions from each group of risk factors – interest rates, exchange rates and the gold price – exceeds the total VaR since the calculation of VaR takes into account that the risk is spread over several risk groups. The reduction, or the diversification gain, is due to the fact that losses on all risks seldom appear at the same time. The increase in VaR for the gold stock is attributable to the rising market value of Danmarks Nationalbank's gold stock. At the same time, the interest-rate risk has declined as a consequence of smaller fluctuations in interest rates. Viewed in isolation, Danmarks Nationalbank's gold stock contributes kr. 1.9 billion to VaR. In relation to the value of the gold stock this is a large amount. The reason is the large fluctuations in the gold price in dollars. The gold price measured as dollars per ounce has increased during the past five years, cf. Chart 30. In 2005, the dollar also strengthened vis-à-vis the euro. Thus, measured in terms of euro per ounce the gold price has also appreciated. Losses on gold (in dollars) are often matched by gains on dollars, whereby the gold stock normally contributes to reducing the bank's risk.

1 VaR is calculated on the basis of estimated volatilities and correlations between the relevant risk factors on the basis of a weighting of the last 160 days. VaR is determined by combining these estimates with Danmarks Nationalbank's portfolio structure as of end-2005.

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GOLD PRICE AND EXCHANGE RATES Chart 30

Gold price per ounce Euro/dollar 600 1.4

550 1.3

500 1.2

450 1.1

400 1.0

350 0.9

300 0.8

250 0.7

200 0.6 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 Gold price in dollars Gold price in euro Euro/dollar (right-hand axis)

Source: Danmarks Nationalbank.

At the close of 2005 Danmarks Nationalbank's net capital totalled kr. 52 billion, cf. the balance sheet on p. 127. VaR as a share of net capital was thus 4.6 per cent at end-2005, compared to 5.0 per cent at end-2004. VaR has been reduced since 2002, mainly as a result of the lower interest-rate risk. At the same time, Danmarks Nationalbank's earnings potential has decreased, primarily due to lower short-term interest rates and a flatter yield curve. Part of the calculated risk relates to the fluctuation of the krone vis-à- vis the euro. The exchange-rate risk in relation to the euro is of a special nature. The krone/euro exchange rate is solely influenced in the interest of the fixed-exchange-rate policy and not to increase earnings. Conse- quently, VaR is also estimated without the exchange-rate risk on the euro, and at the close of 2005 VaR excluding the exchange-rate risk on the euro totalled kr. 2.3 billion. In general the exchange-rate risk on the euro does not affect VaR much due to the stability of the krone vis-à-vis the euro.

Stress test The VaR calculations provide information on the general risk of loss, but not on the extent of the losses in the event of extreme market fluctuations. Stress tests reflecting how extreme, but realistic scenarios of market development affect the value of Danmarks Nationalbank's current portfolio are used for this purpose.

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It is difficult to set out market fluctuations that are both realistic and extreme. Danmarks Nationalbank has selected data from sub-periods between 1993 and 2005 in which the development in interest and exchange rates was particularly unfavourable. On the basis of the portfolio structure at end-2005, the losses to Danmarks Nationalbank if this development were to repeat itself are calculated. The following three scenarios have been set up:

• Scenario 1: The one-year period that has given the greatest concurrent total interest and exchange-rate loss. • Scenario 2: The one-year period that has given the greatest total interest-rate loss, combined with the one-year period that has given the greatest total exchange-rate loss. The losses do not have to be concurrent. • Scenario 3: The one-year periods that for each individual one-year interest-rate segment in each currency have given the greatest interest- rate loss, combined with the one-year periods that for each currency have given the greatest exchange-rate loss. The losses do not have to be concurrent.

As the scenarios are set up, scenario 3 will always give at least as great a loss as scenario 1 or 2. With the current portfolio structure, the three scenarios give a total capital loss of between kr. 12 and 16 billion, cf. Table 13. The most pessimistic scenario will give the bank a capital loss of around 1/3 of its net capital. Losses calculated using VaR and stress tests indicate the immediate loss on a change in market conditions. When the risk over a longer period is to be assessed, the impact of market conditions on current earnings

DANMARKS NATIONALBANK'S LOSS IN STRESS SCENARIOS, END-2005 Table 13

Interest-rate Exchange- Loss on Kr. billion loss rate loss gold Total

Greatest concurrent total interest-rate and exchange-rate loss (scenario 1) ...... 2.9 9.0 -0.2 11.7 Greatest total interest-rate loss combined with greatest total exchange-rate loss (scenario 2) ...... 4.4 9.0 1.5 14.9 Greatest interest rate loss in one-year segments for each currency combined with greatest exchange-rate loss for each currency (scenario 3) ...... 5.0 9.7 1.5 16.2

Note: A negative figure indicates a gain.

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Liquidity risk Liquidity risk comprises several factors. For Danmarks Nationalbank, there is first and foremost the liquidity risk that it is not possible to release funds to support the krone, even though the funds are held in reserve. The principal purpose of the foreign-exchange reserve is to be able to intervene in the foreign-exchange market. In the management of the foreign-exchange reserve it is therefore very important to ensure that the greater part of the reserve can be converted quickly to liquid funds. Therefore, a large proportion of the foreign-exchange reserve is placed in the money market or in bonds with a high degree of security, so that they can easily be realised or used as collateral in various liquid markets. To manage the liquidity requirement, it must, inter alia, be possible to release a minimum amount of kr. 25 billion within two days.1 Danmarks Nationalbank also has several other borrowing options, e.g. access to foreign exchange via the central government's Commercial Paper programme amounting to 12 billion dollars (equivalent to approximately kr. 74 billion), which is administered by Danmarks Nationalbank. The programme has been used on several occasions, particularly in connection with the foreign-exchange crises in the early 1990s. However, it has also been used when the central government needed a short-term loan in order to maintain a positive balance of its account at Danmarks Nationalbank. This was the case in 2005, when approximately kr. 17 billion was raised. In accordance with the ERM II agreement, Danmarks Nationalbank also has an opportunity to borrow at the ECB. This facility has not been used, but serves as a safety net. Danmarks Nationalbank moreover has access to the forward foreign-exchange market where it can transact currency swaps between kroner and foreign exchange. On placement of the domestic securities portfolio the same weight is not given to liquidity considerations.

1 The foreign-exchange market operates with two-day settlement, which means that transactions are settled two days after the contract date. Liquidity must therefore be available within two days if it is to be used for intervention purposes.

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TOTAL CREDIT EXPOSURE ON THE FOREIGN-EXCHANGE RESERVE AND THE DOMESTIC SECURITIES PORTFOLIO, ETC., END-2005 Table 14

Bonds Bank claims

Central 2004 govern- Collat- Uncollat- Supranational Kr. billion Total ment Others1 eralised eralised institutions2 Total

Aaa ...... 87.6 33.7 24.4 5.6 4.1 0.8 68.6 Aa1 ...... 47.2 0.4 8.4 37.3 5.9 - 52.0 Aa2 ...... 45.5 8.8 - 23.9 12.5 - 45.2 Aa3 ...... 66.5 - 2.7 47.7 17.4 - 67.8 A1 ...... 3.8 1.5 - - 3.6 - 5.1 A2 ...... - - 0.3 - 0.7 - 1.0 A3 ...... ------0 No rating ...... 5.2 - 0.2 - 0 5.2 3 5.4

Total ...... 255.8 44.5 36.0 114.5 44.2 6.0 245.2

Note: Moody's credit rating is used. The scale ranges from Aaa to D, where Aaa is the highest credit rating. 1 Other bonds include securities with both explicit and implicit government guarantees, and Danish issuers. 2 Supranational institutions such as BIS, the IMF and the Asian Development Bank. The credit exposure vis-à-vis the IMF totalled net kr. 1.9 billion. In addition, the IMF has unused drawing rights of kr. 22.3 billion. 3 Exclusively covers BIS and IMF.

Credit risk Credit risk is the risk of loss due to a counterparty's default on obligations. Credit risk also comprises the risk that the market rating of a counterparty's credit standing drops, resulting in a capital loss. Credit exposure is stated as the market value of the assets. The credit exposure on the foreign-exchange reserve and the domestic securities portfolio was kr. 245 billion at end-2005 against kr. 256 billion at end-2004, cf. Table 14. At the close of the year, 95 per cent of the foreign-exchange reserve and the domestic securities portfolio was placed in supranational institutions or in assets with a rating of Aa3 or higher1. To reduce the credit risk, Danmarks Nationalbank spreads its assets among counterparties with a high credit standing. Moreover, collateral is required to a large extent. The credit risk is therefore very small. The credit risk on bonds, banks, etc., i.e. claims on foreign governments, banks, etc., is managed on the basis of the ratings given by international credit rating agencies. Moreover, all significant holdings are subject to maximum limits. The domestic securities portfolio almost exclusively comprises government bonds, mortgage-credit bonds and Danish Ship Finance bonds.

1 Loans in connection with monetary-policy operations, the banks' intraday credits and cash depots are solely extended on the basis of collateralised bonds, and are not included.

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For deposits with foreign banks repo agreements with highly-rated government bonds as collateral are also used. Should a repo counterparty be subject to compulsory liquidation, Danmarks Nationalbank's deposit is covered by the collateral provided. Danmarks Nationalbank's holdings of foreign bonds are issued by central governments or supranational institutions with a high credit rating, or guaranteed by central governments with a high credit rating1. Danmarks Nationalbank thus does not hold corporate bonds or bonds issued by central governments with a low credit rating.

1 Government-guaranteed securities include securities with an implicit government guarantee.

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Accounts for the year 2005

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Report on Danmarks Nationalbank's Accounts

Danmarks Nationalbank's accounts for 2005 show a profit of kr. 4.9 bilion, compared to kr. 2.8 billion in 2004. This change is due primarily to the increase in value adjustments by kr. 1.9 billion, and in other income by kr. 0.8 billion, while net income from interest declined by kr. 0.3 billion. Trans- fer of kr. 1.2 billion to the Value Adjustment Reserve reduces the amount for distribution to kr. 3.7 billion, of which kr. 0.7 billion is allocated to the General Reserves and kr. 3.0 billion is payable to the central government.

PRESENTATION OF DANMARKS NATIONALBANK'S ACCOUNTS

The accounts for 2005 have been prepared in accordance with the same accounting policies as in the previous year, cf. p. 123. The accounts reflect that Danmarks Nationalbank issues banknotes and coins, holds substantial assets comprising the foreign-exchange reserve and functions as banker to the banks and the mortgage-credit institutes, and to the central government. The profit from financial items was kr. 4,826 million, which is kr. 1,534 million higher than in 2004, and the total profit for the year is kr. 4,902 million, i.e. kr. 2,059 million higher than in 2004. The balance sheet increased from kr. 337.1 billion to kr. 392.0 billion.

The profit and loss account Net income from interest Net income from interest totalled kr. 3,616 million, which is kr. 338 million less than in 2004. Income from interest on foreign assets fell by kr. 202 million to kr. 5,420 million. The decrease reflects lower interest rates on a virtually unchanged average foreign-exchange reserve. Net interest to banks and mortgage-credit institutes (interest on deposits and certificates of deposit less interest on monetary-policy lending1) increased by kr. 668 million to kr. 2,232 million. The increase is mainly attributable to a higher average net position.

1 The rates of interest for loans and certificates of deposit are identical, while the rate of interest for deposits has been lover than the other interest rates.

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Danmarks Nationalbank's interest expenditure on the central government's deposit fell by kr. 553 million to kr. 1,173 million as the central government's balance on average was kr. 28 billion lower. Interest on domestic bonds fell by kr. 120 million to kr. 1,699 million. The decrease is attributable to a lower level of interest rates.

Value adjustments, etc. Value adjustments resulted in a gain of kr. 1,210 million. Value adjustment of Danmarks Nationalbank's gold stock gave a gain of kr. 1,818 million, which is related to the fact that the price of gold converted to Danish kroner increased by 35 per cent during 2005. Value adjustment of foreign-exchange positions1 resulted in a loss of kr. 97 million. The loss is due to a market-value loss of kr. 806 million, which is partly offset by an exchange-rate gain of kr. 709 million. The market-value loss on domestic securities of kr. 510 million can be related to a market-value loss on domestic bonds. A significant part of the market-value loss on the domestic and foreign bonds can be related to the fact that a large proportion of the bond portfolio at the beginning of the year had a market value above par, and therefore automatically released a capital loss in step with redemption, or because the redemption date was forthcoming.

Other income This item comprises income of kr. 800 million relating to the restructuring of Danish Ship Finance as a limited liability company, as well as revenue of kr. 48 million from the sale of coin sets and medals.

Expenses Total expenses increased by kr. 254 million to kr. 804 million. The increase is mainly related to a one-off payment of kr. 200 million to Danmarks Nationalbank's Pension Fund subject to winding-up to cover Danmarks Nationalbank's pension commitment. The payment is necessary due to a continuing decrease in the level of interest rates combined with an adjustment of the capital requirements for pension funds. Staff expenses increased by kr. 9 million to 326 million, and other expenses increased by kr. 46 million to kr. 278 million. Other expenses comprise kr. 79.5 million for conversion and substantial maintenance of the Danmarks Nationalbank buildings, and represents an increase of kr. 24.3 million compared to 2004. In the period the average number of staff fell from 533 to 521.

1 Foreign-exchange positions comprise the foreign-exchange reserve, as well as unsettled foreign- exchange contracts, currency and interest-rate swaps, domestic foreign-exchange balances, and the liability counterpart of Special Drawing Rights (SDR) allocated by the IMF.

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Profit for the year The result for the year is a profit of kr. 4,902 million, against a profit of kr. 2,844 million in 2004. The positive value adjustment of the year of kr. 1,210 million is transferred to the Value Adjustment Reserve, which here- after amounts to kr. 3,858 million. An amount of kr. 738 million, corres- ponding to 20 per cent of the profit excluding value adjustments, is allocated to the General Reserves, after which the General Reserves total kr. 48,074 million. Kr. 2,954 million is payable to the central government, cor- responding to 80 per cent of the profit excluding value adjustments.

The balance sheet Gold The stock of gold amounted to kr. 6.9 billion at the end of the year, compared to kr. 5.1 billion in 2004. The increase is related to the increase in the price of gold converted to Danish kroner by 35 per cent during 2005.

Foreign assets Assets amounted to kr. 204.2 billion at the end of the year, compared to kr. 208.5 billion in 2004. This is equivalent to a decrease of 2 per cent. The assets are placed in euro (77 per cent), dollars (14 per cent), pounds sterling (5 per cent) and Swedish kronor (4 per cent). The exchange-rate risk is restructured so that the exposure is mainly in euro. The positions are held mainly in highly-rated government bonds and government- guaranteed bonds, deposits with central banks and commercial banks, or as lending against collateral in government bonds and government- guaranteed bonds. Foreign assets are the most significant item of the foreign-exchange reserve, together with gold, claims on the IMF and foreign liabilities.

