Danmarks Nationalbank Report and Accounts 2000

2000

DA N M A R K S NA T I O N A L BANK2000 Accounts Report and Nationalbank Danmarks

26-03-01 10:44 Antal sider: 1 Rev. nr. 2 H:\alle\Aarsberetninger\2000\Engelsk\UK-til- tryk\titel.doc Oprettet af Palle Lorentzen The Report and Accounts are 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 E-mail: [email protected]

The Report is available on Danmarks Nationalbank's Web site: www.nationalbanken.dk under Publications

Office hours: Cashier services: Monday-Friday 10.00 a.m.-1.00 p.m. Other inquiries: Monday-Friday 9.00 a.m.-4.00 p.m.

Explanation of symbols: - Magnitude nil 0 Less than one half of unit employed

• Category not applicable …Data not available Detail may not add because of rounding.

SCHULTZ GRAFISK A/S KØBENHAVN ISSN 1397-520x ISSN (On-line) 1398-3849 Contents

FOREWORD ...... 11

REPORT OF THE BOARD OF GOVERNORS

SUMMARY ...... 15

THE DANISH ECONOMY International background ...... 18 Economic activity in Denmark ...... 21 Balance of payments ...... 24 Credit expansion ...... 25 Wage and price trends ...... 27 Economic prospects ...... 28

MONETARY AND EXCHANGE-RATE POLICY Unchanged fixed-exchange-rate policy after the euro referendum ... 30 Interest and exchange rates in Denmark ...... 31 Capital flows and the foreign-exchange reserve ...... 36 The liquidity of the banks and mortgage-credit institutes ...... 38 The monetary-policy instruments ...... 39

THE MONETARY POLICY OF THE ECB The monetary policy strategy ...... 41 Monetary-policy decisions ...... 41 The ECB's monetary-policy instruments ...... 46

FINANCIAL MARKETS Foreign-exchange markets ...... 48 Interest rates ...... 50 Stock markets ...... 55

THE DOMESTIC FINANCIAL SYSTEM The bond market ...... 58 Measures in the stock-exchange area, etc...... 61 Restructuring of VP A/S – The Danish Securities Centre as a limited liability company ...... 62

22-03-01 10:07 Antal sider: 3 Rev. nr. 5 \\DNB\APP\alle\Aarsberetninger\2000\Engelsk\UK-til-tryk\side-003-05-Indhold.doc Oprettet af Hanne Christensen Statutory framework for the financial sector ...... 63 The banks ...... 65 The mortgage-credit institutes ...... 66 The investment associations ...... 67 VB Finans and Himmerlandsbanken ...... 68

BANKNOTES AND COINS Banknotes and coins in circulation ...... 69 Counterfeiting ...... 72 Preliminary design of Danish euro coins ...... 74

PAYMENT SYSTEMS Krone payment systems ...... 75 Euro payment systems ...... 76 KRONOS ...... 79 Payment systems in an international perspective ...... 80

INTERNATIONAL MONETARY COOPERATION Denmark and the euro ...... 82 The euro area...... 83 The other non-participating EU member states and the candidate countries ...... 86 The intergovernmental conference ...... 88 The Stability and Growth Pact ...... 89 The International Monetary Fund, IMF ...... 90

STATISTICS Expansion of the financial statistics ...... 94 Quality improvements to balance-of-payments statistics ...... 98

ORGANISATION AND TASKS OF THE NATIONALBANK The Nationalbank's objectives and values ...... 100 The Nationalbank's management ...... 102 Departments ...... 104 Staff ...... 108 Information technology...... 112 Special tasks in 2000 ...... 113 Representation on committees, etc...... 114 Representation in international organisations ...... 115 Danmarks Nationalbank's Anniversary Foundation of 1968 ...... 117 The Nationalbank's guest apartments at Nyhavn 18 ...... 117 The Erik Hoffmeyer Travel Grant Foundation ...... 118 REPORT ON THE NATIONALBANK'S ACCOUNTS The Nationalbank's management of financial risks ...... 119 Presentation of the Nationalbank's accounts ...... 124

ACCOUNTS

ACCOUNTS FOR THE YEAR 2000 ...... 131

APPENDIX

Press releases ...... 141 The Statutory Basis for the Financial Sector ...... 148

APPENDIX OF TABLES ...... 159

This Report is based on information available up to end-February 2001 Charts

Chart 1 Gross domestic product, GDP ...... 19 2 Contributions to growth...... 21 3 Nominal and real effective krone rates ...... 23 4 The balance of payments ...... 25 5 Change in domestic lending by banks and mortgage-credit institutes ...... 25 6 Wage increases in Denmark and abroad ...... 26 7 Increase in consumer prices and underlying inflation .... 27 8 Relative domestic demand and balance of payments ...... 28 9 Official interest rates and 3-month money-market interest rate in Denmark ...... 31 10 Interest-rate differential to the euro area ...... 32 11 The krone rate and the Nationalbank's net purchase of foreign exchange ...... 33 12 The banks' lending and deposit rates ...... 36 13 The foreign-exchange reserve ...... 37 14 Accounts of the banks and mortgage-credit institutes with the Nationalbank ...... 39 15 Inflation in euro area ...... 44 16 Growth in M3 and in credit to the private sector in the euro area ...... 44 17 Official interest rates and money-market interest rates in the euro area ...... 45 18 Bid amounts and allotment ratios in the ECB's main refinancing operations ...... 47 19 Euro vis-à-vis dollar and yen ...... 48 20 Swedish krona, Norwegian krone and pound sterling vis-a-vis euro ...... 49 21 Changes in term structure in Germany and the USA ...... 50 22 10-Year Government-bond yields ...... 51 23 Danish bond market, term structure of zero-coupon rates ...... 53 24 10-year government-bond yield differentials to Germany ...... 54 25 Yield averages for new mortgage-credit bond issues .... 54 26 Stock indices, USA ...... 55 Chart 27 Stock indices, Europe and Japan ...... 56 28 Stock indice, Nordic countries ...... 57 29 Early redemptions of mortgage-credit bonds and bond yields ...... 59 30 Ownership of circulating krone-denominated bonds, end-2000 ...... 60 31 Groups and conglomerates' share of total balance sheet ...... 66 32 Assets of the investment associations ...... 67 33 Circulation of individual banknotes ...... 70 34 Remaining proportion of series 1972 in circulation ...... 72 35 Number of counterfeit banknotes ...... 72 36 Counterfeit banknotes found in circulation 2000, international comparision...... 73 37 Staff groups ...... 108 38 Seniority ...... 109 39 Distribution by age and gender ...... 110 40 Average course expenditure per employee ...... 111

Tables in the text

Table 1 Key figures for the Danish economy ...... 22 2 The Danish labour market ...... 23 3 Changes in the lending rate from 23 August to 27 September 2000 ...... 34 4 Changes in the lending rate from 29 September 2000 to end-February 2001 ...... 35 5 Capital flows ...... 37 6 Outstanding volumes of domestic krone-denominated bonds (nominal value) ...... 58 7 Krone payment systems ...... 76 8 Transaction volumes in TARGET and DEBES ...... 78 9 Staff groups ...... 108 10 Interest-rate sensitivity of the Nationalbank ...... 120 11 Foreign-exchange exposure of the Nationalbank ...... 121 12 The Nationalbank's Value-at-Risk ...... 122 13 Total credit exposure on the foreign-exchange reserve and the domestic securites portfolio, etc., end 2000 ...... 124 Boxes

Box 1 The two pillars of the monetary-policy strategy ...... 42 2 The ECB's monetary-policy framework ...... 46 3 Reduced government financing requirements ...... 51 4 The impact of interest-rate guarantees on long-term interest rates ...... 52 5 The new capital-adequacy rules ...... 64 6 Commemorative coins to mark the 60th birthday of Queen Margrethe II ...... 71 7 Propose national sides of Danish Euro coins ...... 74 8 The organisation of the ECB ...... 84 9 The IMF's financing facilities ...... 92 10 The Board of Directors of Danmarks Nationalbank, 1 March 2001 ...... 103 11 The Committee of Directors of Danmarks Nationalbank, 1 March 2001 ...... 104

Appendix of Tables

Table 1 Annual accounts and monthly balance sheets of Danmarks Nationalbank ...... 160 2a Specification of banknotes in circulation ...... 164 2b Issue of new banknotes ...... 164 3a Specification of coin in circulation ...... 165 3b Production of coins (minting) ...... 165 4 The balances of the banks and mortgage-credit institutes with the Nationalbank ...... 166 5 Money stock ...... 167 6 The official interest rates of Danmarks Nationalbank .... 168 7a The official interest rates of the European Central Bank ...... 169 7b Eurosystem monetary policy operations allotted though tenders ...... 169 Table 8 The foreign-exchange reserve ...... 170 9 Principal items of the balance of payment (net revenues) ...... 171 10 Denmark's foreign assets and liabilities ...... 172 11 Denmark's account with the International Monetary Fund ...... 173 12 Central rate and fluctuation band vis-à-vis euro in ERM II ...... 173 13 Conversion rates to euro ...... 173 14 Exchange rates ...... 174 15 Exchange rates for euro area member states ...... 176

Foreword

Danmarks Nationalbank is the central bank of Denmark. Danmarks Natio- nalbank was established in 1818 and has been a self-governing institution since 1936. The legal basis for the Nationalbank's activities is the Nationalbank Act of 1936, according to which the 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 the Nationalbank is independent of the Folketing (Parliament) and the Government.

In March 2000 it was announced that a referendum would be held on Denmark's adoption of the euro. For more than 10 years Danmarks Nationalbank has been involved in issues related to the Economic and Monetary Union. The Nationalbank has stated during this period that Denmark's adoption of a common currency would secure the framework for a stability-oriented economic policy. At the same time, by relin- quishing its formal authority, Denmark would achieve real influence on the monetary policy which in any case is so vital to Denmark. The outcome of the referendum was a rejection of Denmark's adoption of the euro. Since then, the Nationalbank has emphasised that the fixed-exchange-rate policy is to continue unchanged within the framework of ERM II.

The Report and Accounts of Danmarks Nationalbank comprise a presentation and description of the bank's Accounts for the year 2000, 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, the monetary policy of the European Central Bank, and the development in financial and foreign-exchange markets, as well as a review of international monetary cooperation, together with the bank's other areas of operation and its organisation.

In the Monetary Reviews the 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 and Economic and Monetary Union.

Report of the Board of Governors

Summary

The outcome of the referendum held on 28 September 2000 was the rejection of Denmark's adoption of the single currency. The referendum, which was announced in March, affected the activities of Danmarks Nationalbank. Immediately after the referendum Denmark's Govern- ment and Danmarks Nationalbank stated in a joint press release that the fixed-exchange-rate policy would be maintained within the framework of the EU's exchange-rate system, ERM II.

As a consequence of the fixed-exchange-rate policy the interest rates of Danmarks Nationalbank are adjusted in step with those of the European Central Bank, ECB, with due consideration of the conditions in the foreign-exchange market. In 2000 Danmarks Nationalbank raised its interest rates on several occasions following interest-rate increases by the ECB. It was also necessary to widen the differential between the interest rates of the Nationalbank and the ECB since there was a certain outflow of foreign exchange and an underlying tendency for the krone to weaken in considerable periods of the year.

In the time up to the referendum short-term money-market interest rates rose significantly, but with no actual foreign-exchange unrest. In order to avoid uncertainty concerning the krone rate after the referendum, the Nationalbank raised the lending rate by 0.5 per cent on 29 September. In the ensuing period the krone strengthened against the euro and the outflow of foreign exchange was reversed to an inflow. Moreover, interest-rate conditions in the Danish money market nor- malised. Against this background, the Nationalbank gradually lowered the lending rate, whereby the interest-rate differential to the euro area narrowed from 0.95 per cent at the end of September to approximately 0.55 per cent at the end of February, measured against the ECB's marginal interest rate.

A factor contributing to the krone's weakening in certain periods of 2000 was the large net purchases of foreign securities by resident investors. Even though the foreign-exchange market generally absorbed these considerable capital flows without significant problems, the Nationalbank had to sell foreign exchange for a net amount of kr. 38 billion in 2000, in order to dampen the fluctuations in the krone rate. 16

Long-term bond yields in Denmark fell in 2000, following the international trend for interest rates.

Up to the end of October 2000 the dollar strengthened further against the euro in view of the stronger economic growth in the USA than in the euro area. In the autumn the ECB, and in one instance also other central banks, intervened in the foreign-exchange market in support of the euro. In conjunction with the signs of a slowdown in the US economy, this strengthened the euro significantly at the end of the year. Nonetheless, the euro fell by 7 per cent against the dollar in the year overall.

The economic growth of Denmark's trading partners is estimated at 3.4 per cent in 2000. The upswing in the USA continued into the first half-year and growth in the euro area accelerated. Together with rising energy prices this entailed greater inflationary pressure and the tightening of monetary policy in the USA and the euro area. However, in view of the strong dampening of economic growth in the USA at the end of the year, American monetary policy was eased in January 2001.

Denmark's gross domestic product, GDP, is estimated to have risen by 2.5 per cent in 2000. Private consumption stagnated, while exports, and especially investments, rose.

The current-account surplus was kr. 19 billion, i.e. 1.5 per cent of GDP, and was thus maintained at the 1999 level. The weak development in private consumption helped to sustain the growth in exports. A good rate of growth in Europe and a declining effective krone rate also supported exports. The growth in imports must be considered in the light of the expansion of business investments.

After falling continually since 1994 unemployment levelled off in 2000. The rate of wage increase for the year as a whole was 3.7 per cent, which was below the rate of increase in 1999. However, wage increases in Denmark are still a little higher than in the euro area. An increasing supply of labour would make it easier to ensure a continuing expansion of activities and living standards without higher wage increases.

Inflation was 2.7 per cent in 2000, and thus higher than the inflation rate of 2.3 per cent in the euro area. Rising prices for energy, imports and public services contributed to overall inflation. 17

The fixed-exchange-rate policy also imposes certain requirements on fiscal policy. The labour market is tight and price and wage increases are a little higher than the price and wage-increase rates in the euro area. In view of the prospect of relatively strong growth in government consumption in 2001 there is no scope for further relaxation of fiscal policy in the next few years.

The banks' financial statements presented a sound surplus. Activity in the mortgage-credit sector dampened to a degree, due to such factors as a decrease in re-mortgaging activities. There was a large increase in the capital managed by the Investment associations.

In the spring of 2000 Danmarks Nationalbank entered into a cooperation agreement with Statistics Denmark and at the same time gained formal access to collate financial statistics as authorised by an amendment of the Act on Statistics Denmark. The Nationalbank was thereby given the responsibility to further develop the Danish financial statistics.

In April 2000 Danmarks Nationalbank issued a commemorative coin to mark the 60th birthday of Queen Margrethe II.

Had Denmark decided to adopt the euro, the Nationalbank would have been required to undertake extensive restructuring measures within a very short period. For this reason, prior to the referendum an internal EMU contingency plan was drawn up, identifying a number of projects, primarily related to IT, which the bank would be required to implement in the event of Denmark adopting the euro.

The Nationalbank's accounts for 2000 show a profit of kr. 5.7 billion, against kr. 1.5 billion in 1999. The improvement in profits is primarily related to positive value adjustments, in contrast to 1999, when this item was negative. In accordance with the customary practice for allocation of profits the value adjustments of kr. 1.3 billion are transferred to the Value Adjustment Reserve. An amount of kr. 1.3 billion, equivalent to 30 per cent of the profit for the year before value adjustments, is allocated to the General Reserves. The remainder of kr. 3.1 billion is payable to the central government. 18

The Danish Economy

The Danish economy took a stable course in 2000. Growth was attributable particularly to increasing investments, whereas private consumption remained unchanged. Unemployment has stabilised at a low level after falling continuously since 1994. Wage and price increases have approached the rates of the euro area. Both government finances and the balance of payments show a surplus. Growth on Denmark's export markets is expected to dampen in 2001. The labour market is still tight and capacity utilisation high. In the short term it is crucial to avoid acceleration in wage increases, in order to maintain price stability and avoid compromising competitiveness. In the longer term, the principal challenge is to continue to bring down both the government debt and the external debt. The need for fiscal prudence is enhanced by the fixed-exchange-rate policy. There is thus no scope for further relaxation of fiscal policy in the coming years – neither as increased government expenditure nor as unfinanced tax cuts.

INTERNATIONAL BACKGROUND

Global economic growth is slowing down. Growth in the gross domestic product, GDP, of Denmark's trading partners is estimated to decrease from 3.41 per cent in 2000 to 2.62 per cent in 2001. In 2000 growth was strongest in the first six months. In contrast to previously the trend during the winter was for downward adjustment of the international growth forecasts for 2001, including a strong reduction of the expected rate of growth in the USA. As in 1999, oil prices rose in 2000, leading to some upward pressure on consumer prices. Long-term interest rates fell throughout 2000.

In 2000 the USA saw the highest growth rate since the beginning of the boom in 1992. Preliminary data releases indicate that GDP rose by 5 per cent. As in previous years the main contributing factor was private consumption, and savings continued to decline. The record-high current- account deficit is attributable to low savings combined with high investment. One result of the favourable cyclical course is a higher gov-

1 2 The OECD's autumn forecast, Economic Outlook No. 68, November 2000. Consensus forecast published by Consensus Economics Inc. 19

GROSS DOMESTIC PRODUCT, GDP Chart 1

1st quarter 1993=100 140

130

120

110

100

90 1993 1994 1995 1996 1997 1998 1999 2000

Denmark Euro area Japan USA

Note: Constant prices, seasonally adjusted. Sources: National statistics and own calculations. ernment surplus. Although inflation rose during 2000, the increase has so far been moderate in view of the strong growth and low unemployment rate. The moderate increase in inflation is related to the remark- ably strong improvement in productivity. Productivity in the non-farm business sector increased by 4.3 per cent in 2000, compared to 2.7 and 2.6 per cent in 1998 and 1999 respectively. At the close of the year a number of key indicators showed a significant slowdown in the US economy, as indicated by e.g. the strong decline in business and consumer confidence. Against this background, on 3 January and 31 January 2001 the Federal Reserve lowered its official short-term interest rate – the federal funds target rate – by a total of 1 per cent to 5.5 per cent.

Growth in Japan was only moderate, cf. Chart 1. The GDP growth estimate for 2000 is 1.9 per cent. The contributing factors were exports and business investments, whereas growth in private consumption was weak. The strength of the current upswing in Japan is subject to considerable uncertainty and the business community continues to be burdened by a large number of failing businesses. Weaker global growth in the coming years, and thereby a lower rate of increase in exports, may dampen the upswing. The large number of economic measures taken by the Japanese government since 1992 have led to high government deficits and a surge 20 in government debt. In 2000 Japan's government budget deficit was 6 per cent of GDP, while its government debt accounted for 112 per cent of GDP.