Claims on the International Monetary Fund, IMF This balance-sheet item comprises Denmark's IMF quota less the IMF's outstanding drawing right on Danmarks Nationalbank with addition of Danmarks Nationalbank's holdings of Special Drawing Rights, SDR, in the IMF and loans for the Poverty Reduction and Growth Facility Trust, PRGF. Loans under PRGF are guaranteed by the central government. The account with the IMF is stated in SDR (Special Drawing Rights). During 2005 the IMF made deposits equivalent to SDR 327 million with Danmarks Nationalbank, and Danmarks Nationalbank increased its holdings of SDR in the IMF by SDR 50 million. Net claims on the IMF have thus been reduced by SDR 277 million. Together with the value adjustments for the year this reduces the claim by kr. 2.1 billion to kr. 3.6 billion.

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Monetary-policy lending Monetary-policy lending is collateralised loans to banks and mortgage- credit institutes. This item increased by kr. 62.7 billion to kr. 135.3 billion.

Other lending The loans of kr. 4.3 billion almost exclusively comprise lending to banks in connection with decentralised cash depots of kr. 3.5 billion and receivables from Danish Ship Finance A/S of kr. 0.8 billion.

Domestic bonds The value of domestic bonds fell from kr. 37.1 billion to kr. 34.3 billion. The holdings comprise mortgage-credit bonds (kr. 21.8 billion), government bonds (kr. 9.9 billion) and Danish Ship Finance bonds (kr. 2.6 billion).

Shares Danmarks Nationalbank has sold its shares in Grønlandsbanken A/S and Bella Center A/S. Danmarks Nationalbank has acquired shares in Danish Ship Finance A/S in connection with its restructuring as a limited liability company.

Banknotes and coins in circulation Banknotes in circulation increased by kr. 3.9 billion to kr. 51.0 billion, while coins in circulation increased by kr. 0.3 billion to kr. 5.3 billion. Banknotes in circulation include Faroese banknotes at kr. 369 million. The increase in banknotes in circulation in 2005 is somewhat greater than in the previous years.

Monetary-policy deposits The net deposits of banks and mortgage-credit institutes in current accounts and settlement accounts increased from kr. 6.9 billion to kr. 12.8 billion, and deposits placed in certificates of deposit rose from kr. 160.4 billion to kr. 207.6 billion.

Other deposits This item comprises banks' and mortgage-credit institutes' deposits in euro-denominated current accounts and securities settlement accounts totalling kr. 0.2 billion, as well as other deposits of kr. 2.0 billion, of which the account of Danish Ship Finance A/S amounts to kr. 1.3 billion.

Central government The central-government deposit decreased from kr. 60.8 billion to kr. 56.4 billion. The central government's share of the profit of Danmarks Nationalbank is included in this amount.

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Foreign liabilities The liabilities increased by kr. 0.8 billion to kr. 2.4 billion and comprise kroner deposits with Danmarks Nationalbank from supranational institutions and other central banks.

Counterpart of Special Drawing Rights allocated by the IMF, SDR The allocation was unchanged during the year, and the adjustment of the item by kr. 0.1 billion to kr. 1.6 billion solely reflects the value adjustment for the year.

Net capital The net capital amounts to kr. 52,232 million, which is the net capital at the beginning of the year of kr. 50,284 million with addition of the allocation to the Value Adjustment Reserve of kr. 1,210 million and allocation to the General Reserves of kr. 738 million.

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ACCOUNTING POLICIES

General Danmarks Nationalbank's Accounts for the year 2005 are presented in accordance with the Danmarks Nationalbank Act. In all significant respects these accounting policies are in accordance with the sound policies for European central banks. Unrealised gains on foreign exchange and securities are recognised in the profit and loss account, however.

The accounting policies applied are unchanged from the previous year.

Accounting policies:

Income and expenses are recognised in the profit and loss account for the period which they concern. Income and expenses in foreign exchange are converted at the exchange rates prevailing at the time they are recorded in the accounts. Premiums and discounts on Treasury bills and certificates of deposit, as well as forward premiums on forward securities and foreign-exchange contracts, are recognised as interest. Both realised and unrealised gains and losses are recognised in the profit and loss account. Income from shares, etc. is recognised in the year in which the dividend is declared.

Gold is stated at market value on the balance-sheet date.

Assets and liabilities in foreign exchange, including forward contracts, are entered at the official exchange rates and securities market prices prevailing on the balance-sheet date. Swaps and futures are stated at market value.

Bonds, including forward contracts, are stated at market value at year-end.

Repurchase agreements, etc. Securities sold in connection with repurchase agreements, and gold and securities made available in lending facilities, are included in Danmarks Nationalbank's holdings.

Shares, etc. Capital investments and equivalent investments and equity investments in associated companies (in which the ownership interest or voting rights are 20 per cent or more) are stated at acquisition value or written down to market value at year-end if this is assessed to be significantly lower.

Tangible fixed assets are stated at acquisition price less depreciation and amortisation. Assets with an acquisition value of less than kr. 100,000 are recognised as expenditure in the year of acquisition. Depreciation on a linear per-annum basis takes place over the expected useful lives of the assets.

The useful lives are assessed as follows: Bank properties ...... 100 years Other properties ...... 25-50 years Building improvements ...... 25 years Technical building facilities ...... 10-25 years Technical production facilities ...... 5-10 years Other machinery and equipment ...... 3-5 years

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PROFIT AND LOSS ACCOUNT FOR THE YEAR 2005

Note 2005 2004 kr. '000 kr. '000 Income from interest, etc.: Interest on foreign assets ...... 5,420,336 5,622,583 1 Interest on domestic loans ...... 2,159,247 1,728,517 Interest on domestic bonds ...... 1,698,753 1,818,472 Commission and other income ...... 2,768 1,950 ______9,281,104 9,171,522 ______Expenditure on interest, etc.: Interest on foreign liabilities ...... 43,681 31,499 2 Interest on domestic deposits ...... 5,621,497 5,186,252 ______5,665,178 5,217,751 ______Net income from interest ...... 3,615,926 3,953,771

Value adjustments, etc.: Value adjustment of gold ...... 1,817,511 -173,672 3 Value adjustment of foreign assets ...... -96,990 -562,153 4 Value adjustment of domestic securities ...... -510,478 73,599 ______1,210,043 -662,226 ______Profit from financial items ...... 4,825,969 3,291,545

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PROFIT AND LOSS ACCOUNT FOR THE YEAR 2005

Note 2005 2004 kr. '000 kr. '000

Profit from financial items ...... 4,825,969 3,291,545

Income from shares, etc...... 67,510 71,733

5 Other income ...... 848,495 83,605

Expenses: 6 Staff expenses ...... 325,862 317,353 One-off payment to Danmarks Nationalbank's Pension Fund subject to winding-up ...... 200,000 - 7 Other expenses ...... 278,467 232,554 ______804,329 549,907

8 Depreciation and write-down of tangible fixed assets 35,513 34,452

Other expenditure ...... - 19,000

______Profit for the year ...... 4,902,132 2,843,524 ______

Distribution of the profit for the year: Profit for the year ...... 4,902,132 2,843,524 Allocation to/from the Value Adjustment Reserve . -1,210,043 662,226 ______3,692,089 3,505,750 ______allocated as follows: Allocation to the General Reserves, 20 per cent ... 738,418 701,150 Payable to the central government, 80 per cent ... 2.953.671 2.804.600 ______3,692,089 3,505,750 ______

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BALANCE SHEET AT 31 DECEMBER 2005

Note 2005 2004 kr. '000 kr. '000 Assets 9 Gold ...... 6,941,496 5,123,985 10 Foreign assets ...... 204,204,373 208,455,625 11 Claims on the International Monetary Fund, IMF, etc. .... 3,557,456 5,683,980 Monetary-policy lending ...... 135,296,000 72,635,000 12 Other lending ...... 4,323,980 3,412,350 13 Domestic bonds ...... 34,329,299 37,101,501 14 Shares, etc...... 748,028 630,452 15 Tangible fixed assets ...... 656,657 669,589 16 Other assets ...... 1,916,771 3,332,220 Accruals ...... 22,347 21,498 ______Total assets ...... 391,996,407 337,066,200 ______

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BALANCE SHEET AT 31 DECEMBER 2005

Note 2005 2004 kr. '000 kr. '000 Liabilities Banknotes ...... 50,953,341 47,046,751 Coins ...... 5,264,107 4,991,867 Monetary-policy deposits 17 Net current accounts ...... 12,840,588 6,873,495 Certificates of deposit ...... 207,582,000 160,379,000 18 Other deposits ...... 2,187,401 2,820,433 Central government ...... 56,428,399 60,810,198 Foreign liabilities ...... 2,391,166 1,632,935 Counterpart of Special Drawing Rights allocated by the International Monetary Fund (SDR) .. 1,614,480 1,513,833 Other liabilities ...... 502,846 714,070 ______Total creditors ...... 339,764,328 286,782,582 ______

General Capital Fund ...... 50,000 50,000 Statutory Reserves ...... 250,000 250,000 Value Adjustment Reserve ...... 3,857,910 2,647,867 General Reserves ...... 48,074,169 47,335,751 ______19 Total net capital ...... 52,232,079 50,283,618 ______Total liabilities ...... 391,996,407 337,066,200 ______

Off-balance-sheet items 20 Guarantees ...... 101,525 169,868 21 Other liabilities ...... 56,749,682 54,331,073 ______56,851,207 54,500,941 ______

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NOTES TO THE ACCOUNTS FOR 2005

Note 2005 2004 kr. '000 kr. '000 1 Interest on domestic loans Interest on monetary-policy loans (collateralised loans) ...... 2,125,359 1,715,392 Interest on loans to other borrowers ...... 33,888 13,125 ______2,159,247 1,728,517 ______

2 Interest on domestic deposits Interest on current accounts ...... 145,012 131,766 Interest on certificates of deposit ...... 4,212,589 3,147,189 Interest on the central government's deposits ...... 1,172,997 1,726,241 Interest to other depositors, etc...... 90,899 181,056 ______5,621,497 5,186,252 ______

3 Value adjustment of foreign assets Market-value adjustment ...... -806,116 -393,588 Exchange-rate adjustment ...... 709,126 -168,565 ______-96,990 -562,153 ______

4 Value adjustment of domestic securities Value adjustment of domestic bonds ...... -511,341 -85,186 Value adjustment of shares ...... 863 158,785 ______-510,478 73,599 ______

5 Other income Income from sale of coin sets and medals ...... 48,495 16,605 Income in connection with the restructuring of Danish Ship Finance as a limited liability company ...... 800,000 - Reversal of provision for VB Finans ...... - 67,000 ______848,495 83,605 ______

6 Staff expenses Salaries and remuneration ...... 242,851 250,648 Other staff expenses ...... 83,011 66,705 ______325,862 317,353 ______

In 2005 the average number of employees was 521 on a full- time basis (2004: 533)

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NOTES TO THE ACCOUNTS FOR 2005

Note 2005 2004 kr. '000 kr. '000 7 Other expenses Materials for banknote production ...... 20,635 23,703 Materials for coin production ...... 35,378 27,927 Real property, current expenses ...... 127,771 99,353 Data processing, etc...... 27,491 30,907 Minor acquisitions and maintenance of machinery and equipment ...... 15,447 9,635 Other expenses ...... 51,745 50,834 Reimbursement of previously paid VAT on canteen services .... - -9,805 ______278,467 232,554 ______

8 Depreciation and write-down of tangible fixed assets Properties ...... 11,857 10,142 Operating equipment ...... 23,656 24,310 ______35,513 34,452 ______

9 Gold The gold stock amounts to 66,550 kg (2004: 66,550 kg)

10 Foreign assets Foreign bonds ...... 46,933,781 63,351,323 Claims on central banks ...... 4,216,278 2,199,754 Claims on foreign commercial banks ...... 38,535,078 31,518,348 Repo transactions against collateral in foreign bonds ...... 114,518,675 111,385,548 Other foreign assets ...... 561 652 ______204,204,373 208,455,625 ______

11 Claims on the International Monetary Fund (IMF), etc. Denmark's IMF quota ...... 14,828,405 13,904,002 The IMF's holdings of Danish kroner ...... 12,878,805 9,309,853 ______Reserve position with the IMF ...... 1,949,600 4,594,149 Holdings of Special Drawing Rights, SDR ...... 705,226 243,471 ______2,654,826 4,837,620 Loans for the Poverty Reduction and Growth Facility Trust (guaranteed by the central government) ...... 902,630 846,360 ______

3,557,456 5,683,980 ______

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NOTES TO THE ACCOUNTS FOR 2005

Note 2005 2004 kr. '000 kr. '000 12 Other lending Banks and mortgage-credit institutes ...... 3,486,533 3,371,367 Receivable from associated company ...... 800,000 - Other loans ...... 37,447 40,983 ______4,323,980 3,412,350 ______

Receivable from associated company is subordinated current and future other debt and liabilities in the company. The receivable is expected to be finally repaid in 2007.

13 Domestic bonds Danish government bonds ...... 9,949,949 14,984,496 Other domestic bonds ...... 24,379,350 22,117,005 ______34,329,299 37,101,501 ______

14 Shares, etc. Marketable shares ...... - 178,744 Capital investments and equivalent investments ...... 455,466 390,148 Equity investments in associated companies ...... 292,562 61,560 ______748,028 630,452 ______

Capital investments and equivalent investments comprise capital subscription to the ECB and shares in the Bank for International Settlements (BIS), SWIFT, PBS Holding, SAS and Exhibition Centre Herning.

Equity investments in associated companies comprise:

Equity investment Share of equity1) Share of result1) Værdipapircentralen A/S (VP Securities Services) ...... 24.2 per cent kr. 35.9 million kr. 19.3 million Danish Ship Finance A/S .... 18.9 per cent kr. 114.0 million kr. 51.0 million

1 Based on provisional accounts.

Danmarks Nationalbank's portfolio of shares, etc. at 31 December 2005 has an estimated market value of no less than kr. 2.0 billion.

15 Tangible fixed assets Properties ...... 582,048 581,364 Machinery and equipment ...... 74,609 88,225 ______656,657 669,589 ______At the most recent official assessment Danmarks Nationalbank's properties were valued at kr. 1,053 million.

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NOTES ON THE ACCOUNTS FOR 2005

Note 2005 2004 kr. '000 kr. '000 16 Other assets The amount includes outstanding interest of kr. 1,888 million (2004: kr. 1,917 million)

17 Net current accounts Deposits in current accounts and settlement accounts ...... 120,597,236 63,296,195 Drawing on current accounts ...... 107,756,648 56,422,700 ______12,840,588 6,873,495 ______At 31 December 2005 Danmarks Nationalbank acts as full guarantor to VP Securities Services for kr. 74.5 billion (2004: kr. 30.3 billion) and to the Danish Bankers Association (Sum- clearing) for kr. 42.6 billion (2004: kr. 31.4 billion) in connection with the banks and mortgage-credit institutes' payment settlements with 2 January 2006 as the value date.

18 Other deposits Banks and mortgage-credit institutes ...... 199,700 255,234 Other depositors ...... 1,987,701 2,565,199 ______2,187,401 2,820,433 ______

General Value General Total Capital Fund and Adjustment Reserves Statutory Fund Reserve kr. '000 kr. '000 kr. '000 kr. '000 ______

19 Total net capital Net capital 1 January 2005 ... 300,000 2,647,867 47,335,751 50,283,618 Carried forward from the profit for the year ...... - 1,210,043 738,418 1,948,461 ______300,000 3,857,910 48,074,169 52,232,079 ______

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NOTES ON THE ACCOUNTS FOR 2005

Note 2005 2004 kr. '000 kr. '000 20 Guarantees VP Securities Services, share of Guarantee Capital ...... 68,796 72,523 VP Securities Services, guarantee for errors by other account-holding institutions ...... 31,699 33,315 Danish Ship Finance, share of Guarantee Capital ...... - 63,000 Other guarantees ...... 1,030 1,030 ______101,525 169,868 ______

The Bank has provided a guarantee for the obligations of Danmarks Nationalbank's Pension Fund subject to winding-up.

21 Other liabilities Forward purchases of foreign exchange ...... 50,656,795 48,428,687 Market value of assets in currency swap agreements ...... 2,537,974 2,681,491 Futures ...... 242,164 114,663 Unutilised portion of credit facilities made available to the IMF (SDR) ...... 3,312,749 3,106,232 ______56,749,682 54,331,073 ______

The bank has established intervention agreements with the ECB, and in addition an undertaking of support has been given to former employees. The undertaking of support is covered by a pension insurance company. Pension commitments: the present value of a defined benefit pension plan concerning the Board of Governors is stated under other liabilities to the extent that the commitments are not hedged in a pension fund.

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SIGNATURES AND AUDIT REPORTS

Danmarks Nationalbank

Copenhagen, 28 February 2006

Nils Bernstein Torben Nielsen Jens Thomsen

/Henrik Larsen, Chief Accountant

Internal Auditor's Report I have audited the Accounts of Danmarks Nationalbank for the financial year 1 January-31 December 2005, pp. 117-132, which are submitted in accordance with the Danmarks Nationalbank Act. The Accounts are the responsibility of Danmarks Nationalbank's Committee of Directors and Board of Directors. My responsibility is to express an opinion on the Accounts based on my audit.

Basis of opinion I have conducted the audit in accordance with Danish Standards on Auditing. Those standards require that I plan and perform the audit to obtain reasonable assurance that the Accounts are free of material misstatement.

The audit included examining, on a test basis, evidence supporting the amounts and other information disclosed in the Accounts. The audit also included assessing the accounting policies applied and the significant estimates made by the Committee of Directors and the Board of Directors. I believe that the audit performed provides sufficient basis for my opinion.

My audit has not resulted in any qualification.

Opinion In my opinion, the Accounts give a true and fair view of Danmarks Nationalbank's assets, liabilities and financial position at 31 December 2005, and of the result of Danmarks Nationalbank's activities for the financial year 1 January-31 December 2005, in accordance with the Danmarks Nationalbank Act.

Copenhagen, 28 February 2006

Jan Birkedal, Chief Auditor

External Auditors' Report As auditors appointed by the Minister of Economic and Business Affairs we have audited the Accounts of Danmarks National- bank for the financial year 1 January-31 December 2005, pp. 117-132, which are submitted in accordance with the Danmarks Nationalbank Act.

The Accounts are the responsibility of Danmarks Nationalbank's Committee of Directors and Board of Directors. Our responsibility is to express an opinion on the Accounts based on our audit.

Basis of opinion We have conducted our audit in accordance with Danish Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance that the Accounts are free of material misstatement.

The audit included examining, on a test basis, evidence supporting the amounts and other information disclosed in the Accounts. The audit also included assessing the accounting policies applied and the significant estimates made by the Committee of Directors and the Board of Directors. We believe that the audit performed provides sufficient basis for our opinion.

Our audit has not resulted in any qualification.

Opinion In our opinion, the Accounts give a true and fair view of Danmarks Nationalbank's assets, liabilities and financial position at 31 December 2005, and of the result of Danmarks Nationalbank's activities for the financial year 1 January-31 December 2005, in accordance with the Danmarks Nationalbank Act.

Copenhagen, 28 February 2006

Svend Ørjan Jensen, State-Authorised Public Accountant Mona Blønd, State-Authorised Public Accountant

These Accounts, audited in the manner prescribed by the by-laws of Danmarks Nationalbank, are hereby adopted by the Board of Directors.

Copenhagen, 20 March 2006

Hans E. Zeuthen Helle Bechgaard Michael Dithmer

Elisabeth Arnold Søren Bjerre-Nielsen Niels Boserup Pia Christmas-Møller Kristian Thulesen Dahl Niels Fog Svend Erik Hovmand Johannes Fløystrup Jensen Niels Due Jensen Knud Koch-Jensen Jette W. Knudsen Henrik Sass Larsen Kjeld Larsen Michael Lunn Kirsten Nielsen Kirsten Nissen Jens Rohde Jens Rostrup-Nielsen Kirsten Stallknecht Villy Søvndal Finn Thorgrimson Helle Thorning-Schmidt

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Appendix

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Press Releases

INTEREST-RATE CHANGES

1 December 2005: Interest rate increase The discount rate and the interest rate on the banks' current accounts with the Nationalbank are raised by 0.25 per cent to 2.25 per cent. The Nationalbank's lending rate and the rate of interest on certificates of deposit are raised by 0.25 per cent to 2.40 per cent. The increase will have effect as from 2 December 2005. The interest rate increase is a consequence of the raising by the Euro- pean Central Bank of the minimum bid rate on the main refinancing operations by 0.25 per cent to 2.25 per cent.

17 February 2006: Interest rate increase With effect from 17 February 2006 the lending rate and the rate of interest for certificates of deposit are raised from 2.40 per cent to 2.50 per cent. The discount rate and the rate of interest on banks' current accounts with Danmarks Nationalbank are unchanged at 2.25 per cent. The increase by 10 basis points is due to an outflow of foreign exchange in February, among other things as a result of Danish institutional investors' purchase of foreign shares and other securities. In accordance with the fixed-exchange-rate policy Danmarks Nationalbank has inter- vened to support the krone. The interest-rate increase is intended to make placements in kroner more advantageous. Danmarks Nationalbank emphasises that the outflow of capital does not reflect a weakening of the Danish economy.

2 March 2006: Interest rate increase The discount rate and the interest rate on the banks' current accounts with the Nationalbank are raised by 0.25 per cent to 2.50 per cent. The Nationalbank's lending rate and the rate of interest on certificates of deposit are raised by 0.25 per cent to 2.75 per cent. The increase will have effect as from 3 March 2006. The interest rate increase is a consequence of the raising by the Euro- pean Central Bank of the minimum bid rate on the main refinancing operations by 0.25 per cent to 2.50 per cent.

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THE BOARD OF DIRECTORS AND THE COMMITTEE OF DIRECTORS

11 March 2005: Election to Danmarks Nationalbank's Board of Directors Folketinget (Parliament) has elected Mr Svend Erik Hovmand to the Board of Directors of Danmarks Nationalbank until 31 March 2006. He succeeds Ms Rikke Hvilshøj, Minister of Refugee, Immigration and Integration Affairs.

16 March 2005: Elections to the Committee of Directors and Board of Directors of Danmarks Nationalbank Elections to the Board of Directors The five-year terms of three of the 25 members of the Board of Directors expire on 31 March 2005. At the meeting on 15 March 2005 at 3 pm the Board of Directors re-elected Ms Helle Bechgaard, Director, Mr Niels Fog, Merchant, and Ms Kirsten Stallknecht, Former President of the ICN. The Board of Directors re-elected Mr Hans E. Zeuthen, Professor, as Chairman and Ms Helle Bechgaard, Director, as Deputy Chairman for the coming year.

Elections to the Committee of Directors The Committee of Directors has seven members, of whom five are elected by the Board of Directors. The Board of Directors re-elected Mr Søren Bjerre-Nielsen, Group President, Ms Pernille Blach Hansen, MP, Ms Kirsten Nissen, Trade Union President, Mr Jens Rohde, MP, and Mr Hans E. Zeuthen, Professor. All are elected for the coming year. Two members of the Committee of Directors, Mr Michael Dithmer, Permanent Secretary, and Mr Michael Lunn, Permanent Secretary, are appointed by the Royal Bank Commissioner for the period ending in 2006. At its first meeting the Committee of Directors re-elected Mr Hans E. Zeut- hen, Professor, as Chairman and Mr Michael Dithmer, Permanent Secretary, as Deputy Chairman for the period from 1 April 2005 to 31 March 2006.

3 May 2005: Election to Danmarks Nationalbank's Board of Directors Folketinget (Parliament) has elected Ms Helle Thorning-Schmidt and Mr Henrik Sass Larsen to the Board of Directors of Danmarks Nationalbank until 31 March 2006. They succeed Ms Pernille Blach Hansen and Ms Pia Gjellerup.

10 May 2005: Election to the Committee of Directors of Danmarks Nationalbank The Board of Directors has elected Ms Helle Thorning-Schmidt, MP, as a new member of the Committee of Directors for the remainder of the term

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28 October 2005: Election to Danmarks Nationalbank's Board of Directors Folketinget (Parliament) has elected Mr Villy Søvndal to the Board of Directors of Danmarks Nationalbank until 31 March 2006. He succeeds Mr Holger K. Nielsen.

PUBLICATIONS

16 March 2005: Danmarks Nationalbank's Report and Accounts for 2004 At the meeting of the Board of Directors of Danmarks Nationalbank on 15 March 2005 the Board of Governors presented the Report and Accounts for 2004. The Report, which presents recent trends in the Danish economy, the monetary and foreign-exchange policy, and the financial and foreign- exchange markets, as well as a review of international monetary cooperation, together with Danmarks Nationalbank's other areas of operation and its organisation, was noted. Danmarks Nationalbank's Accounts for 2004 were submitted by the Board of Governors for adoption on the recommendation of the Com- mittee of Directors. The Board of Directors and the Royal Bank Commis- sioner, Mr Bendt Bendtsen, Minister of Economic and Business Affairs, approved the Accounts.

Accounts The net profit for the year was kr. 2,844 million, compared to kr. 3,609 million in 2003. Net income from interest totalled kr. 3,954 million, which is kr. 500 million less than in 2003. Value adjustments are negative at kr. 662 million. In 2003 they were negative at kr. 267 million. Total expenses decreased by kr. 29 million to kr. 550 million.

Allocation of profit: • Transfer of kr. 662 million – equivalent to the value adjustments for the year – from the Value Adjustment Reserve. • Allocation of kr. 701 million – equivalent to 20 per cent of the profit after allocation from the Value Adjustment Reserve – to the General Reserves for consolidation of Danmarks Nationalbank. • The remaining amount of kr. 2,805 million is transferred to the central government. For 2003 the amount transferred was kr. 3,101 million.

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The Report and Accounts for 2004 are published today and can be viewed at www.nationalbanken.dk under Publications, or be obtained from Danmarks Nationalbank, Information Desk.

12 May 2005: Financial Stability 2005 Danmarks Nationalbank today publishes its annual report on financial stability in Denmark, "Finansiel stabilitet 2005". The English edition of this publication is expected to be available on Danmarks Nationalbank's website as from 31 May 2005. The printed English edition is expected to be released on 6 June 2005. The publication will be available at www.nationalbanken.dk under Publications. The most significant risks to the financial system are identified in the report, including situations that are very unlikely to arise, but which might have major consequences for the economy. It is assessed whether the overall financial system is robust enough for any problems experienced within the sector not to spread and prevent the financial markets from functioning as providers of capital and financial services. It is the task of the Danish Financial Supervisory Authority to ensure that each financial institution is sufficiently robust. In connection with the report's publication Governor Bodil Nyboe An- dersen says: "In general, the financial institutions are doing well in these years where we see a slightly unusual combination of a favourable economic climate and low interest rates." "The banking institutions are still robust, but for the small institutions in particular the exposure to rising losses has increased. This is attributable to such factors as the high growth in lending and reduced capital reserves," Bodil Nyboe Andersen adds. "Banking institutions with high lending growth also tend to have the greatest credit risk on their lending portfolios." An analysis of the households' interest-rate exposure, based on data from a single mortgage-credit institute, shows that on average the interest expenses of Danish homeowners increase by 1 per cent of their income before tax if the short-term interest rate goes up by 1 percentage point. However, the figures are subject to considerable variation, and a substantial group of households is far more at risk since their interest-rate exposure is more than twice as high. The figures are not alarming in relation to financial stability. For the individual household, the exposure depends on whether it has other loans at adjustable interest rates, whether it has a buffer against a possible increase in interest expenses, and whether it can easily reduce its consumption if interest rates go up. These issues should be key elements of the advice provided before a loan is granted.

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The publication is in two parts. The first part starts with an analysis of the development in the financial sector, with emphasis on the banking institutions. This is followed by chapters on the development in the corporate sector and the households and in the financial markets, and a chapter on framework conditions for the financial system. The second part of the report includes various current topics in relation to financial stability. These are the interest-rate exposure of Danish households, an analysis of bank equity prices, and an assessment of settlement risks in VP Securities Services.

5 July 2005: Payment Systems in Denmark Today Danmarks Nationalbank announces the Danish edition of the publication Payment Systems in Denmark. The English edition is expected to be published in September 2005. The publication provides a description of payment and securities settlement systems and describes central banks' role regarding these systems. The Danish payment and securities settlement systems and Danmarks Na- tionalbank's responsibilities herein are thoroughly explained, while selected international payment and settlement systems are described in more general terms. Retail payments are discussed in a Danish and Euro- pean perspective. Finally, Danmarks Nationalbank's role as overseer of important payment and settlement systems is explained. One of the objectives of Danmarks Nationalbank is to contribute to the efficiency and stability of payment and settlement systems. These systems are a necessity for the efficiency of the Danish financial sector. Danmarks Nationalbank considers it important that the Danish payment infrastructure is described in full detail and that this description is available to the general public. The publication is available on www.nationalbanken.dk. Printed versions of the publication can be obtained by contacting: Danmarks Nationalbank, Information Desk, Tel.: (+45) 33 63 70 00 (direct), E-mail: [email protected].

APPOINTMENTS

15 March 2005: New Head of Statistics as from 1 August 2005 As of 1 August 2005, Jens Dalsgaard, Deputy Head of Statistics, will take over the position as Head of Statistics. Jens Dalsgaard replaces Assistant Governor Jørgen Ovi, who is to retire. Jens Dalsgaard, Msc (Econ) is aged 40. He has held positions with Dan- marks Nationalbank since 1989 and has been Deputy Head of Statistics since 2002.

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Jørgen Ovi has held a number of managerial positions with Danmarks Nationalbank, where he has been employed since 1967.