Growth accelerated in the euro area during 2000. The OECD estimates growth in GDP at 3.5 per cent, which is the strongest expansion of the economy since 1990. The main contributor was exports, supported by strong global demand and improved competitiveness resulting from the weakening of the euro against the dollar and other currencies up to the end of October. Domestic demand was driven by the private sector via higher private consumption and increased capital formation. Euro-area inflation rose during 1999 and 2000, due mainly to increasing energy prices. The average rate of price increases in 2000 was 2.3 per cent. This exceeds the ECB's definition of price stability as a year-on-year increase in consumer prices of below 2 per cent. The oil price fell towards the end of the year, which led to a moderation of inflationary pressure at the beginning of 2001. Euro-area unemployment has fallen steadily since the autumn of 1997. At the end of 2000 8.7 per cent of the labour force were unemployed. However, the individual rates of the member states vary considerably. In recent years the government finances of the euro area as a whole have improved significantly. The small government budget surplus in 2000 is attributable to such factors as extraordinary revenue from the sale of UMTS licences1. The euro area taken as one had a small current- account deficit. Towards the end of the year a number of key indicators showed that growth would dampen in the coming year, although the slowdown will probably be less pronounced than in the USA. Business and consumer confidence were high, and fiscal policy is relaxed after tax cuts in e.g. Germany, France and Italy in 2001.

Preliminary data show growth in GDP of 3 per cent in the UK in 2000. Growth is still driven mainly by private consumption. Inflation is low, even though the labour market is tight. The upswing in Sweden continued in 2000 and preliminary data indicate GDP growth of 4 per cent, to which both domestic demand and exports contributed. Inflation has been rising, but is still low. In Norway growth in GDP was 2.2 per cent in 2000, following low growth in 1999. Exports and private consumption were the main factors driving growth. Unemployment is very low, and inflation is high.

1 UMTS (Universal Mobile Telephone System) licences are the sale of transmission licences for third-generation mobile telephony. 21

ECONOMIC ACTIVITY IN DENMARK

The structure of growth in the Danish economy has changed, becoming more balanced in recent years, cf. Chart 2. After some years of rising private consumption, the expansion of domestic demand, and thereby imports, dampened in 1999, and exports showed a significant improvement. Growth increased somewhat in 2000, and is estimated at 2.5 per cent, against 2.1 per cent in 1999, cf. Table 1. The growth can be attributed to higher investment, comprising both housing and business investments, primarily due to the large-scale repairs required after the hurricane in Denmark in December 1999. Part of the expansion of business investments is related to higher capacity utilisation during the year, primarily due to the improvement in exports. The pronounced slowdown in private consumption in 1999 continued into 2000. In the first half of 2000 private consumption even declined, but then increased moderately. Overall, private consumption made no contribution to growth in 2000. The dampening of private consumption is related to weak development in the households' real disposable income, as well as a strong decrease in car sales in reaction to the high sales in the previous years. Moreover, the savings ratio increased in 2000, attributable to the incentives in the Whitsun package of 1998. As a result of the strong growth in private investment the private sector continued to show a savings deficit, amounting to 1.1 per cent of GDP in 2000.

CONTRIBUTIONS TO GROWTH Chart 2

Per cent of GDP in preceding year 5

-1

-2 1996 1997 1998 1999 2000

Net exports Private consumption Government demand Private investments Stockbuilding

Note: Private investments comprise business and residential investments. Estimates for 2000. Sources: Statistics Denmark and own calculations. 22

KEY FIGURES FOR THE DANISH ECONOMY Table 1

Real growth against the previous year, per cent 1996 1997 1998 1999 20001

Private consumption ...... 2.5 2.9 3.6 0.5 0.0 Government demand ...... 3.8 0.8 2.5 1.3 1.0 Business investments ...... 2.7 13.7 10.3 1.6 12.0 Residential investments ...... 5.8 7.1 4.5 2.1 10.9 Domestic demand, excluding stockbuilding ...... 3.0 3.9 4.3 1.0 2.7 Stockbuilding2 ...... -0.8 0.9 0.3 -1.6 0.0 Domestic demand, total ...... 2.2 4.9 4.5 -0.6 2.7 Exports ...... 4.3 4.1 2.4 9.7 8.5 Imports ...... 3.5 10.0 7.4 2,2 9.5 Net exports 2 ...... 0.4 -1.7 -1.7 2.8 0.0 Gross domestic product, GDP ...... 2.5 3.0 2.8 2.1 2.5

Unemployment, per cent of the labour force ...... 8.9 7.9 6.6 5.7 5.4 Consumer-price index3, percentage growth ...... 2.1 1.9 1.3 2.1 2.7 Current account, per cent of GDP ...... 1.7 0.4 -0.8 1.7 1.5 Government balance, per cent of GDP ...... -1.0 0.3 1.1 3.1 2.6 Private savings surplus4, per cent of GDP ...... 2.7 0.1 -1.9 -1.4 -1.1

Source: Statistics Denmark. 1 Partial estimate, based on provisional statistics from Statistics Denmark. 2 Contribution to growth in GDP at constant prices. 3 The Harmonised Index of Consumer Prices (HICP). 4 Current-account surplus plus general-government budget deficit.

Besides stimulating private savings the Whitsun package also aimed at dampening the rate of increase in property prices. According to the Association of Danish Mortgage Banks prices rose at a lower rate in 2000, although house prices are still rising more quickly than prices for consumer goods. However, the number of property sales has declined, and in this respect the housing market has dampened. Total government demand, i.e. government consumption and investment, rose by 1 per cent in 2000. Preliminary statistics indicate a slightly contractive fiscal policy, with a fiscal effect of 0.1 per cent of GDP. The overall economic policy, including the structural effects of the Whitsun package, is estimated to have dampened economic activity by 0.6 per cent of GDP in 2000. The monetary conditions are still expansionary. Long-term interest rates have fallen, while the effective krone rate weakened in both nominal and real terms during the year, cf. Chart 3. Short-term interest rates have risen, however. As a consequence of the fixed-exchange-rate policy vis-à-vis the euro the weaker effective krone rate reflects the strengthening of the dollar and the yen against the euro up to October when the nominal effective krone rate reached its lowest level. At the end of the year the 23

NOMINAL AND REAL EFFECTIVE KRONE RATES Chart 3

1980=100 108

106

104

102

100

90 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Nominal Real

Note: The real effective krone rate based on hourly earnings in manufacturing industry. The real effective krone rate denotes the trend for Danish wages compared to abroad in a common currency. For the real effective krone rate partial estimate for 4th quarter 2000. Sources: Statistics Denmark, OECD and own calculations. nominal effective krone rate was 1.7 per cent lower than at end-1999. Expansionary monetary conditions underline the need for a tight fiscal- policy stance. Total employment rose by around 22,000 in 2000, which approximately corresponds to the increase in 1999, cf. Table 2. Employment in

THE DANISH LABOUR MARKET Table 2

1,000 persons, annual average 1997 1998 1999 20001

Wage and salary earners Private sector ...... 1,606 1,634 1,657 1,680 Public sector ...... 795 809 812 813 Self-employed ...... 206 200 197 195 Total employment ...... 2,607 2,643 2,666 2,688 Unemployed ...... 220 183 158 151 Labour force ...... 2,827 2,826 2,824 2,839 Recipients of early retirement benefit2 ...... 170 176 179 179 Recipients of leave benefits ...... 46 41 33 25 Unemployment, per cent of the labour force ... 7.9 6.6 5.7 5.4 Unemployment, EU definition, per cent of the labour force3 ...... 5.6 5.2 5.2 4.7

Sources: Statistics Denmark, the Directorate General for Employment Placement and Vocational Training and own calculations. 1 Partial estimate, based on provisional statistics. 2 Including recipients of transitional allowance. 3 Eurostat method. 24 the private sector (including the self-employed) rose by 21,000, while employment in the public sector rose by 1,000. After falling continuously since 1994 the unemployment rate levelled off in 2000, and has been almost unchanged since April 2000. At the close of the year 5.4 per cent of the labour force were unemployed. According to the Eurostat definition, the unemployment rate was 4.7 per cent.1 In contrast to the preceding years, the labour force expanded in 2000. An increasing supply of labour would make it easier to ensure a continuing expansion of activities and living standards without higher wage increases. In 2000 employment rose slightly less than activity, entailing a moderate increase in productivity.

BALANCE OF PAYMENTS

The current-account surplus in 2000 was kr. 19 billion, corresponding to 1.5 per cent of GDP. The surplus of 1999 was thus maintained. Stag- nating private consumption allowed growth in exports to continue. Exports were further stimulated by a good rate of growth in Europe, and a decrease in the effective krone rate. Growth in imports accelerated in 2000 against the background of the increase in business investments. In overall terms, the balance of goods has improved by kr. 4 billion against 1999, and the balance of services by approximately kr. 9 billion, cf. Chart 4. Interest and transfers, etc. have deteriorated by kr. 15 billion since December 1999. Despite the benefit from improved competitiveness caused by the decline in the effective krone rate, a net gain in market share was not achieved in 2000 as in 1999. The reason may be the high capital utilisation in many sectors of manufacturing after the rise in manufactured exports in 1999, and the lack of scope for further expansion of production capacity in the short term. In the longer term there is a clear relation between competitiveness and market shares. It is therefore important that wage increases in Denmark do not exceed wage increases in the euro area. The current-account surplus in 2000 made a positive contribution to reduction of Denmark's external debt. However, the external debt is also affected by value adjustment of assets and liabilities (shares and bonds). A provisional estimate of Denmark's external debt at end-2000 is published at the end of March 2001.

1 Eurostat is the statistical body of the European Commission. 25

THE BALANCE OF PAYMENTS Chart 4

Kr. billion 60

-20

-40

-60 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Current account Goods Services Interest and transfers, etc.

Note: 12-month moving average. Source: Statistics Denmark.

CREDIT EXPANSION

After several years of decrease in private savings, this trend was reversed in 1999. The private sector's savings deficit was reduced a little further in

CHANGE IN DOMESTIC LENDING BY BANKS AND MORTGAGE-CREDIT INSTITUTES Chart 5

Per cent, year-on-year 15

-5

-10 1995 1996 1997 1998 1999 2000

Business Non-business Total

Note: Lending denominated in both kroner and foreign exchange. Adjusted for losses and provisions. Non-business includes the self-employed. 26

2000. This trend is reflected in lending by banks and mortgage-credit institutes, but the rate of increase is still high, cf. Chart 5. The rate of increase in lending to the business sector has been higher than the rate of increase in lending to the non-business sector. This is related to such factors as the strong growth in investments and the moderate growth in private consumption. At end-2000 mortgage-credit loans at adjustable interest rates accounted for around kr. 100 billion, corresponding to 9 per cent of total mortgage-credit lending, against 6 per cent in 1999. Variable-interest loans were raised particularly at the beginning of the year. The yield curve has made it relatively less attractive to raise loans at adjustable interest rates. At end-2000 euro-denominated lending by the mortgage-credit institutes was kr. 6 billion higher than in 1999 and accounted for kr. 16 billion of the total lending of kr. 1,095 billion. The trend followed by borrowing in 2000 was not reflected in the monetary aggregate M3. The money stock, which consists of the deposits with the banks from private individuals, business enterprises and local governments, together with their holdings of banknotes and coins, was unchanged. The money stock has thus not increased by the transaction requirement measured as the value of domestic demand.

WAGE INCREASES IN DENMARK AND ABROAD Chart 6

Per cent, year-on-year 7

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

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 are wage increases in the manufacturing sector. Sources: Statistics Denmark, OECD and own calculations. 27

INCREASE IN CONSUMER PRICES AND UNDERLYING INFLATION Chart 7

Per cent, year-on-year 5

-1

-2 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Increase in consumer prices Underlying inflation

Note: Underlying inflation has an overweight of services. Sources: Statistics Denmark and own calculations.

WAGE AND PRICE TRENDS

After declining in the first half-year the rate of wage increase registered by the Danish Employers' Confederation rose in most sectors in the second half-year. The rate of wage increase for the year as a whole was 3.7 per cent, which was below the rate of increase in 1999. Wages are still increasing faster in Denmark than in the euro area, although the rates have tended to converge since the beginning of 1999, cf. Chart 6. As the labour market remains tight there is a risk that the rate of wage increase in Denmark will begin to rise again. Measured in HICP terms, inflation in Denmark was 2.7 per cent in 2000, against 2.1 per cent in 1999. Inflation was on average higher in Denmark than in the euro area, even though the inflation differential was eliminated during the year. Inflation was sustained by strong price trends for energy, imported goods and public services. On the other hand, underlying inflation, which is a measure of the domestic market-determined price increases, was low throughout 2000, cf. Chart 7. This was primarily a result of weak growth in profit margins, since increases in import prices were not passed on to consumers. 28

RELATIVE DOMESTIC DEMAND AND BALANCE OF PAYMENTS Chart 8

Per cent of GDP 1990=100 4 105

2 100

0 95

-2 90

-4 85

-6 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00

Balance of payments Domestic demand abroad relative to Denmark (right-hand axis)

Note: The balance of payments is a 4-quarter moving average. Domestic demand abroad is weighted together using the weights of the effective krone rate index. Partial estimate for 4th quarter 2000. Sources: Statistics Denmark, OECD and own calculations.

ECONOMIC PROSPECTS

At the beginning of 2001 there are no acute imbalances in the Danish economy. The growth in 1999 and 2000 was driven by the strong upturn in the global economy, while domestic-market activity was moderate. Domestic demand thus rose less in Denmark than abroad, which benefited the balance of payments, cf. Chart 8. An important risk factor in the short term is the dampening of growth abroad, especially in the USA. In conjunction with the increase in the effective krone rate since October 2000 this may make it difficult to sustain growth in exports and thereby the considerable current- account surplus. Price and wage trends must be compatible with price stability if competitiveness is to be maintained. The labour market is still tight and capacity utilisation high, so there is still a risk of upward pressure on wages. The government sector should avoid contributing to further wage pressure via higher employment than planned, or via the derived effects on activity of strong increases in government expenditure. It is necessary to maintain a current-account surplus and a budget surplus in order to continue the reduction of the external debt and the government debt. The need for fiscal prudence is enhanced by the 29 fixed-exchange-rate policy. Real growth in government consumption in 2001 is estimated to be a good deal stronger than the government's medium-term objective of an annual increase of 1 per cent. There is thus no scope for further relaxation of fiscal policy in the coming years – neither as increased government expenditure nor as unfinanced tax cuts. 30

Monetary and Exchange-Rate Policy

The fixed-exchange-rate policy remains unchanged after Denmark's rejection of the euro by referendum on 28 September 2000. The policy entails that Danmarks Nationalbank's interest rates are fixed in accordance with the interest rates of the European Central Bank, ECB, and the conditions in the foreign-exchange market. In 2000 Danmarks Nationalbank raised its interest rates on several occasions following interest-rate increases by the ECB. It was also necessary to widen the differential between the official interest rates of the Nationalbank and the ECB since there was some outflow of foreign exchange and underlying trends for the krone to weaken in considerable periods of the year. In the time up to the referendum short-term market interest rates rose significantly, but with no real foreign-exchange unrest. The large net purchases of foreign securities by resident investors contributed to the krone's weakening in certain periods of 2000. Even though the foreign-exchange market generally absorbed these considerable capital flows without significant problems, the Nationalbank had to sell foreign exchange for a net amount of kr. 38 billion in 2000, in order to dampen the fluctuations in the krone rate.

UNCHANGED FIXED-EXCHANGE-RATE POLICY AFTER THE EURO REFERENDUM

The objective of Denmark's fixed-exchange-rate policy is to keep the krone stable against the euro. In view of the primary objective of monetary policy in the euro area to maintain price stability the linking of the krone to the euro creates a framework for price stability in Denmark. The formal framework for Denmark's fixed-exchange-rate policy is its participation in the exchange-rate mechanism, ERM II. The purpose of ERM II is to ensure stable exchange rates between the euro area and the EU member states which have not introduced the single currency. Denmark participates in ERM II with a central rate of kr. 746.038 per 100 euro and a fluctuation band of +/- 2.25 per cent. In recent years the Nationalbank has maintained a stable krone rate close to the central rate. Underlying trends for the krone to fluctuate are dampened by buying or selling foreign exchange, or by adjusting interest rates. The fixed-exchange-rate policy is unchanged after Denmark's rejection of the euro by referendum on 28 September 2000. This was confirmed 31

OFFICIAL INTEREST RATES AND 3-MONTH MONEY-MARKET INTEREST RATE IN DENMARK Chart 9

Per cent 8

0 1999 2000

Discount rate The Nationalbank's lending rate 3-month money-market interest rate

by the Danish Government and the Nationalbank in a joint press release after the referendum. In its opening statement to the Folketing (Parlia- ment) on 3 October 2000 the government emphasised that it will not hesitate to tighten fiscal policy in order to sustain the fixed-exchange- rate policy. The fixed-exchange-rate policy entails a clear dividing line between monetary and fiscal policy in Denmark. Monetary policy is designed to support the fixed-exchange-rate policy. In practice, this means that the Nationalbank's interest rates are fixed in accordance with the ECB's interest rates and conditions in the foreign-exchange market. It is the task of fiscal policy and other economic policy to ensure a balanced economic course and price stability in line with the ECB's objective, and thereby support the fixed-exchange-rate policy.

INTEREST AND EXCHANGE RATES IN DENMARK

At the beginning of 2000 the discount rate and the Nationalbank's current-account rate were 3 per cent, while the interest rate for certificates of deposit and the Nationalbank's lending rate were 3.30 per cent, cf. Chart 9.1 The spread between the lending rate and the ECB's

1 The rate of interest on the monetary-policy counterparties' current accounts corresponds to the discount rate, and the rate of interest for certificates of deposit corresponds to the lending rate, which is higher than the discount rate. 32

INTEREST-RATE DIFFERENTIAL TO THE EURO AREA Chart 10

Per cent 2.5

2.0

1.5

1.0

0.5

0.0 1999 2000 3-month money market interest-rate differential to the euro area Interest-rate differential for official lending rates

Note: The interest-rate differential for official lending rates is the difference between the Nationalbank's lending rate and the rate of interest for the ECB's main refinancing operations. As from 28 June 2000 the marginal interest rate for the ECB's main refinancing operations is used. main refinancing rate was 0.30 per cent, while the differential between 3-month money market interest rates in Denmark and the euro area was 0.35-0.40 per cent, cf. Chart 10. The Nationalbank closely matches the ECB's interest-rate adjustments. On three occasions, with effect from 4 February, 17 March and 28 April, the discount rate was raised by a total of 0.75 per cent to 3.75 per cent after equivalent interest-rate increases by the ECB. With effect from 4 February the lending rate was raised by 0.30 per cent. On the other two occasions the lending rate was raised by 0.25 per cent to a total of 4.10 per cent. In these months the krone continued its slight weakening against the euro which began in the 2nd half of 1999, cf. Chart 11. One factor behind the underlying tendency for the krone to weaken in this period was considerable portfolio restructuring in favour of foreign securities by major Danish investors. In January and February 2000 the Nationalbank sold foreign exchange for approximately kr. 19 billion, in order to dampen the fluctuations in the krone rate. However, from March to May the outflow of foreign exchange was subdued, and the differential between money-market interest rates in Denmark and the euro area was relatively stable for the entire period. With effect from 9 June the Nationalbank raised the discount rate by 0.5 per cent to 4.25 per cent after the ECB raised its interest rates. The lending rate was raised by 0.60 per cent to 4.70 per cent, which widened 33