15 April 2005: Appointment Danmarks Nationalbank's Committee of Directors has appointed Anne- Mette Thorsen Reimann, Assistant Head of Division, to Head of Division. Anne-Mette Thorsen Reimann, MSc (chemical engineering), aged 41, has held positions at Danmarks Nationalbank since November 2000.

16 August 2005: Appointment Danmarks Nationalbank's Committee of Directors has appointed Bent Christiansen, Assistant Head of Division, to Head of Division. Bent Christiansen, aged 48, holds an MSc (econ.) and has held positions at Danmarks Nationalbank since 1987.

25 August 2005: New Head of Banking Services as from 1 October 2005 As from 1 October 2005, Lars Gerrild Sørensen, Head of Division, is to head Banking Services. Lars Gerrild Sørensen succeeds Tage Heering, Chief Cashier, who will undertake international assignments related to cash services until his retirement in autumn 2006. Lars Gerrild Sørensen, aged 47, trained in the banking sector and holds a Dip.Econ. (HD) in Finance. Lars Gerrild Sørensen joined Danmarks Nation- albank in 1982 and has been assistant head of Banking Services since 2002.

BANKNOTES AND COINS

27 January 2005: Landet Church adorns new thematic coin On 28 January 2005, Danmarks Nationalbank issues the sixth in its series of thematic 20-krone coins with specially chosen Danish towers as the motif on the reverse. Seen through chestnut leaves from the grave of Elvira Madigan and Sixten Sparre, the tower of Landet Church on the island of Tåsinge reaches towards the sky on the reverse of the new thematic coin. Landet Church is a traditional Danish village church, built around 1150-1200 in the Age of the Valdemars, with the tower and porch added later. The church tower was built in 1634. The sculptor Øivind Nygaard is the artist behind the tower motif from Landet Church. The hearts and pistol that Øivind Nygaard has woven into the chestnut leaves around the tower symbolise the tragic love story of Elvira Madigan and Sixten Sparre. "In addition to showing a Danish

20-03-2006 11:48:00 Antal sider: 172 Rev. nr. 2 H:\Aarsberetninger\2005\Engelsk\faerdige\Hel.doc Oprettet af Hanne Christensen Report and Accounts 2005 142 church tower, the pictorial metaphors seen on the coin, combined with the view of the tower of Landet Church, are intended to tell a story and interpret the history and mythology of the church," Øivind Nygaard ex- plains. The Landet Church tower coin is issued as a 20-krone coin in an edition of 1.2 million. It is of the same size and alloy as the ordinary 20-krone coin in circulation. The face of the coin shows a profile of the Queen by the sculptor, Professor Mogens Møller. The new thematic coin can be purchased from banks and Danmarks Nationalbank from 28 January 2005. The next tower coin is expected to be issued in the autumn of 2005. Pictures can be downloaded from www.nationalbanken.dk – Press room, Photogallery.

3 February 2005: Thematic coins with Hans Christian Andersen's fairy tales To mark the bicentenary of Hans Christian Andersen, Danmarks Nationalbank is issuing a new series of thematic coins. The first in the series is issued on 31 March 2005 and is a 10-krone coin in three different editions – a gold coin, a fine silver coin and an ordinary 10- krone coin. The gold and silver coins are issued to meet a demand in the collector market. These coins will be sold at a price exceeding the face value, a practice that was customary in Denmark until 1986 and is now standard international practice. On the reverse of the first Hans Christian Andersen coin, an adult swan is studying its reflection in the lake at Bregentved Manor, where Hans Christian Andersen was inspired to write his famous fairy tale "The Ugly Duckling". The artist is the sculptor Hans Pauli Olsen. The face of the Hans Christian Andersen coins shows a profile of the Queen by the sculptor, Professor Mogens Møller. The gold coin will be issued in an edition not exceeding 7,000, while the silver coin will be issued in an edition of up to 75,000. The ordinary 10- krone coin will be issued in an edition of 1.2 million. All Hans Christian Andersen coins are legal tender and can be exchanged at Danmarks Nationalbank at face value. The Hans Christian Andersen thematic coins can be purchased from banks and coin dealers as from 31 March 2005. Some banks and coin dealers already take orders. The recommended retail prices including Danish VAT are kr. 2,000 for the gold coin and kr. 200 for the silver coin. The coins will also be sold from 31 March 2005 from Danmarks Nationalbank, Banking Services, between 10 am and 1 pm on week- days.

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24 August 2005: New 50-krone banknote completes the upgrading of the banknote series Tomorrow, Danmarks Nationalbank introduces a new, more secure 50- krone banknote with a hologram and fluorescent colours. The motifs remain unchanged. The new 50-krone banknote completes the upgrading of the Danish banknote series commenced by Danmarks Nationalbank in November 2002. Governor Torben Nielsen says: "With the new security features the Danish banknotes are even better protected against counterfeiting. The general public's awareness of the security features is directly related to the volume of counterfeiting. The more people that know how to distinguish a genuine banknote from a counterfeit, the more difficult it becomes for counterfeiters to use their counterfeits."

Hologram and fluorescent colours The metallic hologram on the face of the banknote alternately shows a flower, the Roman numeral L and the figure 50. Fluorescent colours, which are visible under ultraviolet light, are used on both sides of the banknote. On the face, a centaur becomes visible under ultraviolet light, and on the reverse the green colour shines, particularly in the ring on the right-hand side of the banknote.

Old 50-krone banknotes remain legal tender The old 50-krone banknotes remain legal tender, but will be gradually withdrawn from circulation. The two versions of the 50-krone banknote will be in parallel circulation for a period of time.

Photo gallery Pictures of the new security features on the 50-krone banknote can be downloaded from www.nationalbanken.dk – Press room/Photogallery/ Danish banknotes.

Further information At www.nationalbanken.dk under Notes and coins a video presentation of the key security features is available. The information campaign also comprises a GO-CARD, i.e. a free postcard available at cafés in Denmark, as well as advertising in "Med Rundt", which is distributed to all households.

7 September 2005: The fairy tale continues – a new coin with "The Little Mermaid" A new thematic coin inspired by Hans Christian Andersen's fairy tale "The Little Mermaid" is issued on 20 October 2005.

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This is the second in a series of five coins with fairy tales as their common theme. Earlier this year, the first fairy tale coin, inspired by Hans Christian Andersen's fairy tale "The Ugly Duckling", was issued. The motif on the new coin is designed by the sculptor Tina Maria Nielsen, who also designed the motif for the Goose Tower coin. The obverse of the coin is the same as on the ordinary 10-krone coins, i.e. a profile of the Queen.

Gold and silver coins and an ordinary 10-krone coin The fairy tale coin is a 10-krone coin issued in three versions – a gold coin, a silver coin and an ordinary 10-krone coin. The gold coin is minted in an edition not exceeding 6,000, while the silver coin is minted in an edition of up to 60,000. All fairy tale coins are legal tender and can be exchanged at Danmarks Nationalbank at face value.

On sale from 20 October 2005 The Little Mermaid coins can be purchased from banks as from 20 Oc- tober 2005. Some banks and coin dealers already take orders. The recommended retail prices including Danish VAT are kr. 2,000 for the gold coin and kr. 200 for the silver coin. The coins can also be purchased from 20 October 2005 from Danmarks Nationalbank, Banking Services, during the daily opening hours from 10 am to 1 pm.

The fairy tale continues The next fairy tale coin will be issued in the spring of 2006.

Pictures of the coin can be downloaded from www.nationalbanken.dk – Press room, Photogallery.

15 September 2005: Faroese lighthouse on new tower coin Today Danmarks Nationalbank issues the seventh in its series of thematic coins with towers as the common theme. The motif of Nólsoy Lighthouse in the Faroe Islands was designed by the Faroese sculptor Hans Pauli Olsen, who also designed the motifs for the Christiansborg Palace Tower coin in 2003 and The Ugly Duckling coin in 2005. The Nólsoy Lighthouse coin is issued as a 20-krone coin in an edition of 1.2 million. It is of the same size and alloy as the ordinary 20-krone coin in circulation. The obverse of the coin shows a profile of the Queen by the sculptor, Professor Mogens Møller. The new tower coin can be purchased from banks and Danmarks Nationalbank as from today.

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The seventh tower coin in a series of ten Since 2002, seven tower coins have been issued. Besides Nólsoy Light- house, the motifs are: Landet Church, Svaneke Water Tower, the Goose Tower, Christiansborg Palace Tower, the Old Copenhagen Stock Exchange (Børsen) and Aarhus City Hall tower. On selecting the individual towers, importance has been attached not only to displaying beautiful towers, but also towers with different functions and from different regions of Denmark. The next tower coin is expected to be issued at the beginning of 2006. The last of the 10 tower coins is expected to be issued in 2007. Pictures of this and earlier tower coins can be downloaded from www.nationalbanken.dk – Press room, Photogallery.

15 September 2005: The new Faroese banknote series is complete Today a new Faroese 1,000-krone banknote is issued. This completes the banknote series. The series was introduced in 2001 with the issue of a 50-krone banknote. The five banknotes in the series depict motifs from the Faroese landscape and fauna. The primary motif of the new 1,000-krone banknote is a fragment of a purple sandpiper, a bird which is common to the Faroe Islands. Be- hind the purple sandpiper, a watercolour of a flock of birds is reproduced. The motif on the reverse is a watercolour of a view from the island of Sandoy. The watercolours are both by the Faroese artist Zacharias Heine- sen. The new 1,000-krone banknote measures 165 x 72 mm and its main colour is dusty red.

Security features The 1,000-krone banknote, like the 100-, 200- and 500-krone banknotes, has a hologram. With the other security features – e.g. the watermark and security thread with colour change – this helps protect the banknotes from counterfeiting.

Old banknotes are still legal tender The old 1,000-krone banknotes remain legal tender, but will be gradually withdrawn from circulation.

Further information A folder on the new 1,000-krone banknote will be distributed to every household in the Faroe Islands from 15 September 2005. For further information, see www.nationalbanken.dk – Notes and coins.

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12 October 2005: Coin Set 2005 from The Royal Mint Naval battles and fairy tales are the themes of the 2005 Coin Set. In addition to the seven ordinary coins in circulation, the coin set includes a copy of the medal from the Battle of Copenhagen. The medal was awarded to Captain (later Vice Admiral) Olfert Fischer and his men after the Battle of Copenhagen in 1801, in which they defended Copenhagen against the British navy. The expression "to turn a blind eye" relates to this battle. The fairy tale coin in the Coin Set 2005 has a motif from Hans Christian Andersen's "The Ugly Duckling".

The coin set is minted in two versions The ordinary version of the coin set includes the seven ordinary coins in circulation, a medal of Nordic gold and the fairy tale coin "The Ugly Duckling". The coins are mined with two strokes. This is one stroke more than the coins in circulation. The more strokes, the more distinct the embossment. This version of the set is minted in an edition of maximum 31,000. The proof version includes the medal in silver and the coins in circulation in an especially fine quality minted with three strokes. The proof version is minted in an edition of maximum 3,500. The tower and fairy tale coins will be issued as full sets once the respective series are complete.

The coin sets are on sale from 14 November 2005 Some banks and coin dealers already take orders. The recommended retail price is DKK 200 for the ordinary version and DKK 875 for the proof version. The coin sets can also be purchased from Danmarks Nationalbank, Banking Services, Havnegade 5, DK-1093 Copenhagen K. The opening hours are Monday-Friday from 10.00 am to 1.00 pm.

Information and pictures See www.nationalbanken.dk, Notes and coins/Coin set for further information, and Press room/Photogallery/Coins for pictures.

1 February 2006: New tower coin with Gråsten Palace On 15 February 2006, Danmarks Nationalbank issues a new tower coin with the Bell Tower of Gråsten Palace as its motif. This is the eighth in the series of tower coins, of which the first was issued in 2002. The motif for the new tower coin is designed by the sculptor and graphic artist Sys Hindsbo.

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Can be used as an ordinary 20-krone coin The Gråsten Palace coin is issued in an edition of 1.2 million. The tower coin, which bears a portrait of the Queen on the obverse, can be used as an ordinary 20-krone coin.

Different parts of Denmark On selecting the towers for the coin series, importance has been attached to choosing towers with different functions from different regions of Denmark. This is evident from the list of towers, which – besides the Bell Tower of Gråsten Palace – includes Nólsoy Lighthouse in the Faroe Islands, Landet Church on the island of Tåsinge, Svaneke Water Tower on Born- holm, the Goose Tower in Vordingborg, Christiansborg Palace Tower, the Old Copenhagen Stock Exchange (Børsen) and Aarhus City Hall Tower.

Series to be completed in 2007 The next tower coin is expected to be issued in the autumn of 2006, and the last of the 10 coins in 2007.

Photo gallery Pictures of this and earlier tower coins can be downloaded from www.nationalbanken.dk – Press room, Photogallery.

16 February 2006: Coin Set for Children On 28 February 2006, Danmarks Nationalbank for the first time issues a coin set especially for children. The coin set unfolds like a picture book, from the stag on the front cover to the medal's happy little beetle with antlers and a crown. The motifs are inspired by animals of the forest and drawn in an imaginative style by the illustrator Cato Thau-Jensen.

Silver medal with space for a child's name On the inside of the coin set, there is space for such information as a child's name, date of birth and christening date. A child's name can be engraved on the silver medal. It is up to the buyer of the coin set to ar- range this, as Danmarks Nationalbank does not provide this service. Besides the medal, the coin set comprises Denmark's coin series, i.e. 25- and 50-øre coins and 1-, 2-, 5-, 10- and 20-krone coins minted in 2006. This year's coin set for children is issued in a maximum edition of 10,000.

The coin set is on sale from 28 February 2006 The recommended retail price is kr. 250.00. The coin set can be purchased from banks, coin dealers, gold and silver smiths, and from Dan-

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Information and pictures, etc. Pictures of the coin set can be downloaded from www.nationalbanken.dk under Press room, Photogallery, and details are available under Notes and coins, Coin set.

EXCHANGE RATES

29 March 2005: Seven new currencies added to the list of exchange rates published by Danmarks Nationalbank on a daily basis As from 1 April 2005, seven new currencies are added to the list of exchange rates published by Danmarks Nationalbank, and the number of significant figures for Icelandic kronur (ISK), Hungarian forints (HUF) and Slovenian tolar (SIT) is increased from three to four.

The seven new currencies on the list are: • Croatian kuna (HRK) • Russian roubles (RUB) • Thai baht (THB) • Malaysian ringgit (MYR) • Philippine pesos (PHP) • Indonesian rupiah (IDR) • Chinese yuan renminbi (CNY)

This brings the number of currencies on the list published by Danmarks Nationalbank to 36. Danmarks Nationalbank's exchange rates are normally listed daily at 2.15 pm on the basis of information from a number of central banks. The exchange rates are published for information only. Currency cannot be bought from or sold to Danmarks Nationalbank at the published exchange rates.