THE KRONE RATE AND THE NATIONALBANK'S NET PURCHASE OF FOREIGN EXCHANGE Chart 11

Kr. per 100 euro Kr. billion 739 70

741 60

743 50

745 40

747 30

749 20

751 10

753 0 1999 2000 Krone rate vis-à-vis the euro (left-hand axis) Central rate of the krone in ERM II (left-hand axis) Net foreign-exchange purchases, accumulated since the beginning of 1999 (right-hand axis)

Note: Weekly observations. The fluctuation limits in ERM II are respectively kr. 729.252 and 762.824 per 100 euro.

the spread to the ECB's main refinancing rate by 0.10 per cent to 0.45 per cent. The widening was due to a considerable outflow of foreign exchange at the end of May and beginning of June when the krone weakened to below the central rate after several opinion polls had shown that support for Denmark's joining the euro was diminishing. This decline in support for the euro contributed to widening the differential between money-market interest rates in Denmark and the euro area. From the beginning of June to mid-July the differential widened by almost 1 per cent to just below 1.4 per cent. However, part of this widening was reversed in the period from mid-July to the end of August. The Nationalbank's monetary policy in the summer of 2000 was com- plicated by the ECB's adoption at the end of June of a variable-rate tender procedure for allotment of liquidity in the main refinancing operations, instead of a fixed-rate tender procedure. The ECB's new tender procedures meant that the Nationalbank had to adapt its practice for adjustments of interest rates in response to the ECB's interest-rate adjustments. In stable foreign-exchange conditions, the discount rate will now be adjusted in accordance with the ECB's minimum bid rate, while the lending rate will be adjusted on the basis of the marginal interest rate for the ECB's main refinancing operations. Minor fluctuations in the marginal interest rate will not normally entail adjustments of the 34

CHANGES IN THE LENDING RATE FROM 23 AUGUST TO 27 SEPTEMBER 2000 Table 3

ECB's marginal Interest-rate Per cent Changes Lending rate interest rate differential

23 August ...... +0.2 4.90 4.47 0.43 30 August ...... +0.2 5.10 4.68 0.42 6 September ...... -0.1 5.00 4.55 0.45 27 September ...... +0.1 5.10 4.65 0.45

Note: The ECB raised the minimum bid rate by 0.25 per cent from 4.25 per cent to 4.50 per cent with effect from 1 September. The marginal interest rate is fixed at the weekly tenders. lending rate, but will instead lead to minor fluctuations in the interest- rate differential. For a period after the ECB's adoption of the variable- rate tender procedure the Nationalbank as an extraordinary measure announced adjustments of the lending rate in press releases. The purpose was to emphasise that the adjustments were due solely to fluctuations in the marginal interest rate, and not to any change in conditions on the foreign-exchange market. Since then, the National- bank has resumed its normal practice of only issuing press releases if the discount rate is adjusted1. In the period from 23 August to 27 September the Nationalbank adjusted the lending rate on several occasions as a consequence of fluctuations in the marginal interest rate for the ECB's main refinancing operations, cf. Table 3. In addition, the discount rate was raised by 0.25 per cent to 4.50 per cent with effect from 1 September after an equivalent raising of the ECB's minimum bid rate. In the period just before the referendum the krone weakened again to below the central rate, but with no actual foreign-exchange unrest. For a short period the differential between money-market interest rates in Denmark and the euro area widened to just above 2 per cent, and the spread between the 3-month money-market interest rate in Denmark and the Nationalbank's lending rate widened to almost 2 per cent. The money market's reaction reflected the market participants' expectations of interest-rate increases in response to pressure on the krone rate. Although the short-term market rates began to fall in the 2nd half of September, the 3-month interest rate remained significantly higher than the Nationalbank's interest rates. In September the Nationalbank sold foreign exchange for approximately kr. 11 billion in order to dampen the fluctuations in the krone. After the referendum the Nationalbank raised the lending rate by 0.50 per cent to 5.60 with effect from 29 September. As a result the

1 Adjustments of the rate of interest for certificates of deposit and the lending rate are announced via the Nationalbank's electronic information system. See also the Nationalbank's interest rates on www.nationalbanken.dk under Markets. 35

CHANGES IN THE LENDING RATE FROM 29 SEPTEMBER 2000 TO END-FEBRUARY 2001 Table 4

ECB's marginal Interest-rate Per cent Changes Lending rate interest rate differential

29 September 2000...... +0.5 5.60 4.65 0.95 13 October 2000 ...... -0.1 5.50 4.76 0.74 27 October 2000 ...... -0.1 5.40 4.80 0.60 9 February 2001...... -0.1 5.30 4.75 0.55

Note: The ECB raised the minimum bid rate by 0.25 per cent from 4.50 per cent to 4.75 per cent with effect from 1 September. The marginal interest rate is fixed at the weekly tenders. interest-rate differential to the marginal interest rate for the ECB's main refinancing operations widened to 0.95 per cent. The purpose of the raising of interest rates was to prevent uncertainty concerning the krone after the referendum. During the following period the krone strengthened against the euro, and the outflow of foreign exchange was reversed to an inflow as the Nationalbank purchased foreign exchange for almost kr. 17 billion in October. Furthermore, interest-rate conditions in the Danish money market returned to normal and the spread between money-market interest rates in Den- mark and the euro area narrowed to the level of the beginning of the year. With effect from 6 October the Nationalbank raised the discount rate by 0.25 per cent to 4.75 per cent after an equivalent raising of the ECB's minimum bid rate. The lending rate was maintained unchanged in view of the krone's strengthening. As the marginal interest rate for the ECB's main refinancing operations at the same time rose by almost 0.10 per cent the spread between the Nationalbank's lending rate and the marginal interest rate narrowed to approximately 0.85 per cent. From 13 October 2000 up to the end of February 2001 the National- bank gradually lowered the lending rate by a total of 0.30 per cent, cf. Table 4. As the marginal interest rate for the ECB's main refinancing operations was stable in that period, the interest-rate differential narrowed to approximately 0.55 per cent, i.e. approximately 0.25 per cent above the level of the beginning of 2000. Around the turn of the year 2000/2001 the krone rate moved to slightly below the central rate, and the differential between 3-month money market interest rates in Denmark and the euro area widened slightly to 0.50-0.60 per cent. The small underlying trend for the krone to weaken at the beginning of 2001 was partly due to Danish investors' purchases of foreign securities. However, the outflow of foreign exchange was significantly less than in the first months of 2000. 36

THE BANKS' LENDING AND DEPOSIT RATES Chart 12

Per cent 10

0 1996 1997 1998 1999 2000

Lending rate Deposit rate Interest margin The Nationalbank's discount rate

Note: Quarterly averages.

The banks' interest rates The banks' average lending and deposit rates have matched the development in the Nationalbank's discount rate, cf. Chart 12. From the 4th quarter of 1999 to the 3rd quarter of 2000 the lending and deposit rates rose by respectively 1.2 per cent and 1.0 per cent. Interest-rate statistics for the 4th quarter of 2000 have not yet been released. The interest margin has increased slightly since the 1st quarter of 1999, after declining in the preceding years.

CAPITAL FLOWS AND THE FOREIGN-EXCHANGE RESERVE

The surplus on the current account of the balance of payments is estimated to have been around kr. 19 billion in 2000, cf. Table 5. Private capital flows led to net capital exports of an estimated kr. 57 billion. In 2000 the Nationalbank had to sell foreign exchange for kr. 37.7 billion, which could be attributed partly to the considerable net capital exports. In 2000 the central government repaid foreign loans for kr. 5.2 billion. The foreign-exchange reserve excluding value adjustments decreased by kr. 43.0 billion, cf. Chart 13. Portfolio investments in 2000 resulted in net capital exports of kr. 153 billion. For the year as a whole net purchases of foreign securities by residents amounted to kr. 191 billion, of which equity securities accounted for kr. 110 billion. In 2000 non-residents' net 37

CAPITAL FLOWS Table 5

Net receipts, kr. billion 1999 2000

Current account of the balance of payments ...... 21 19 Capital transfers ...... 7 0 Capital inflows: Direct investments ...... -8 52 Portfolio investments1 ...... -24 -153 Of which foreign securities ...... -68 -191 Financial derivatives ...... 2 6 Lending and deposits2 ...... 87 68 Estimate of unrecorded commercial credits3 ...... -12 17 Errors and omissions ...... -10 -46 The Nationalbank's net purchase of foreign 63 -38 exchange ......

Used as follows: To reduce the central government's external debt .. -1 5 To increase the foreign-exchange reserve ...... 64 -43

Note: Excluding value adjustments, etc. 1 Excluding the central government's foreign bond issues. 2 Excluding the central government's foreign bank loans. 3 Compensation for the hurricane in December 1999 is included as capital outflows in 1999 and as capital inflows in 2000. purchases of Danish securities (krone-denominated bonds, bonds denominated in foreign exchange and Danish equity securities) totalled kr. 32 billion. The merger of Unidanmark and the Finnish/

THE FOREIGN-EXCHANGE RESERVE Chart 13

Kr. billion 180

160

140

120

100

0 1997 1998 1999 2000

Note: End of month. 38

Swedish MeritaNordbanken1 group accounts for kr. 30.9 billion of residents' net purchases of foreign securities. In recent years residents' net purchases of foreign securities have increased strongly. The increase in net purchases of foreign securities in 2000 can be attributed to such factors as extensive portfolio restructuring in favour of foreign securities by Danish institutional investors. In the foreign-exchange market investors' net purchases of foreign securities will normally increase the demand for foreign exchange and the supply of Danish kroner. The considerable net purchases of foreign securities have thus contributed to the underlying tendency for the krone to weaken in considerable periods of 2000.