8 June 2005: Danmarks Nationalbank's publication of exchange rates As of 1 July 2005 Romania introduces New Romanian lei (RON) as its official currency, replacing old Romanian lei (ROL). The conversion rate between the two currencies is 1 RON = 10,000 ROL. As from 1 July 2005 Danmarks Nationalbank's list of exchange rates will reflect this change: Romanian lei will be removed from the list and replaced by New Romanian lei.

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Danmarks Nationalbank's exchange rates are normally listed daily at 2.15 pm on the basis of information from a number of central banks. The exchange rates are published for information only. Currency cannot be bought from or sold to Danmarks Nationalbank at the published exchange rates.

OTHER PRESS RELEASES

17 January 2005: Restructuring of Danish Ship Finance as a limited liability company In 1960-61 Danmarks Nationalbank participated in the establishment of Danish Ship Finance, and since then has been one of its guarantors. Danish Ship Finance, the Danish Ministry of Economic and Business Affairs and Danmarks Nationalbank have now concluded an agreement to restructure Danish Ship Finance as a limited liability company. Danmarks Nationalbank's participation in Danish Ship Finance should be seen against the background of its involvement during the 1950s and 1960s in the establishment of a number of specialist institutions for financing industry, agriculture, housing and shipbuilding. This was done in response to a requirement at that time to strengthen the capital markets, and because there was a need for specialised institutions. These institutions were set up as foundations, which make it difficult for them to adapt to market conditions. Consequently, they have, one by one, been restructured as limited liability companies. Danish Ship Finance has been an important instrument in relation to financing and subsidising shipbuilding in Denmark, e.g. via interest- subsidy schemes for ship finance, which were discontinued in 1993. Since then it has granted loans on market terms. Until 1984, Danish Ship Finance made a profit in connection to borrowers prepayments of interest-subsidised loans. Recognising that the profit from such prepayments would have accrued to the government if the latter itself had handled these lending activities, the parties have agreed to compensate for this profit in connection with the modernisation of Danish Ship Finance. Consequently, Danmarks Na- tionalbank and the Danish government will receive a total of DKK 1,610 million. Like the other guarantors, Danmarks Nationalbank will acquire shares in the limited liability company. These shares cannot be sold for at least five years. The agreement is subject to the Danish Parliament (Folketing) passing the necessary legislation, and to approval of the agreement by the Board

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21 January 2005: Danmarks Nationalbank sells its shares in Grønlandsbanken A/S to the Greenland Home Rule Danmarks Nationalbank has been a shareholder of Grønlandsbanken A/S since its foundation in 1967. At that time the establishment of a bank in Greenland was considered an important task for society. It is not normally the role of Danmarks Nationalbank to be a co-owner of a private bank, and Danmarks Nationalbank has gradually reduced its ownership interest over the years. Today Danmarks Nationalbank has concluded an agreement with the Greenland Home Rule to transfer Danmarks Nationalbank's total shareholding in Grønlandsbanken A/S, nominally DKK 24,666,000. This shareholding constitutes 13.7 per cent of the share capital of Grønlandsbanken A/S and is denominated as 246,660 shares of DKK 100 each. The agreement is subject to the approval of the Home Rule's acquisition of the shares by the Danish Financial Supervisory Authority. The agreed purchase sum is DKK 89,044,260, equivalent to DKK 361 per share.

9 February 2005: Danmarks Nationalbank has sold its shares in Grønlandsbanken A/S In a stock-exchange announcement dated 20 January 2005 Danmarks Na- tionalbank stated that it had sold its total shareholding of nominally kr. 24,666,000 shares in Grønlandsbanken A/S to the Greenland Home Rule. The shareholding amounted to 13.7 per cent of the total share capital of Grønlandsbanken A/S and was denominated as 246,660 shares of kr. 100 each. The agreement was subject to the approval of the Home Rule's acquisition of the shares by the Danish Financial Supervisory Au- thority. The Financial Supervisory Authority has approved the Greenland Home Rule as the purchaser of the shares. The property and voting rights relating to the shares are therefore transferred to the Greenland Home Rule as of 15 February 2005.

4 April 2005: Ruling in the Himmerlandsbanken case The Himmerlandsbanken winding-up estate today lost the "bond case" at the Danish Supreme Court. The ruling means that subscribers to subordinate capital are ranked alongside with other creditors.

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After the Supreme Court's ruling, Danmarks Nationalbank will take the necessary steps to ensure that legitimate claims under the guarantee provided by the Guarantee Consortium are met as soon as possible.

18 April 2005: Exhibition in Danmarks Nationalbank's lobby In the period from 19 April to 13 May 2005, Danmarks Nationalbank ex- hibits the three prize-winning designs from the international urban planning and architectural design competition for the new premises of the European Central Bank, ECB, in Frankfurt am Main, Germany. The exhibition will be open to the public in the lobby of Danmarks Na- tionalbank, Havnegade 5, Copenhagen, from Monday to Friday between 9 am and 4 pm. Pictures and further information about the competition can be found at the ECB's website, www.ecb.int/ecb/premises, and at the competition website, www.new-ecb-premises.com.

2 May 2005: Cyprus, Latvia and Malta join ERM II With effect from Monday, 2 May 2005, Cyprus, Latvia and Malta have joined the EU's exchange rate mechanism, ERM II. Danmarks Nationalbank welcomes the new participants in ERM II. The central rates and fluctuation bands of the three currencies have been fixed vis-à-vis the euro and are stated in press releases from the EU and the ECB. The entry of the new member states will not entail any changes in the central rate, fluctuation band and other terms and conditions for the Danish krone in ERM II.

28 November 2005: Slovakia joins ERM II With effect from 28 November 2005, Slovakia joined the EU's exchange rate mechanism, ERM II. Danmarks Nationalbank welcomes the new participant in ERM II. The central rate and fluctuation bands of the new currency has been fixed vis-à-vis the euro and are stated in press releases from the EU and the ECB. The press releases from the ECB are available at www.Nationalbanken.dk under Monetary Policy/Exchange Rate Mechanism/ERM II. The entry of the new member state will not entail any changes in the central rate, fluctuation band and other terms and conditions for the Danish krone in ERM II.

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Danmarks Nationalbank's Publications

Danmarks Nationalbank publishes the following publications: • Report and Accounts (March) Danmarks Nationalbank's Report and Accounts comprises a presentation and description of the bank's Accounts for the year, and a Report of the Board of Governors on, inter alia, recent trends in the Danish economy and the monetary and foreign-exchange-rate policy. • Financial Stability (May) Financial Stability includes an analysis of financial stability and an assessment of whether the financial sector is robust. • Monetary Review (Published on a quarterly basis) The Monetary Review describes and comments on recent trends in external finance and domestic credit. It also includes articles on areas of Danmarks Nationalbank's work which are judged to be of interest to a broader audience. • Danish Government Borrowing and Debt (February) Publishing "Danish Government Borrowing and Debt" is an integral part of the debt administration. The publication describes the development over the past year and reports on issues of significance to debt management. • Working Papers (Current issues – Electronic publication only) The Working Papers of Danmarks Nationalbank describe research and development, often still ongoing, as a contribution to the professional debate. • PhD Theses (Current issues – Electronic publication only) Every year Danmarks Nationalbank offers a PhD grant in economics, where the topic of the thesis is related to Danmarks Nationalbank's areas such as monetary policy, risk management and financial stability. • Financial Statistics – Nyt (News) and Tables Supplement (Current issues – Electronic publication only) The "Nyt" series presents key figures from the statistics which Dan- marks Nationalbank is responsible for compiling. "Nyt" comprises nine series. The Tables Supplement contains far more extensive data than the "Nyt" publications and also describes the sources and method- ologies. All time series in Danmarks Nationalbank's statistical publications can also be downloaded from the statistics database at Danmarks National- bank's website. For some subjects, further series can be downloaded,

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e.g. more detailed distributions by sector, instrument, country or maturity.

Other publications by Danmarks Nationalbank: • Danmarks Nationalbank, the Nationalbank Building, 2nd edition (2005) This publication describes the Danmarks Nationalbank building and its layout. It is illustrated with an abundance of photos of the exterior and interior of the building. • The Coins and Banknotes of Denmark, 2nd edition (2005) This publication presents Denmark's coins and banknotes together, with an account of how the coins and banknotes are manufactured. • Payment Systems in Denmark (2005) The publication presents a description of payment and securities settlement systems and the roles of central banks regarding these systems. Danmarks Nationalbanks' role in payment systems and the Danish payment and securities settlement systems are explained in detail. • Financial Management at Danmarks Nationalbank (2004) The publication provides a description of the principles and method- ologies used in connection with management of the foreign-exchange reserve and Danmarks Nationalbank's other portfolios. • Mona – a quarterly model of the Danish economy (2003) This publication outlines the major features and properties of the economic model applied by Danmarks Nationalbank for analysing domestic business cycles. • Monetary Policy in Denmark, 2nd edition (2003) The publication offers interested parties a comprehensive presentation of the Danish approach to monetary policy and of the relation between monetary policy in theory and practice.

The publications are available at Danmarks Nationalbank's website, www.nationalbanken.dk, under Publications. They can be ordered via the order form at the website or from:

Danmarks Nationalbank Information Desk Havnegade 5 DK-1093 Copenhagen K Telephone: +45 33 63 70 00 (direct) or +45 33 63 63 63 E-mail: [email protected]

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Danish Bank Holidays other than Saturdays and Sundays

New Year's Day Maundy Thursday Good Friday Easter Monday General Prayer Day (in 2006, 12 May) Ascension Day Whit Monday Constitution Day (5 June) 24 December Christmas Day Boxing Day 31 December

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Appendix of Tables

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ANNUAL ACCOUNTS AND MONTHLY BALANCE SHEETS OF DANMARKS NATIONALBANK Table 1

Assets

Assets deposited with the European Claims Foreign Monetary on the Monetary-policy Kr. million Gold assets Institute IMF, etc.1 lending 1995 ...... 3,531 53,577 4,521 4,177 • 1996 ...... 3,652 73,624 4,979 4,598 • 1997 ...... 3,331 115,844 4,790 6,602 • 1998 ...... 3,934 89,416 • 9,330 • 1999 ...... 4,567 154,715 • 8,441 • 2000 ...... 4,683 110,851 • 5,127 • 2001 ...... 4,979 138,633 • 8,549 • 2002 ...... 5,196 183,034 • 8,268 • 2003 ...... 5,298 214,441 • 7,416 • 2004 ...... 5,124 208,456 • 5,684 72,635 2005 ...... 6,941 204,204 • 3,557 135,296 2004 Jan ...... 5,298 202,593 • 7,302 • Feb ...... 5,298 194,432 • 7,102 • Mar ...... 5,300 203,866 • 6,813 • Apr ...... 5,304 211,485 • 6,818 • May ...... 5,304 214,422 • 6,833 • Jun ...... 5,304 216,431 • 6,788 • Jul ...... 5,304 217,147 • 6,697 • Aug ...... 5,304 217,975 • 6,587 • Sep ...... 5,304 214,956 • 6,410 • Oct ...... 5,304 211,662 • 6,137 • Nov ...... 5,304 208,451 • 6,118 • Dec ...... 5,304 208,143 • 5,919 • 2005 Jan ...... 5,124 213,577 • 5,673 84,341 Feb ...... 5,124 213,997 • 5,580 87,560 Mar ...... 5,124 225,235 • 5,580 93,336 Apr ...... 5,124 216,794 • 5,246 86,810 May ...... 5,124 223,418 • 5,148 98,684 Jun ...... 5,124 227,136 • 4,748 113,203 Jul ...... 5,124 215,966 • 4,701 99,005 Aug ...... 5,124 216,252 • 4,712 102,976 Sep ...... 5,124 217,177 • 4,712 111,481 Oct ...... 5,124 201,607 • 4,708 105,645 Nov ...... 5,124 197,770 • 4,194 124,864 Dec ...... 5,124 202,594 • 3,208 135,296

Note: End of period. The annual figures are from the annual accounts of Danmarks Nationalbank. The monthly figures – also at end December – are from the monthly balance sheets. As from the 2004 annual accounts Danmarks Nationalbank's annual and monthly balance sheets are published with monetary-policy lending and deposits listed as separate balance-sheet items, whereas previously they were included under "Lending", "Deposits" and "Certificates of Deposit". Moreover, as from the 2004 annual accounts, current accounts, retail clearing accounts and securities settlement accounts in kroner are included in net terms. Previously, these items were included in gross terms under "Lending" and "Deposits". For more information on the balance-sheet changes see also Danmarks Nationalbank, Report and Accounts, 2004, p. 124. The use of the monetary-policy instruments is specified in Table 5. 1 Danmarks Nationalbank's accounts with the International Monetary Fund are specified in Table 10. 2 Including shares and tangible fixed assets as from 2001, when these were capitalised, cf. Danmarks Nationalbank, Report and Accounts, 2001, p. 116. 3 Up to and including December 2004 the figures show only certificates of deposit.

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ANNUAL ACCOUNTS AND MONTHLY BALANCE SHEETS OF DANMARKS NATIONALBANK Table 1

Assets

Other lending Domestic bonds Other assets, etc.2 Total Kr. million 49,670 34,096 2,348 151,920 ...... 1995 49,659 35,108 2,383 174,003 ...... 1996 37,116 33,766 2,822 204,271 ...... 1997 40,225 37,487 2,402 182,794 ...... 1998 72,946 37,696 3,437 281,802 ...... 1999 67,635 39,847 8,865 237,007 ...... 2000 97,016 41,037 5,073 295,286 ...... 2001 132,037 41,012 5,856 375,403 ...... 2002 125,486 39,746 4,921 397,307 ...... 2003 3,412 37,102 4,654 337,066 ...... 2004 4,324 34,329 3,344 391,996 ...... 2005 72,412 38,001 4,009 329,615 ...... Jan 2004 82,921 37,978 3,847 331,578 ...... Feb 129,270 38,158 3,947 387,354 ...... Mar 135,421 37,668 4,056 400,752 ...... Apr 105,637 37,659 4,201 374,055 ...... May 131,820 37,723 4,851 402,917 ...... Jun 112,965 37,994 4,904 385,011 ...... Jul 118,234 38,265 4,921 391,286 ...... Aug 152,585 37,773 5,567 422,595 ...... Sep 120,229 37,280 5,656 386,269 ...... Oct 90,369 37,876 5,429 353,546 ...... Nov 133,277 37,169 5,975 395,788 ...... Dec 3,122 36,971 3,866 352,675 ...... Jan 2005 2,977 37,727 3,602 356,567 ...... Feb 3,115 35,780 3,833 372,002 ...... Mar 2,628 36,165 3,881 356,648 ...... Apr 3,033 37,856 4,144 377,407 ...... May 2,894 38,449 4,832 396,386 ...... Jun 3,004 38,099 5,198 371,097 ...... Jul 3,026 37,823 5,312 375,223 ...... Aug 3,525 38,679 5,938 386,637 ...... Sep 3,474 38,725 6,144 365,427 ...... Oct 3,400 36,568 6,256 378,177 ...... Nov 4,324 34,885 6,679 392,111 ...... Dec

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ANNUAL ACCOUNTS AND MONTHLY BALANCE SHEETS OF DANMARKS NATIONALBANK Table 1

Liabilities

Banknotes in Coins in Monetary-policy Other Central Kr. million circulation circulation deposits3 deposits Government 1995 ...... 31,434 3,222 33,813 3,219 38,808 1996 ...... 33,187 3,426 30,865 28,068 34,995 1997 ...... 35,079 3,631 52,738 33,863 33,954 1998 ...... 37,199 3,816 34,752 21,231 37,131 1999 ...... 42,430 3,952 99,896 46,404 39,678 2000 ...... 40,650 4,148 51,874 52,460 37,718 2001 ...... 42,966 4,333 113,620 37,996 43,510 2002 ...... 43,164 4,491 160,664 61,679 50,319 2003 ...... 44,984 4,701 157,279 91,002 43,981 2004 ...... 47,047 4,992 167,252 2,820 60,810 2005 ...... 50,953 5,264 220,423 2,187 56,428 2004 Jan ...... 42,536 4,616 131,140 38,219 56,875 Feb ...... 42,132 4,604 139,014 35,288 54,487 Mar ...... 42,961 4,655 141,256 48,701 96,607 Apr ...... 43,803 4,703 159,437 37,220 101,955 May ...... 44,517 4,780 134,518 39,595 96,377 Jun ...... 44,654 4,799 140,498 52,234 105,557 Jul ...... 45,158 4,823 141,065 39,734 98,416 Aug ...... 44,933 4,832 136,940 38,812 109,334 Sep ...... 44,884 4,833 137,124 58,175 120,221 Oct ...... 44,864 4,856 119,441 40,903 118,014 Nov ...... 45,510 4,900 128,158 39,921 75,948 Dec ...... 47,047 4,992 160,379 66,804 58,006 2005 Jan ...... 45,800 4,965 177,496 2,642 65,755 Feb ...... 45,787 4,943 196,827 2,587 50,592 Mar ...... 46,575 5,008 183,362 2,627 80,699 Apr ...... 46,945 5,018 167,920 2,718 80,320 May ...... 47,372 5,080 186,520 2,551 81,564 Jun ...... 47,949 5,135 202,368 2,707 83,121 Jul ...... 48,137 5,112 193,937 2,341 66,185 Aug ...... 47,794 5,121 221,839 2,322 42,207 Sep ...... 47,661 5,135 226,862 6,861 42,126 Oct ...... 47,914 5,143 209,206 2,704 42,094 Nov ...... 48,623 5,213 221,845 2,440 40,504 Dec ...... 50,953 5,264 220,423 2,185 53,475

Cf. the notes to the Table of Assets.

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ANNUAL ACCOUNTS AND MONTHLY BALANCE SHEETS OF DANMARKS NATIONALBANK Table 1

Liabilities

General Counterpart Capital of SDRs Fund and Value Foreign allocated by Other Statutory Adjustment General liabilities the IMF1 liabilities Reserve Reserve Reserves Total Kr. million 2,200 1,474 1,523 300 • 35,927 151,920 ...... 1995 1,634 1,527 1,548 300 1,093 37,359 174,003 ...... 1996 876 1,648 1,333 300 2,107 38,742 204,271 ...... 1997 1,253 1,606 2,333 300 3,101 40,072 182,794 ...... 1998 2,425 1,815 3,445 300 20 41,439 281,802 ...... 1999 3,143 1,869 729 300 1,363 42,753 237,007 ...... 2000 3,734 1,884 539 300 1,454 44,951 295,286 ...... 2001 3,311 1,721 317 300 3,577 45,859 375,403 ...... 2002 2,976 1,577 562 300 3,310 46,635 397,307 ...... 2003 1,633 1,514 714 300 2,648 47,336 337,066 ...... 2004 2,391 1,614 503 300 3,858 48,074 391,996 ...... 2005 631 1,577 4,283 300 3,577 45,859 329,615 ...... Jan 2004 429 1,577 4,310 300 3,577 45,859 331,578 ...... Feb 488 1,577 864 300 3,310 46,635 387,354 ...... Mar 530 1,577 1,281 300 3,310 46,635 400,752 ...... Apr 685 1,577 1,761 300 3,310 46,635 374,055 ...... May 910 1,577 2,444 300 3,310 46,635 402,917 ...... Jun 1,146 1,577 2,847 300 3,310 46,635 385,011 ...... Jul 1,317 1,577 3,295 300 3,310 46,635 391,286 ...... Aug 1,665 1,577 3,871 300 3,310 46,635 422,595 ...... Sep 1,943 1,577 4,427 300 3,310 46,635 386,269 ...... Oct 2,250 1,577 5,037 300 3,310 46,635 353,546 ...... Nov 1,637 1,577 5,102 300 3,310 46,635 395,788 ...... Dec 750 1,514 3,508 300 3,310 46,635 352,675 ...... Jan 2005 637 1,514 3,436 300 3,310 46,635 356,567 ...... Feb 848 1,514 1,086 300 2,648 47,336 372,002 ...... Mar 375 1,514 1,555 300 2,648 47,336 356,648 ...... Apr 553 1,514 1,969 300 2,648 47,336 377,407 ...... May 705 1,514 2,603 300 2,648 47,336 396,386 ...... Jun 684 1,514 2,903 300 2,648 47,336 371,097 ...... Jul 728 1,514 3,415 300 2,648 47,336 375,223 ...... Aug 1,518 1,514 4,676 300 2,648 47,336 386,637 ...... Sep 1,519 1,514 5,049 300 2,648 47,336 365,427 ...... Oct 2,122 1,514 5,633 300 2,648 47,336 378,177 ...... Nov 2,391 1,514 5,622 300 2,648 47,336 392,111 ...... Dec

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SPECIFICATION OF BANKNOTES IN CIRCULATION Table 2

Total, Kr. million 1,000 kr. 500 kr. 200 kr. 100 kr. 50 kr. Total1 mio.pieces 1995 ...... 18,238 5,307 • 6,759 737 31,041 111 1996 ...... 19,280 5,819 • 6,926 778 32,803 116 1997 ...... 19,589 6,556 1,618 6,119 799 34,681 118 1998 ...... 19,787 8,088 2,182 5,881 851 36,789 123 1999 ...... 22,978 9,272 2,534 6,339 904 42,026 136 2000 ...... 22,049 8,789 2,688 5,825 917 40,268 130 2001 ...... 23,569 9,296 2,890 5,768 931 42,453 133 2002 ...... 23,434 9,395 3,065 5,731 956 42,581 134 2003 ...... 24,387 10,052 3,262 5,729 989 44,417 138 2004 ...... 25,627 10,777 3,335 5,712 1,028 46,479 142 2005 ...... 27,892 12,006 3,602 5,802 1,083 50,386 150

Note: End of year. 1 Banknotes in circulation as stated in Danmarks Nationalbank's balance sheet furthermore includes the special notes circulation on the Faroe Island (on 30 December 2005 kr. 369 million) and 20-, 10- and 5-krone notes (on 30 December 2005 kr. 198 million).

SPECIFICATION OF COINS IN CIRCULATION Table 3

Total, Kr. million 20 kr. 10 kr. 5 kr. 2 kr.1 1 kr. 50 øre 25 øre Total2 mio.pieces 1995 ...... 1,122 697 442 259 385 112 152 3,169 1,561 1996 ...... 1,212 738 462 291 393 121 159 3,374 1,641 1997 ...... 1,299 773 483 321 401 126 163 3,566 1,706 1998 ...... 1,371 813 504 348 413 134 169 3,752 1,779 1999 ...... 1,421 842 523 369 422 139 171 3,887 1,829 2000 ...... 1,522 874 540 386 435 141 175 4,072 1,881 2001 ...... 1,600 922 562 403 443 148 179 4,257 1,940 2002 ...... 1,673 958 574 420 454 152 183 4,414 1,991 2003 ...... 1,789 993 592 439 466 160 186 4,625 2,056 2004 ...... 1,950 1,037 609 461 479 165 189 4,890 2,119 2005 ...... 2,091 1,087 635 488 497 170 194 5,162 2,197

Note: End of year. 1 2-krone coins put into circulation up to and including 1959 are included in the Table. The figures are revised back to 1995, and there will therefore be deviations from previous Annual Reports. 2 Coins in circulation as stated in Danmarks Nationalbank's balance sheet furthermore includes the 200-krone commemorative coin (kr. 102 million on 30 December 2005).

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LOANS FINANCING DECENTRALISED BANKNOTE HOLDINGS Table 4

Kr. million

1995 ...... 1,361 1996 ...... 1,438 1997 ...... 1,655 1998 ...... 2,912 1999 ...... 4,991 2000 ...... 2,677 2001 ...... 2,150 2002 ...... 3,208 2003 ...... 3,123 2004 ...... 3,371 2005 ...... 3,487

Note: Monthly figures are available on www.nationalbanken.dk, under Statistics (Download statistics – Publications, Tables supplement: Specification of Danmarks Nationalbank's balance sheet).

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THE BANKS' AND THE MORTGAGE-CREDIT INSTITUTES' NET POSITION WITH DANMARKS NATIONALBANK Table 5

Monetary-policy deposits

Certificates Net current Monetary-policy Kr. million of deposit1 accounts2 loans3 Total net position 1995 ...... 33,813 2,025 44,040 -8,202 1996 ...... 30,865 15,565 33,822 12,608 1997 ...... 52,738 18,456 19,901 51,293 1998 ...... 34,752 12,612 29,775 17,589 1999 ...... 99,896 6,536 33,123 73,309 2000 ...... 51,874 8,099 25,335 34,638 2001 ...... 113,620 3,705 63,408 53,917 2002 ...... 160,664 10,106 81,167 89,603 2003 ...... 157,279 12,945 48,024 122,200 2004 ...... 160,379 6,873 72,635 94,617 2005 ...... 207,582 12,841 135,296 85,127 2004 Jan ...... 131,140 4,688 39,370 96,458 Feb ...... 139,014 3,347 51,668 90,693 Mar ...... 141,256 18,207 99,120 60,343 Apr ...... 159,437 5,514 104,430 60,521 May ...... 134,518 4,397 71,121 67,794 Jun ...... 140,498 12,407 92,295 60,610 Jul ...... 141,065 6,079 79,175 67,969 Aug ...... 136,940 14,214 93,486 57,668 Sep ...... 137,124 11,035 105,088 43,071 Oct ...... 119,441 11,756 91,373 39,824 Nov ...... 128,158 13,158 63,515 77,801 Dec ...... 160,379 7,055 72,635 94,799 2005 Jan ...... 163,645 13,851 84,341 93,155 Feb ...... 187,178 9,649 87,560 109,267 Mar ...... 177,733 5,629 93,336 90,026 Apr ...... 163,379 4,541 86,810 81,110 May ...... 172,710 13,810 98,684 87,836 Jun ...... 187,421 14,947 113,203 89,165 Jul ...... 188,758 5,179 99,005 94,932 Aug ...... 204,304 17,535 102,976 118,863 Sep ...... 218,455 8,407 111,481 115,381 Oct ...... 195,468 13,738 105,645 103,562 Nov ...... 201,585 20,260 124,864 96,981 Dec ...... 207,582 12,841 135,296 85,127

Note: End of period. The annual figures are from the annual accounts of Danmarks Nationalbank. The monthly figures – also at end December – are from the monthly balance sheets. In 1999 the group of monetary-policy counterparties was expanded to include mortgage-credit institutes. Before 1999 the statistics solely include banks. 1 Nominal value. 2 The monetary-policy counterparties' net current-account balances in Danish kroner at the close of the monetary-policy day. 3 Loans against collateral. Up to 20 June 1999 including repurchase agreements.

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MONEY STOCK Table 6

Time Deposits deposits at notice Bonds, etc. Year-on-year with an with an issued with increase original original an original Money in money Banknotes Deposits on maturity maturity Repurchase maturity stock stock Kr. billion and coins1 demand < 2 years < 3 months agreements < 2 years M3 per cent 1995 ...... 30.1 260.8 107.6 14.0 2.1 4.3 418.9 3.2 1996 ...... 31.1 291.7 114.9 16.2 3.5 7.0 464.4 10.8 1997 ...... 32.6 310.9 122.4 15.1 2.5 17.3 500.9 7.9 1998 ...... 33.9 333.2 119.0 14.9 1.9 17.4 520.2 3.9 1999 ...... 36.1 341.8 128.3 12.9 4.3 11.6 535.0 2.8 2000 ...... 37.4 349.2 101.7 6.9 3.3 8.6 507.1 -5.2 2001 ...... 39.2 375.6 102.7 9.9 4.0 15.0 546.4 7.7 2002 ...... 39.0 399.1 102.7 18.5 6.6 45.2 611.2 11.8 2003 ...... 41.0 428.2 112.2 19.2 2.7 77.3 680.6 11.4 2004 ...... 43.7 492.8 119.2 21.0 2.0 20.2 699.0 2.7 2005 ...... 47.3 596.3 114.1 18.4 14.2 8.2 798.5 14.2 2004 Jan ..... 40.1 440.4 141.1 19.1 4.4 114.1 759.1 15.6 Feb .... 40.0 437.8 137.7 19.0 4.1 119.8 758.3 13.9 Mar .... 39.9 437.0 141.1 19.2 3.5 120.7 761.4 18.6 Apr .... 41.6 463.7 145.2 20.2 8.7 123.2 802.6 15.3 May ... 41.7 471.8 144.6 20.1 9.1 117.0 804.3 14.3 Jun ..... 41.7 458.7 133.2 19.9 10.1 102.0 765.6 12.9 Jul ...... 42.3 471.7 154.9 20.3 9.0 103.1 801.3 13.5 Aug ... 41.7 477.3 151.4 19.6 7.2 98.8 796.0 14.2 Sep .... 41.9 464.6 144.1 19.8 6.3 97.4 774.1 14.3 Oct ..... 42.3 486.5 143.6 20.4 4.7 88.7 786.3 9.4 Nov .... 42.6 496.9 144.7 22.3 4.5 76.4 787.5 9.5 Dec .... 43.7 492.8 119.2 21.0 2.0 20.2 699.0 2.7 2005 Jan ..... 43.2 502.0 135.1 21.3 4.9 6.7 713.1 -6.1 Feb .... 43.0 500.4 134.8 21.3 6.3 0.5 706.5 -6.8 Mar .... 43.1 508.1 128.3 18.3 2.8 2.4 703.0 -7.7 Apr .... 44.4 550.1 133.4 18.8 6.0 2.0 754.8 -6.0 May ... 44.2 552.4 123.5 19.0 4.9 1.7 745.7 -7.3 Jun ..... 44.9 561.9 138.5 18.0 11.5 3.6 778.4 1.7 Jul ...... 45.1 581.8 152.2 18.3 5.2 1.6 804.3 0.4 Aug ... 44.7 581.8 146.7 18.8 3.7 3.9 799.6 0.5 Sep .... 45.5 576.6 138.9 19.0 3.4 0.1 783.7 1.2 Oct ..... 45.4 584.2 142.4 18.5 3.8 0.6 795.0 1.1 Nov .... 46.1 597.1 129.3 20.3 4.2 2.1 799.2 1.5 Dec .... 47.3 596.3 114.1 18.4 14.2 8.2 798.5 14.2

Note: End of period. The money stock is calculated in accordance with the ECB's definition of harmonised monetary aggregates for the EU: M1, M2 and M3. This includes residents' short-term deposits with MFIs in kroner and foreign currencies. Special deposit schemes are included in the money stock (M2 og M3) to the extent that they are within the short-term band. Bonds issued with an original maturity of up to and including 2 years, money market papers and shares issued by MFIs are included in M3. The money stock is calculated on the basis of the consolidated balance sheet of the MFI sector and represents the MFI sector's liquid liabilities via-à-vis the money-holding sectors – i.e. citizens and companies, but excluding the central government and non-residents, who are regarded as money-neutral in this connection. The M1 monetary aggregate is calculated as the sum of "Banknotes and coins" and "Deposits on demand", and the M2 monetry aggregate is calculated as the sum of M1, "Time deposits with an original maturity < 2 years" and "Deposits at notice with an original maturity < 3 months". The MFI sector comprises Danish Monetary Financial Institutions, i.e. banks and mortgage-credit institutes, other credit institutions, money market funds and Danmarks Nationalbank. 1 Banknotes and coins in circulation, excluding MFI holdings.