THE LIQUIDITY OF THE BANKS AND MORTGAGE-CREDIT INSTITUTES

The Nationalbank's monetary-policy counterparties are banks and mortgage-credit institutes in Denmark. The net position of the monetary-policy counterparties, i.e. their net claims on the National- bank, is influenced by various factors. Viewed over a longer period the Nationalbank's net purchases of foreign exchange are the main factor contributing to changes in the net position. When the Nationalbank purchases foreign exchange and sells kroner, viewed in isolation the net position is increased, and vice versa. The considerable net sales of foreign exchange by the Nationalbank up to and including September 2000 led to a gradual decrease in the net position, cf. Chart 14. The Nationalbank's extensive purchases of foreign exchange in October brought this decline to an end, and during the last months of the year the net position rose a little.

Central-government receipts and disbursements For the year as a whole, the central government's domestic krone- denominated borrowing covers the gross domestic financing requirement, i.e. the central government's current deficit and redemptions of the domestic debt. Within the same year, however, central-government receipts and disbursements may entail major fluctuations in the net position. The Nationalbank prepares monthly and daily forecasts of central-government receipts and disbursements. These forecasts are used by the monetary-policy counterparties in the management of their own liquidity, and by the Nationalbank as an element of the management of

1 The merger is also registered in the statistics as a direct investment in Denmark (capital imports) of kr. 42.5 billion, and a repurchase of Danish shares for kr. 11.5 billion (capital exports under portfolio investments). Excluding the merger between Unidanmark and MeritaNordbanken the year's net capital imports from direct investments amounted to kr. 10 billion. 39

ACCOUNTS OF THE BANKS AND MORTGAGE-CREDIT INSTITUTES WITH THE NATIONALBANK Chart 14

Kr. billion 120

100

-20

-40

-60

-80 1999 2000

Certificates of deposit Lending Current-account deposits Net position

Note: The mortgage-credit institutes are included as from 21 June 1999. overall liquidity. The forecasts are prepared on the basis of the budget reviews of the Ministry of Finance and the Nationalbank's knowledge of central-government receipts and disbursements. For a number of years the Nationalbank and private banks have handled various types of central-government receipts and disbursements, e.g. payments between the central government and local governments, tax payments and disbursements of social benefits. However, in 1999 the Ministry of Finance decided to gather all central-government receipts and disbursements in one system, SKB (Statens KoncernBetalingssystem). After a public procurement procedure the design of the system was awarded to Jyske Bank, and the system is now being established. After the introduction of SKB the central government's liquidity will still be held in an account with the Nationalbank. The gathering of central-government receipts and disbursement in one system is expected to improve the basis for the Nationalbank's forecasts of central-government receipts and disbursements.

THE MONETARY-POLICY INSTRUMENTS

The Nationalbank's monetary-policy counterparties have access to place liquidity as overnight deposits (current-account deposits) with the Na- tionalbank and to participate in the Nationalbank's weekly market operations. Via the weekly market operations the counterparties may raise 40

14-day loans against collateral (the Nationalbank supplies liquidity) and/or place funds by purchasing 14-day certificates of deposit (the Nationalbank absorbs liquidity). The rate of interest for these instruments is a central element of monetary policy. Current-account deposits with the National- bank accrue interest at the current-account rate, which is identical to the discount rate. The Nationalbank's 14-day loans and certificates of deposit are subject to the lending rate and the rate of interest for certificates of deposit, respectively. These are also identical and higher than the discount rate. The net position of the monetary-policy counterparties consists of their holdings of certificates of deposit and current-account deposits, less their 14-day loans from the Nationalbank. In the weekly market operations the monetary-policy counterparties will normally ensure a net position whereby the total current-account deposit covers the expected liquidity requirement in the coming week. In the event of major known fluctuations in the liquidity requirement, e.g. in the light of major central-government receipts or disbursements, the Nationalbank may pre-announce its intention to repurchase or sell certificates of deposit outside the weekly market operations. Furthermore, the Nationalbank may also provide access for repurchase or sale of certificates of deposit without pre-announcement in the event of major unforeseen fluctuations in the liquidity requirement. Since 2000 the current-account deposits with the Nationalbank of 1 monetary-policy counterparties have been subject to certain limits . The limits are intended to prevent the accumulation of large current-account deposits which might be used for speculation in changes in interest rates and/or exchange rates. The total limit for current accounts is almost kr. 20 billion. If the total limit for all counterparties taken as one is exceeded the current-account deposits exceeding the individual limits will be converted to certificates of deposit. For a certain period around the referendum the current-account deposits of the monetary-policy counterparties were close to the overall ceiling, but it has still not been necessary to convert current- account deposits to certificates of deposit. Towards the end of the year the Nationalbank made a minor adjustment to the individual current- account limits in view of the development in the financial sector and the counterparties' utilisation of the current-account limits. The overall ceiling for current accounts remained unchanged. The revised current- account limits have been in force since 1 January 2001 and are listed at www.nationalbanken.dk under Monetary policy.

1 The limits were introduced in June 1999 in connection with a number of mainly technical adjustments to the range of monetary-policy instruments. These adjustments are described in the Monetary Review, 2nd Quarter 1999, p. 15. 41

The Monetary Policy of the ECB

The primary monetary-policy objective of the European Central Bank, ECB, is to maintain price stability in the euro area. The ECB's monetary policy is therefore based on three main elements: a quantitative definition of price stability, and two pillars for analysis of data as the basis for the monetary-policy decisions. In 2000 the ECB raised its official interest rates by a total of 1.75 per cent in order to prevent future inflation as a consequence of stronger economic growth and oil-price rises. In the autumn of 2000 the ECB, and in one instance also other central banks, intervened in the foreign-exchange market in support of the euro. The background was concern about the global and domestic consequences of the falling euro rate against the dollar and the yen, including the risk of price increases in the euro area.

THE MONETARY POLICY STRATEGY

Under the Maastricht Treaty the primary objective of the ECB is to maintain price stability in the euro area. The ECB has defined price stability as a year-on-year increase in the Harmonised Index of Consumer Prices, HICP, for the euro area of below 2 per cent. The ECB's monetary policy has a medium-term orientation. The ECB's mandate entails that monetary policy may support the growth potential of the euro area unless this is incompatible with the primary objective of price stability. The monetary-policy strategy is based on two pillars which together form the basis for the monetary-policy decisions, cf. Box 1. The pillars indicate the key factors in the assessment of price developments. Monetary policy must be forward-looking in view of the medium-term orientation of the primary objective. Short-term price fluctuations do not necessarily call for a monetary-policy response. Cases in point are the effects of adjusting indirect taxes or the one-off effects of variations in international commodity prices, such as oil prices.

MONETARY-POLICY DECISIONS

Interest-rate adjustments The rate of increase in consumer prices rose in 2000 due to rising oil prices, a weakening of the effective euro exchange rate, and increasing 42

THE TWO PILLARS OF THE MONETARY-POLICY STRATEGY

Primary objective of price stability

Governing Council systematically combines all information in order to take monetary-policy decisions

First pillar Second pillar

Analysis assigning a prominent role to Analysis focused on a wide range of money (signalled by the reference other economic and financial value for M3 growth) Cross-checking indicators

Economic information

Source: ECB Monthly Bulletin, November 2000.

The first pillar The first pillar comprises an analysis assigning a prominent role to money. The prominent role of money is signalled by the announcement of a reference value for growth in the broad monetary aggregate, M3. M3 consists of deposits with credit institutions from private citizens and business enterprises, etc., as well as their holdings of currency in circulation and negotiable instruments issued by monetary financial institutions. The reference value is derived from the relationship between money, real income, prices and the velocity of money. The correlation is as follows in terms of changes:

∆m/m = ∆y/y + ∆p/p - ∆v/v,

where ∆m/m is the percentage growth in money, ∆y/y is the growth in real income, ∆p/p is inflation and ∆v/v is the percentage increase in the velocity of money. The first reference value was announced in December 1998 as a year-on-year rate of growth of 4½ per cent. This reference value was derived on the basis of medium-term assumptions of annual trend growth in real income (real GDP) of 2-2.5 per cent, an underlying annual decline in the velocity of circulation of M3 of 0.5-1 per cent and price trends in accordance with the ECB's definition of price stability (a year-on-year increase in HICP of below 2 per cent). The reference value of 4½ per cent was reconfirmed in December 1999 and again in December 2000. At the announcement in December 2000 the Governing Council noted that the available data was still insufficient to provide any basis for adjusting the assumption of the trend growth in real GDP despite structural progress in the euro area. Under normal circumstances strong or persistent deviations of monetary growth from the reference value indicate upward pressure on prices, but in the short term the deviations can be explained by a range of factors. The ECB does not regard the reference value as a target to be controlled, but as an analytical tool to assess future inflation. The first pillar also includes analyses of the development in other monetary aggregates (M1, M2), trends in the various sub-components of M3, and an analysis of 43

Box 1 their counterparts on the balance sheets of monetary financial institutions, including growth in lending in particular.

The second pillar The second pillar comprises an analysis of a number of real-economic and other indicators to assess the risks to price stability, particularly in the short term and the medium term. These are output, demand and labour-market indicators, the euro exchange rate, the balance of payments, fiscal-policy and financial indicators, and trends in price and cost indices. The development in asset prices may also influence price development via the income account. Under the second pillar macroeconomic projections prepared by the ECB and others also play a role as background material to the monetary-policy decisions of the Governing Council. In the Monthly Bulletin of December 2000 the ECB for the first time published macroeconomic projections compiled by ECB economists in cooperation with the national central banks of the euro area. The ECB states that these projections do not reflect the Governing Council's views or estimates. In contrast to a forecast the projections assume unchanged monetary policy and thus unchanged official interest rates and exchange rates. The intention of these assumptions is to clarify any consequences of an unchanged monetary policy in the projection period. The projections are thus not necessarily the best estimate of future trends, particularly not in the longer term, since monetary policy will respond to any changes in the price prospects. The ECB's projections of inflation and growth in real GDP, including subcomponents, are published as ranges to emphasise the uncertainty of the predictions. The uncertainty of the projections increases with the time horizon, which is reflected in broader ranges. According to the projections the price-increase rate is expected to decline in the coming years. Since the preparation of the projections, oil prices have continued to fall and the euro has continued to strengthen. Both factors exert downward pressure on inflation. According to the ECB the Governing Council cross checks the projections with other projections and other information concerning real-economic trends based on available indicators, including expectations of the future.