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THE OFFICIAL INTEREST RATES OF DANMARKS NATIONALBANK Table 7

Lending Lending Current and certifi- Current and certi- Discount account cates of Discount account ficates of Per cent per annum rate deposits1 deposit2 Per cent per annum rate deposits1 deposit2

1995 8 Mar ...... 6.00 6.00 7.00 2000 4 Feb ..... 3.25 3.25 3.60 6 Apr ...... 6.75 17 Mar ..... 3.50 3.50 3.85 27 - ...... 6.50 28 Apr ..... 3.75 3.75 4.10 18 May ...... 6.35 9 Jun ..... 4.25 4.25 4.70 6 Jul ...... 5.75 5.75 6.20 23 Aug ..... 4.90 27 - ...... 6.05 30 - ..... 5.10 3 Aug ...... 5.50 5.50 5.90 1 Sep ..... 4.50 4.50 25 - ...... 5.00 5.00 6 - ..... 5.00 7 Sep ...... 5.50 27 - ..... 5.10 28 - ...... 5.40 29 - ..... 5.60 5 Oct ...... 5.30 6 Oct ..... 4.75 4.75 9 Nov ...... 4.75 4.75 5.15 13 - ..... 5.50 23 - ...... 5.00 27 - ..... 5.40 15 Dec ...... 4.25 4.25 4.75 2001 9 Feb ..... 5.30 28 - ...... 4.60 14 May ..... 4.50 4.50 5.00 1996 11 Jan ...... 4.50 6 Jul ..... 4.95 25 - ...... 4.00 4.00 4.35 31 Aug ..... 4.25 4.25 4.65 8 Feb ...... 4.25 18 Sep ..... 3.75 3.75 4.15 7 Mar ...... 3.75 3.75 4.10 5 Oct ..... 4.10 21 - ...... 4.00 9 Nov ..... 3.25 3.25 3.60 1 Apr ...... 3.90 2002 1 Feb ..... 3.55 19 - ...... 3.25 3.25 3.80 9 Aug ..... 3.50 6 Jun ...... 3.70 30 - ..... 3.45 23 Aug ...... 3.50 6 Dec ..... 2.75 2.75 2.95 1997 10 Oct ...... 3.50 3.50 3.75 2003 7 Mar ..... 2.50 2.50 2.70 1998 6 May ...... 4.00 4.00 4.25 23 May ..... 2.65 29 - ...... 3.75 3.75 4.00 6 Jun ..... 2.00 2.00 2.15 21 Sep ...... 4.25 4.25 5.00 2005 2 Dec ..... 2.25 2.25 2.40 8 Oct ...... 4.75 22 - ...... 4.65 2006 17 Feb ..... 2.50 5 Nov ...... 4.00 4.00 4.40 3 Mar ..... 2.50 2.50 2.75 26 - ...... 4.25 4 Dec ...... 3.50 3.50 3.95 1999 7 Jan ...... 3.75 4 Feb ...... 3.25 3.25 3.50 1 Mar ...... 3.40 9 Apr ...... 2.75 2.75 2.90 17 Jun ...... 2.85 5 Nov ...... 3.00 3.00 3.30

Note: Interest rates at year-end or as from the date stated. 1 As from April 1992 until end-April 1997 interest-earning deposits were subject to maximum limits. Until end-March 1992 the banks also had access to drawings on current account. The rate of interest for these drawings was 0.5 to 1 per cent higher. 2 Danmarks Nationalbank's interest rate for collateralised lending as well as for sale and repurchase of the Nationalbank's certificates of deposit. On purchasing certificates of deposit before expiry the Nationalbank's buy-back price is normally based on a slightly higher interest rate. The interest rates stated exclude this premium. Until 21 June 1999 the Nationalbank's lending rate was called the repo rate.

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THE OFFICIAL INTEREST RATES OF THE EUROPEAN CENTRAL BANK Table 8a

Main refinancing operations

Variable rate tenders Marginal With effect from1 Deposit facility Minimum bid rate lending facility

2002 6 Dec ...... 1.75 2.75 3.75 2003 7 Mar ...... 1.50 2.50 3.50 6 Jun ...... 1.00 2.00 3.00 2005 6 Dec ...... 1.25 2.25 3.25 2006 8 Mar ...... 1.50 2.50 3.50

Note: On 8 June 2000 the ECB announced that, starting from the operation to be settled on 28 June 2000, the main refinancing operation of the Euro-system would be conducted as variable rate tenders. The minimum bid rate refers to the minimum interest rate at which counterparties may place their bids. Source: ECB. 1 The dates refer to the deposit and marginal lending facilities. For main refinancing operations, changes in the rate are effective from the first operation following the date indicated.

EUROSYSTEM MONETARY-POLICY OPERATIONS ALLOTTED THROUGH TENDERS Table 8b

Variable rate tenders Variable rate tenders Variable rate tenders

Minimum Minimum Minimum Per cent bid Marginal Per cent bid Marginal Per cent bid Marginal per annum rate rate per annum rate rate per annum rate rate 2005 5 Jan ..... 2.00 2.06 2005 1 Jun ..... 2.00 2.05 2005 26 Oct .... 2.00 2.06 12 - ..... 2.06 8 - ..... 2.05 3 Nov ... 2.05 19 - ..... 2.06 15 - ..... 2.05 9 - .... 2.05 26 - ..... 2.06 22 - ..... 2.05 16 - .... 2.05 2 Feb ..... 2.06 29 - ..... 2.05 23 - .... 2.08 8 - ..... 2.06 6 Jul ..... 2.05 30 - .... 2.09 16 - ..... 2.05 13 - ..... 2.05 6 Dec .... 2.25 2.29 23 - ..... 2.05 20 - ..... 2.05 14 - .... 2.29 2 Mar ..... 2.05 27 - ..... 2.05 21 - .... 2.30 9 - ..... 2.05 3 Aug ... 2.05 29 - .... 2.25 16 - ..... 2.05 10 - ..... 2.05 2006 4 Jan .... 2.30 23 - ..... 2.05 17 - ..... 2.05 11 - .... 2.30 30 - ..... 2.05 24 - ..... 2.05 18 - .... 2.30 6 Apr .... 2.05 31 - ..... 2.05 25 - .... 2.30 13 - ..... 2.05 7 Sep .... 2.05 1 Feb .... 2.30 20 - ..... 2.05 14 - ..... 2.06 8 - 2.31 27 - ..... 2.05 21 - ..... 2.06 15 - 2.31 4 May .... 2.05 28 - ..... 2.06 22 - 2.31 11 - ..... 2.05 5 Oct .... 2.06 28 - 2.32 18 - ..... 2.05 12 - ..... 2.07 8 Mar ... 2.50 • 25 - ..... 2.05 19 - ..... 2.06

Note: Cf. note in table 8a. The marginal rate refers to the lowest rate at which funds were allotted. Source: ECB.

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THE FOREIGN-EXCHANGE RESERVE Table 9

Assets deposited with the European Claims on Foreign Monetary the Total Foreign Total Kr. million Gold assets Institute IMF, etc.1 gross liabilities net2 1995 ...... 3,531 53,577 4,521 4,177 65,806 2,200 63,606 1996 ...... 3,652 73,624 4,979 4,598 86,853 1,634 85,219 1997 ...... 3,331 115,844 4,790 6,602 130,567 876 129,691 1998 ...... 3,934 89,416 • 9,330 102,680 1,253 101,427 1999 ...... 4,567 154,715 • 8,441 167,724 2,425 165,299 2000 ...... 4,683 110,851 • 5,127 120,661 3,143 117,517 2001 ...... 4,979 138,633 • 8,549 152,161 3,734 148,427 2002 ...... 5,196 183,034 • 8,268 196,498 3,311 193,187 2003 ...... 5,298 214,441 • 7,416 227,155 2,976 224,179 2004 ...... 5,124 208,456 • 5,684 219,264 1,633 217,631 2005 ...... 6,941 204,204 • 3,557 214,703 2,391 212,312 2004 Jan ...... 5,298 202,593 • 7,302 215,193 631 214,562 Feb ...... 5,298 194,432 • 7,102 206,832 429 206,403 Mar ...... 5,300 203,866 • 6,813 215,979 488 215,491 Apr ...... 5,304 211,485 • 6,818 223,607 530 223,076 May ...... 5,304 214,422 • 6,833 226,559 685 225,873 Jun ...... 5,304 216,431 • 6,788 228,523 910 227,613 Jul ...... 5,304 217,147 • 6,697 229,148 1,146 228,002 Aug ...... 5,304 217,975 • 6,587 229,866 1,317 228,548 Sep ...... 5,304 214,956 • 6,410 226,669 1,665 225,005 Oct ...... 5,304 211,662 • 6,137 223,103 1,943 221,161 Nov ...... 5,304 208,451 • 6,118 219,873 2,250 217,623 Dec ...... 5,304 208,143 • 5,919 219,366 1,637 217,730 2005 Jan ...... 5,124 213,577 • 5,673 224,374 750 223,624 Feb ...... 5,124 213,997 • 5,580 224,701 637 224,064 Mar ...... 5,124 225,235 • 5,580 235,938 848 235,091 Apr ...... 5,124 216,794 • 5,246 227,164 375 226,789 May ...... 5,124 223,418 • 5,148 233,690 553 233,137 Jun ...... 5,124 227,136 • 4,748 237,007 705 236,302 Jul ...... 5,124 215,966 • 4,701 225,791 684 225,107 Aug ...... 5,124 216,252 • 4,712 226,088 728 225,360 Sep ...... 5,124 217,177 • 4,712 227,013 1,518 225,495 Oct ...... 5,124 201,607 • 4,708 211,439 1,519 209,920 Nov ...... 5,124 197,770 • 4,194 207,089 2,122 204,967 Dec ...... 5,124 202,594 • 3,208 210,926 2,391 208,535

Note: End of period. The annual figures are from the annual accounts of Danmarks Nationalbank. The monthly figures – also at end-December – are from the monthly balance sheets. 1 Danmarks Nationalbank's account with the International Monetary Fund is specified in Table 10. 2 As a result of exchange-rate adjustments the foreign-exchange reserve declined by kr. 3,841 million in 1995, increased by kr. 765 million in 1996, by kr. 1,454 million in 1997, by kr. 913 million in 1998, declined by kr. 366 million in 1999, by kr. 4,821 million in 2000, increased by kr. 3,437 million in 2001, declined by kr. 699 million in 2002, increased by kr. 161 million in 2003, declined by kr. 99 million in 2004 and increased by kr. 3,777 million in 2005.

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DENMARK'S ACCOUNT WITH THE INTERNATIONAL MONETARY FUND Table 10

The Fund's Denmark's Denmark's qouta holdings of reserve position Allocated SDR Denmark's in the Fund Danish kroner in the Fund1 (accumulated) holdings of SDR SDR Kr. SDR Kr. SDR Kr. SDR Kr. SDR Kr. million million million million million million million million million million 1995 ...... 1,070 8,818 670 5,521 400 3,297 179 1,474 107 880 1996 ...... 1,070 9,134 648 5,533 422 3,601 179 1,527 117 997 1997 ...... 1,070 9,856 602 5,545 468 4,311 179 1,648 249 2,291 1998 ...... 1,070 9,605 277 2,483 793 7,122 179 1,606 246 2,208 1999 ...... 1,643 16,667 1,061 10,762 582 5,905 179 1,815 250 2,536 2000 ...... 1,643 17,167 1,203 12,568 440 4,599 179 1,869 51 528 2001 ...... 1,643 17,306 1,076 11,335 567 5,971 179 1,884 223 2,354 2002 ...... 1,643 15,811 921 8,863 722 6,948 179 1,721 76 730 2003 ...... 1,643 14,488 957 8,435 686 6,053 179 1,577 55 481 2004 ...... 1,643 13,904 1,100 9,310 543 4,594 179 1,514 29 243 2005 ...... 1,643 14,828 1,427 12,879 216 1,950 179 1,614 78 705

Note: End of period. Conversion from SDR to Danish kroner is made at the year-end SDR-rate. In addition to the above account, kr. 903 million had been lent to the Poverty Reduction and Growth Facility at end-2005. 1 Denmark's reserve position in the IMF is determined as the difference between the quota and the Fund's holdings of Danish kroner.