THE ECB'S MACROECONOMIC PROJECTIONS FOR THE EURO AREA

Annual change, per cent 19991 2000 2001 2002

Consumer-price index, HICP ...... 1.1 2.3 - 2.5 1.8-2.8 1.3-2.5 GDP in constant prices ...... 2.5 3.2 - 3.6 2.6-3.6 2.5-3.5 Of which: Private consumption...... 2.8 2.3 - 2.7 2.2-3.2 1.7-3.3 Government consumption ...... 1.4 0.8 - 2.0 0.6-1.6 0.9-1.9 Gross fixed capital formation...... 5.3 4.7 - 5.7 3.3-6.3 3.1-6.3 Exports (goods and services)...... 4.6 9.8 -12.6 6.5-9.7 5.6-8.8 Imports (goods and services) ...... 6.2 8.8 -11.4 6.0-9.4 5.3-8.7

Source: ECB Monthly Bulletin, December 2000. 1 Actual figures. 44

INFLATION IN THE EURO AREA Chart 15

Per cent, year-on year 3.0

2.5

2.0

1.5

1.0

0.5

0.0 1999 2000 Consumer-price index, HICP

Source: EcoWin. import and producer prices. During 2000 the rate of inflation thus exceeded the upper limit of 2 per cent stated in the ECB's definition of price stability, cf. Chart 15. The stronger activity contributed to a tightening of the labour market during the year.

GROWTH IN M3 AND IN CREDIT TO THE PRIVATE SECTOR IN THE EURO AREA Chart 16

Per cent, year-on-year 11

3 1999 2000 M3 Reference value for M3 Private-sector borrowing

Source: ECB. 45

OFFICIAL INTEREST RATES AND MONEY-MARKET INTEREST RATES IN THE EURO AREA Chart 17

Per cent 7

0 1999 2000 EONIA Main refinancing rate Interest rate for the marginal lending facility Rate of interest for the deposit facility Marginal interest rate

Note: The main refinancing rate is the minimum bid rate as from 28 June 2000. Source: ECB.

Throughout 2000 monetary growth exceeded the reference value of 4½ per cent, although the growth rate was declining during most of the year. Credit to the private sector continued to expand at a high rate, cf. Chart 16. In order to prevent transmission of rising import and producer prices to increased inflation expectations and thereby to price and wage formation, the ECB raised its official interest rates on 6 occasions in 2000 by a total of 1.75 per cent, cf. Chart 17. The rates of interest for the two standing facilities, the marginal lending facility and the deposit facility, matched the rate of interest for the main refinancing operations. As a result, the interest-rate corridor for the day-to-day money-market interest rate, EONIA, cf. Box 2, was unchanged throughout 2000.

Foreign exchange The monetary-policy strategy for the euro area does not include a target for the euro rate. Exchange-rate fluctuations as such therefore do not evoke monetary-policy adjustments. The euro's exchange rate will result in a monetary-policy response only in so far as it affects expectations of price and cost developments. In view of the possible consequences for the world economy of the exchange-rate fluctuations, on 22 September 2000 the ECB, together with 46

THE ECB'S MONETARY-POLICY FRAMEWORK Box 2

By means of open market operations credit institutions are supplied with liquidity against collateral. Most of the liquidity is alloted in the main refinancing operations which are weekly tenders providing liquidity at a maturity of 14 days. Furthermore, the Eurosystem provides liquidity via long-term refinancing operations which are monthly tenders, providing liquidity at a maturity of three months. The Eurosystem may also apply fine-tuning operations to even out interest-rate fluctuations, particularly if they are caused by unexpected liquidity fluctuations. Finally, the Eurosystem may also carry out structural operations to adjust its structural position vis-à-vis the financial sector over a longer period. The standing facilities aim to provide and absorb overnight liquidity. The credit institutions may use the marginal lending facility to obtain overnight liquidity against collateral, and the deposit facility to make overnight deposits. The standing facilities are made available via the national central banks of the euro area. The rates of interest on the standing facilities are normally the limits of EONIA (Euro Overnight Index Average). Under the Eurosystem's minimum reserve system credit institutions in the euro area are obliged to deposit 2 per cent of selected liabilities with the national central banks. The reserve requirements must be met on average during a 1-month maintenance period from the 24th to the 23rd of the following month. The holdings of required reserves are remunerated at the rate of the Eurosystem's main refinancing operations. On the last day of each maintenance period the reserve requirement becomes binding, so the EONIA rate may fluctuate more than usual. Strong fluctuations in the EONIA interest rate towards the end of a maintenance period are typically due to a liquity shortage among credit institutions with a view to compliance with the reserve requirement. A drop in EONIA at the end of a maintenance period can be attributed to ample liquidity among the credit institutions.

the central banks of the USA, Japan, Canada and the UK, intervened in support of the euro. The ECB intervened on a few more occasions during the first part of November. In mid-September 2000 the ECB announced that inflows derived from the interest income of the foreign reserve assets would be sold against euro in order to maintain the structure and risk profile of the ECB's balance sheet as it was at the beginning of 1999.

THE ECB'S MONETARY-POLICY INSTRUMENTS

With a view to its monetary-policy objective the ECB and the national central banks of the euro area conduct open-market operations, impose minimum reserve requirements on credit institutions, and offer standing facilities, cf. Box 2. This operational framework for monetary policy remained unchanged in 2000, with the exception of amendment of the liquidity allotment procedure in the main refinancing operations. 47

BID AMOUNTS AND ALLOTMENT RATIOS IN THE ECB'S MAIN REFINANCING OPERATIONS Chart 18

Euro billion Per cent 9,000 100

8,000 90

80 7,000 70 6,000 60 5,000 50 4,000 40 3,000 30 2,000 20

1,000 10

0 0 2000 Total bids (left-hand axis) Allotment ratio (right-hand axis)

Source: ECB.

The main refinancing operations are intended to manage short-term money-market interest rates and the supply of liquidity to the money market. The main refinancing operations are carried out as weekly tenders supplying liquidity to the market at a maturity of 14 days against collateral. Until 28 June 2000 liquidity was allotted at a pre-announced fixed interest rate in connection with the main refinancing operations. However, the fixed-rate tender procedure gave rise to very high bids and low allotment ratios, cf. Chart 18. With effect from 28 June 2000 the ECB therefore amended the tender procedure in the main refinancing operations from fixed-rate tenders to variable-rate tenders. Under the variable-rate tender procedure counterparties submit bids for interest rates as well as amounts. The bids with the highest interest rates are accommodated first and are payable at the bid rate (American auction). The ECB then accepts successively lower rates of interest until the desired allotment is reached. The marginal interest rate is the lowest rate at which liquidity is allotted. At the Governing Council's monetary-policy meetings a minimum bid rate is decided. The amendment of the tender procedure from fixed-rate to variable-rate tenders led to a strong decrease in the bid amounts, and a substantial increase in the allotment ratios. The total allotment of liquidity was virtually unchanged.

21-03-01 15:08 Antal sider: 8 Rev. nr. 5 H:\alle\Aarsberetninger\2000\Engelsk\UK-til- tryk\side-041-47-ECBs pengepolitik-en.doc Oprettet af Jens Anton Kjærgaard Larsen 48

Financial Markets

The dollar appreciated against the euro and the yen in 2000. However, the euro strengthened generally towards the end of the year. The official interest rates of most industrialised countries rose during the year, whereas long-term interest rates fell. The decrease can be attributed primarily to a dampening of global growth towards the end of the year, but also a reduced need for new government bond issues in several countries. The international stock markets were characterised by substantial fluctuations in prices for IT stocks and the year closed with significant price drops. The broad indices closed with a more moderate decline.

FOREIGN-EXCHANGE MARKETS

During 2000 the dollar strengthened by approximately 7 per cent vis-à-vis the euro. The dollar has risen by a good 20 per cent against the euro since the introduction on 1 January 1999, cf. Chart 19. The strengthening is related to stronger growth in the USA than in the euro area. European business enterprises' net acquisitions of US companies, and net portfolio in-

EURO VIS-À-VIS DOLLAR AND YEN Chart 19

Dollar per euro Yen per euro 1.4 140

1.3 130

1.2 120

1.1 110

1.0 100

0.9 90

0.8 80 1999 2000 Dollar per euro Yen per euro

Note: Weekly observations. 49

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

Pound sterling per euro Swedish krona and Norwegian krone per euro 0.50 7.50

0.55 8.00

0.60 8.50

0.65 9.00

0.70 9.50

0.75 10.00 1999 2000 Pound sterling Norwegian krone Swedish krona

Note: Weekly observations. vestments from Europe to the USA also contributed to the dollar's strengthening. During the autumn the ECB, and in one instance also other central banks, intervened in support of the euro, cf. p. 45f. Together with indi- cations of dampened growth in the US economy this significantly strengthened the euro against the dollar from the end of October to the beginning of January 2001. During this period the euro also strengthened against a number of other currencies. The exchange rates of the major currencies fluctuate considerably over time, and the fluctuations between the dollar and the euro in 1999 and 2000 are thus not of any great magnitude. The Japanese yen weakened particularly towards the close of 2000 against both the euro and the dollar. The currency weakened since the upswing in Japan is still fragile, especially in view of the weak private consumption. At the end of 2000 the exchange rate for sterling against euro was at the same level as at the beginning of the year, cf. Chart 20. Sterling thus did not follow the dollar as closely as before. Sterling's weakening against the dollar was attributable to the strong US economy in the first half of 2000. During the year the Norwegian krone was almost unchanged against the euro. The Swedish krona weakened by 3 per cent against the euro in 2000, reflecting a strengthening during the first four months of the year, followed by a weakening in the remainder of 2000. This trend is 50 related to such factors as price trends for technology stocks, cf. p. 53ff, in view of the large number of high-tech companies in Sweden. The weakening against the euro since end-October should also be viewed in the light of the relatively low Swedish short-term interest rates compared to the euro area, as well as Swedish portfolio investments abroad and the general strengthening of the euro.