CENTRAL RATE AND FLUCTUATION BAND VIS-À-VIS EURO IN ERM II Table 11

Kroner per 100 euro Denmark

Upper limit ...... 762.824 Central rate ...... 746.038 Lower limit ...... 729.252

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EXCHANGE RATES Table 12

Pounds Swedish Norwegian Danish kroner Euros1 US dollars Japanese yen sterling kronor kroner per 100 units (EUR) (USD) (JPY) (GBP) (SEK) (NOK) 1995 ...... • 560.53 5.9799 884.61 78.65 88.45 1996 ...... • 579.59 5.3316 905.17 86.47 89.79 1997 ...... • 660.86 5.4761 1,082.32 86.54 93.36 1998 ...... • 669.70 5.1338 1,109.36 84.23 88.70 1999 ...... 743.56 698.34 6.1755 1,129.49 84.46 89.47 2000 ...... 745.37 809.03 7.5081 1,223.33 88.26 91.89 2001 ...... 745.21 831.88 6.8522 1,197.74 80.58 92.60 2002 ...... 743.04 788.12 6.2969 1,182.10 81.12 99.03 2003 ...... 743.07 658.99 5.6840 1,074.99 81.45 93.03 2004 ...... 743.98 598.93 5.5366 1,096.69 81.54 88.90 2005 ...... 745.19 600.34 5.4473 1,090.02 80.29 93.11 2004 Jan ...... 744.81 590.55 5.5535 1,076.15 81.52 86.69 Feb ...... 745.11 589.25 5.5291 1,100.85 81.20 84.91 Mar ...... 744.93 607.56 5.5992 1,109.85 80.67 87.23 Apr ...... 744.35 621.43 5.7656 1,118.36 81.21 89.75 May ...... 744.06 620.24 5.5293 1,107.53 81.46 90.62 Jun ...... 743.42 612.49 5.5964 1,119.18 81.31 89.73 Jul ...... 743.55 606.26 5.5457 1,116.87 80.85 87.73 Aug ...... 743.65 610.81 5.5280 1,110.96 80.96 89.26 Sep ...... 743.81 608.82 5.5307 1,091.77 81.81 88.97 Oct ...... 743.79 595.65 5.4703 1,075.73 82.08 90.32 Nov ...... 743.13 572.11 5.4609 1,063.74 82.59 91.28 Dec ...... 743.32 555.13 5.3456 1,070.97 82.80 90.46 2005 Jan ...... 744.05 567.20 5.4866 1,065.01 82.24 90.60 Feb ...... 744.27 571.96 5.4512 1,079.16 81.92 89.46 Mar ...... 744.64 563.71 5.3623 1,075.75 81.94 90.95 Apr ...... 744.99 576.15 5.3666 1,090.89 81.27 91.11 May ...... 744.44 586.97 5.4995 1,088.37 80.98 92.16 Jun ...... 744.48 612.03 5.6310 1,112.96 80.38 94.32 Jul ...... 745.84 619.65 5.5354 1,084.83 79.11 94.17 Aug ...... 745.96 606.87 5.4861 1,088.64 79.87 94.23 Sep ...... 745.84 608.65 5.4818 1,100.74 79.91 95.52 Oct ...... 746.20 621.10 5.4055 1,095.18 79.20 95.24 Nov ...... 745.96 632.99 5.3441 1,098.13 78.02 95.28 Dec ...... 745.41 628.76 5.3033 1,097.49 79.03 93.49

Note: Annual and monthly averages. As from 2002 the stated exchange rates are fixed on the basis of market exchange rates at 2.15 pm, whereas previously they were fixed on the basis of market exchange rates at 11.30 am. However, the SDR exchange rate is not fixed directly on the basis of market exchange rates, but calculated on the basis of a basket of currencies. This basket is published by the international Monetary Fund, IMF. As of 1 January 2006 the amounts for the four currencies that determine the value of the SDR were revised. The value of the SDR is now the sum of the values of the following amounts of each currency: Dollar 0.632, euro 0.410, yen 18.4 and pound sterling 0.0903. Previously they were: Dollar 0.577, euro 0.426, yen 21.0 and pound sterling 0.0984. For a number of currencies only averages for the recent years are stated, since the Table solely comprises exchange rates fixed by Danmarks Nationalbank. The structure of the list of exchange rates is changed continuously, most recently with effect from 1 April 2005, cf. the press release, p. 148. Exchange rates on a daily basis can be downloaded from www.nationalbanken.dk, Market info and Statistics (Download statistics – Database). 1 Historical annual and monthly averages for the euro area and the weighted ECU based on these currencies, subsequently renamed the euro, are found in Danmarks Nationalbank, Report and Accounts, 2001 and earlier. 2 As of 1 July 2005 Romania introduced New Romanian lei (RON) as its official currency, replacing old Romanian lei (ROL). 3 As of 1 January 2005 Turkey introduced New Turkish lira (TRY) as its official currency, replacing old Tyrkish lira (TRL).

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EXCHANGE RATES Table 12

New Nominal Icelandic Swiss Canadian Australian Zealand effective kronur francs dollars dollars dollars SDRs krone rate (ISK) (CHF) (CAD) (AUD) (NZD) (XDR) (1980 = 100) 8.65 474.22 408.39 415.80 367.64 849.63 103.9 8.69 469.65 425.08 453.67 398.76 841.42 102.9 9.31 455.35 477.44 490.90 437.20 909.13 100.0 9.41 462.37 452.28 421.66 359.66 908.10 101.3 9.64 464.63 470.26 450.86 369.27 954.73 99.6 10.27 478.68 544.49 469.29 367.89 1,065.90 95.6 8.56 493.47 537.54 430.51 349.85 1,059.21 96.9 8.62 506.47 501.86 427.91 364.87 1,019.83 97.7 8.58 488.88 470.27 428.17 382.69 921.93 101.2 8.54 481.96 460.64 440.53 397.53 886.70 102.2 9.55 481.30 496.12 457.13 422.41 885.50 101.6 8.49 475.72 455.68 454.89 397.24 880.56 102.6 8.59 473.56 443.07 458.29 408.04 881.85 102.6 8.54 475.39 456.68 455.14 401.35 894.70 102.1 8.50 478.74 463.19 460.86 397.19 906.78 101.4 8.46 483.03 449.88 436.78 381.61 899.94 101.8 8.49 489.36 450.81 425.24 385.21 897.76 101.8 8.48 486.93 458.45 433.94 392.16 892.92 102.0 8.54 483.29 464.63 433.70 399.75 894.64 101.9 8.49 482.03 471.76 427.60 401.25 891.73 102.0 8.49 482.17 476.78 436.26 406.92 881.27 102.3 8.53 488.39 478.24 440.63 400.86 866.03 102.8 8.85 484.06 455.72 425.85 397.04 854.61 103.2 9.06 481.00 463.33 433.98 399.67 864.25 102.8 9.22 480.15 461.52 446.50 409.13 867.74 102.5 9.41 480.68 463.26 443.09 412.00 860.94 102.7 9.238 481.37 466.18 445.16 414.61 869.85 102.4 9.056 481.89 467.44 449.47 421.62 878.40 102.0 9.389 483.72 492.75 469.06 433.51 898.06 100.9 9.514 478.77 506.37 466.12 420.63 898.26 101.2 9.519 480.39 503.42 462.08 422.07 890.28 101.3 9.796 481.32 516.28 465.96 425.85 892.35 101.0 10.182 481.74 527.43 468.24 433.53 897.54 100.9 10.224 482.87 535.03 465.38 436.59 903.30 100.7 9.892 481.58 541.07 466.57 436.87 899.70 100.8

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EXCHANGE RATES Table 12

Estonian Latvian Lithuanian Polish Czech Hungarian Hong Kong Singapore Danish kroner krooni lats litai zlotys koruny forint dollars dollars per 100 units (EEK) (LVL) (LTL) (PLN) (CZK) (HUF) (HKD) (SGD) 1995 ...... … … … … … … … … 1996 ...... … … … … … … … … 1997 ...... … … … … … … … … 1998 ...... … … … … … … … … 1999 ...... … … … 176.05 20.19 2.94 … … 2000 ...... … … … 186.03 20.95 2.87 … … 2001 ...... … … … 203.05 21.88 2.91 … … 2002 ...... 47.49 1,279.75 214.79 193.07 24.13 3.06 101.05 439.96 2003 ...... 47.49 1,161.21 215.21 169.26 23.34 2.93 84.62 378.02 2004 ...... 47.55 1,118.83 215.47 164.73 23.33 2.96 76.89 354.21 2005 ...... 47.63 1,070.38 215.82 185.46 25.03 3.00 77.20 360.41 2004 Jan ...... 47.60 1,110.48 215.69 158.04 22.76 2.82 76.05 347.82 Feb ...... 47.62 1,112.41 215.77 153.42 22.68 2.83 75.80 349.45 Mar ...... 47.61 1,129.47 215.75 156.38 22.58 2.94 77.97 357.52 Apr ...... 47.57 1,144.87 215.57 156.35 22.89 2.97 79.70 368.75 May ...... 47.55 1,134.82 215.49 157.48 23.26 2.94 79.55 362.23 Jun ...... 47.51 1,132.43 215.31 161.96 23.52 2.94 78.55 357.57 Jul ...... 47.52 1,127.35 215.35 166.54 23.57 2.98 77.73 354.16 Aug ...... 47.53 1,129.21 215.38 167.84 23.51 2.99 78.31 356.07 Sep ...... 47.54 1,125.35 215.42 170.03 23.54 3.00 78.06 359.02 Oct ...... 47.54 1,111.84 215.41 172.25 23.62 3.01 76.47 355.11 Nov ...... 47.49 1,092.42 215.23 174.57 23.75 3.03 73.57 346.53 Dec ...... 47.51 1,078.20 215.28 179.55 24.25 3.03 71.39 338.20 2005 Jan ...... 47.55 1,068.52 215.49 182.40 24.55 3.02 72.76 346.10 Feb ...... 47.57 1,069.27 215.55 186.71 24.84 3.05 73.33 349.00 Mar ...... 47.59 1,069.72 215.66 185.94 25.03 3.04 72.27 345.90 Apr ...... 47.62 1,070.29 215.77 179.35 24.73 3.002 73.88 348.69 May ...... 47.58 1,069.51 215.60 178.38 24.62 2.953 75.35 355.35 Jun ...... 47.58 1,069.63 215.62 183.35 24.79 2.990 78.71 365.99 Jul ...... 47.67 1,071.53 216.01 181.99 24.71 3.026 79.70 368.20 Aug ...... 47.68 1,071.74 216.05 184.48 25.21 3.051 78.09 364.99 Sep ...... 47.67 1,071.53 216.01 190.47 25.44 3.034 78.41 362.05 Oct ...... 47.69 1,071.32 216.11 190.23 25.15 2.963 80.07 367.12 Nov ...... 47.67 1,071.33 216.04 187.91 25.49 2.972 81.63 372.68 Dec ...... 47.64 1,069.88 215.89 193.61 25.73 2.950 81.09 375.44

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EXCHANGE RATES Table 12

South Bulgarian Cyprus Maltese Romanian Slovakian Slovenian Turkish Korean leva pounds liri lei koruny tolars liras won (BGN) (CYP) (MTL) (RON)2 (SKK) (SIT) (TRY)3 (KRW) ...... 1,284.63 ...... 3.82 ... 0.5881 ... 1,298.73 ...... 3.61 ... 0.7160 382.50 1,294.10 1,849.01 0.0287 17,21 3.42 0.0007242 0.6449 381.21 1,291.67 1,817.41 0.0239 17,41 3.29 0.0005265 0.6324 381.26 1,272.34 1,744.45 0.0198 17,91 3.18 0.0004399 0.5535 380.88 1,278.80 1,738.48 0.0184 18,59 3.11 0.0004199 0.5231 381.02 1,292.11 1,733.39 ... 19,31 3.11 445.32 0.5861 380.84 1,269.99 1,731.68 0.0181 18,29 3.14 0.0004387 0.4992 381.43 1,271.50 1,739.24 0.0184 18,38 3.14 0.0004429 0.5053 382.70 1,271.25 1,746.16 0.0186 18,44 3.13 0.0004598 0.5212 382.40 1,269.57 1,751.04 0.0183 18,54 3.12 0.0004546 0.5387 382.29 1,269.83 1,746.91 0.0184 18,52 3.12 0.0004096 0.5268 380.32 1,276.51 1,747.63 0.0182 18,62 3.11 0.0004098 0.5287 380.17 1,278.21 1,745.66 0.0182 18,64 3.10 0.0004168 0.5234 380.21 1,285.75 1,745.12 0.0182 18,54 3.10 0.0004132 0.5277 380.30 1,289.18 1,739.06 0.0181 18,57 3.10 0.0004046 0.5302 380.29 1,291.41 1,730.93 0.0181 18,60 3.10 0.0003999 0.5216 379.95 1,285.95 1,720.67 0.0187 18,79 3.10 0.0003946 0.5267 380.04 1,283.67 1,719.14 0.0192 19,12 3.10 0.0003969 0.5279 380.42 1,279.09 1,721.41 0.0195 19,29 3.10 418.56 0.5464 380.53 1,276.30 1,727.18 0.0203 19,56 3.10 435.17 0.5595 380.72 1,276.96 1,724.67 0.0205 19,49 3.11 430.19 0.5599 381.02 1,278.19 1,733.05 0.0205 19,00 3.109 422.41 0.5702 380.56 1,287.92 1,734.17 0.0206 19,09 3.108 428.05 0.5857 380.65 1,296.89 1,734.18 0.0206 19,32 3.109 449.62 0.6047 381.35 1,300.12 1,737.35 209.24 19,18 3.114 462.33 0.5974 381.42 1,301.37 1,737.64 212.97 19,29 3.114 451.25 0.5942 381.35 1,301.73 1,737.35 212.52 19,39 3.115 453.99 0.5913 381.51 1,301.84 1,738.17 207.30 19,17 3.115 456.94 0.5938 381.42 1,300.69 1,737.62 204.14 19,29 3.115 465.30 0.6083 381.14 1,299.86 1,736.35 203.73 19,68 3.112 464.79 0.6149

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EXCHANGE RATES Table 12

South Chinese African Croatian Russian Thai Malaysian Philippine Indonesian yuan Danish kroner rand kuna roubles baht ringgit pesos rupiah renminbi per 100 units (ZAR) (HRK) (RUB) (THB) (MYR) (PHP) (IDR) (CNY) 1995 ...... 1996 ...... 1997 ...... 1998 ...... 1999 ...... 114.22 ...... 2000 ...... 116.75 ...... 2001 ...... 98.02 ...... 2002 ...... 75.07 ...... 2003 ...... 87.52 ...... 2004 ...... 93.05 ...... 2005 ...... 94.17 ...... 2004 Jan ...... 84.96 ...... Feb ...... 87.13 ...... Mar ...... 91.65 ...... Apr ...... 94.25 ...... May ...... 91.30 ...... Jun ...... 95.21 ...... Jul ...... 98.97 ...... Aug ...... 94.80 ...... Sep ...... 93.05 ...... Oct ...... 93.15 ...... Nov ...... 94.60 ...... Dec ...... 96.71 ...... 2005 Jan ...... 94.94 ...... Feb ...... 95.03 ...... Mar ...... 93.61 ...... Apr ...... 93.52 100.80 20.71 14.57 151.62 10.58 0.0603 69.61 May ...... 92.34 101.60 21.00 14.73 154.47 10.80 0.0619 70.92 Jun ...... 90.60 101.75 21.46 14.95 161.03 11.08 0.0635 73.95 Jul ...... 92.33 102.05 21.59 14.86 163.61 11.07 0.0632 75.38 Aug ...... 93.82 101.24 21.31 14.74 161.41 10.85 0.0608 74.91 Sep ...... 95.71 100.27 21.45 14.83 161.50 10.85 0.0595 75.22 Oct ...... 94.31 101.08 21.74 15.18 164.62 11.17 0.0616 76.78 Nov ...... 95.05 101.09 21.99 15.39 167.52 11.61 0.0630 78.30 Dec ...... 98.82 100.89 21.82 15.30 166.41 11.75 0.0638 77.86

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