INTEREST RATES

The official interest rates of most industrialised countries rose during 2000, whereas long-term government-bond yields fell, cf. Chart 21. By the end of 2000 the yield curve had levelled off in the USA and Germany. This may reflect market expectations of monetary-policy relaxations. During the first half of 2000 the Federal Reserve of the USA raised the federal funds target rate by a total of 1 per cent to 6.5 per cent. This is the highest level since the beginning of 1991. The interest rate was raised in view of the risk of rising inflation as a consequence of strong growth in the US economy, a tight labour market and rising energy prices. The considerable dampening of the economy towards the end of the year caused the Federal Reserve to lower the federal funds target rate on two occasions during January 2001 by a total of 1.0 per cent to 5.5 per cent. In 2000 the yield on 10-year US government bonds fell by 1.3 per cent to 5.2 per cent at year-end, cf. Chart 22. This decline can be attributed to the slowdown in the US economy towards the end of the year, as well as

CHANGES IN TERM STRUCTURES IN GERMANY AND THE USA Chart 21

Per cent 7.0

6.5

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5 1 year 2 years 3 years 4 years 5 years 7 years 10 years

Germany, 31 December 1999 Germany, 29 December 2000 USA, 31 December 1999 USA, 29 December 2000

Note: The yield curves are based on yields to maturity. 51

10-YEAR GOVERNMENT-BOND YIELDS Chart 22

Per cent 7

0 1999 2000 USA Germany Japan UK

Note: Weekly observations. a reduced requirement for issue of US government bonds, cf. Box 3, as well as stock-market volatility. Throughout 2000, 10-year yields in Japan fluctuated within a narrow range, just below 2 per cent. The low level reflects weak growth and de-

REDUCED GOVERNMENT FINANCING REQUIREMENTS Box 3

In recent years a number of industrialised countries, with Japan as a notable exception, have significantly improved their government budgets. This has reduced the supply of government bonds and thereby contributed to falling long-term interest rates. Furthermore, the financing requirements of several European countries were influenced in 2000 by extraordinary receipts from the sale of UMTS licences (transmission licences for third-generation mobile telephony). In Germany the sale of UMTS licences thus generated receipts of more than euro 50 billion or approximately 2.5 per cent of GDP. However, the receipts from UMTS licences vary considerably among the individual countries.

BUDGET BALANCE AS A PERCENTAGE OF GDP

1995 1996 1997 1998 1999 2000

USA ...... -3.1 -2.2 -0.9 0.3 1.0 2.3 Japan...... -3.6 -4.2 -3.3 -5.0 -7.0 -6.0 Germany ...... -3.3 -3.4 -2.7 -2.1 -1.4 1.4 UK ...... -5.8 -4.4 -2.0 0.4 1.3 2.7 Denmark ...... -2.3 -1.0 0.5 1.2 2.8 2.7

Source: OECD Economic Outlook No. 68, November 2000. 52

THE IMPACT OF INTEREST-RATE GUARANTEES ON LONG-TERM INTEREST RATES Box 4

Pension funds and life assurance companies in a number of European countries are committed to paying a minimum return to their customers, i.e. an interest-rate guarantee. This guarantee has become more and more important in recent years, in view of the declining trend in global interest rates. The pension funds and life assurance companies need to place funds in long-term bonds in order to hedge the risk associated with this commitment. Furthermore, the method of calculating the solvency ratio has been adjusted in some countries, which has increased the placement requirement in long-term securities, and thereby demand for long-term bonds. The strong demand contributed to the decline in long-term interest rates. This was the case particularly in the UK, where long-term interest rates (30-year) are very low, but the trend was also seen in Denmark.

flation. This overshadowed the substantial government bond issues. In the first two months of 2001 long-term interest rates decreased by 0.3 per cent to 1.4 per cent. In August 2000 the Bank of Japan decided to raise the benchmark interest rate by 0.1 per cent to 0.25 per cent, which ended the "zero-interest-rate policy" whereby the leading interest rates were kept close to zero. The background to the increase was the slightly more positive prospects for the Japanese economy. In February 2001 the Bank of Japan lowered the benchmark interest rate by 0.1 per cent to 0.15 per cent, in view of the dampening of economic activity in Japan, as well as falling stock prices, continued deflation and the slowdown in global growth. In the euro area the ECB in 2000 raised the interest rate for the main refinancing operations by a total of 1.75 per cent, cf. p. 45. The yield on the benchmark 10-year German government bond fell by 0.5 per cent to 4.9 per cent at the close of the year. This can be attributed to the lower financing requirement in the euro area member states, cf. Box 3, as well as falling interest rates in the USA, and a moderate dampening of growth in the euro area towards the end of the year, in view of factors such as the higher official interest rates and rising oil prices. In the UK the Bank of England in January and February 2000 raised the base rate by a total of 0.5 per cent to 6.0 per cent on the grounds of high capacity utilisation and accelerating growth. In February 2001 the Bank of England lowered the base rate by 0.25 per cent to 5.75 per cent, primarily due to low inflationary pressure. The yield on UK 10-year government bonds declined by 0.6 per cent to 4.9 per cent in the course of the year and in several periods was below the yield for equivalent German government bonds, cf. Chart 22. The decrease is related to moderate inflation and a reduction of government bond issues as a con- 53 sequence of an improvement in government finances. The strong demand for long-term government bonds from pension funds and life assurance companies contributed to the decline in long-term interest rates, cf. Box 4.

Development in interest rates in Denmark In Denmark yields in the bond market followed the trends in the euro area during 2000. The Danish yield curve had thus also levelled out by the end of the year, cf. Chart 23. Yields on 10-year government bonds had fallen by 0.5 per cent to 5.2 per cent by the end of the year. The 10-year yield differential to Ger- many fluctuated in the range of 0.30-0.55 per cent during 2000, cf. Chart 24. The moderate fluctuations in the yield differential both before and after the referendum on Denmark's adoption of the euro reflected sustained confidence in the Danish economy and the fixed-exchange- rate policy. At end-2000, Denmark's yield differential to Germany was lower than those of e.g. Belgium and Italy, the primary reason being that the government debts of Belgium and Italy are significantly higher than Denmark's debt. The decline in government-bond yields during 2000 affected the Danish mortgage-credit market to some degree. The extent of re- mortgaging of mortgage-credit bonds is described on p. 58f.

DANISH BOND MARKET, TERM STRUCTURE OF ZERO-COUPON RATES Chart 23

Per cent 6.0

5.5

5.0

4.5

4.0 1 year 2 years 3 years 4 years 5 years 6 years 7 years 8 years 9 years 10 years

31 December 1999 29 December 2000

Note: The zero-coupon rate is the yield to maturity on a bond with only one payment. The zero-coupon rate is a unique measure of the yield for the individual maturities. In general, it is not possible to observe the zero-coupon rate, which must instead be estimated. 54

10-YEAR GOVERNMENT-BOND YIELD DIFFERENTIALS TO GERMANY Chart 24

Per cent 0.7

0.6

0.5

0.4

0.3

0.2

0.1

0.0 1999 2000 France Netherlands Belgium Italy Denmark

Note: Weekly observations.

In 2000 the Association of Danish Mortgage Banks began to publish average yields for respectively new 30-year mortgage-credit-bond issues and mortgage-credit bonds with a maturity of 1-2 years, cf. Chart 25. The average yield for short-term mortgage-credit bonds had risen by ap-

YIELD AVERAGES FOR NEW MORTGAGE-CREDIT BOND ISSUES Chart 25

Per cent 9

0 1999 2000

1-2year mortgage-credit bond, average 30-year mortgage-credit bond, average Differential

Note: Weekly averages. Source: The Association of Danish Mortgage Banks. 55 proximately 1 per cent by the end of 2000. The spread between the two average yields peaked in the autumn of 1999, but has since narrowed considerably, in line with the trend in the government securities market. The levelling-out of the yield curve has reduced the immediate advant- age of financing at variable interest rates. Prices for Danish index-linked bonds fell in connection with first the publicity concerning the government's proposal to restructure the taxation of pension yields, and then the publication of the bill, cf. p. 62. The background to the decline is that the after-tax yield on other bonds will be increased relative to index-linked bonds issued prior to 1 Janu- ary 1999.

STOCK MARKETS

2000 was a turbulent year in the global stock markets, and prices for particularly IT stocks fluctuated considerably. Overall for the year prices for IT stocks declined, after strong price increases for several years. The US Nasdaq index, with an overweight of technology stocks, thus fell by 39 per cent in 2000, while the broad-based Dow Jones and S&P 500 indices, with smaller proportions of technology stocks, closed the year with more moderate price decreases, cf. Chart 26. The general uncertainty concerning IT stocks led to day-to-day fluctuations in the Nasdaq index: nine of the ten largest percentage increases so far in Nasdaq's 29

STOCK INDICES, USA Chart 26

January 1999=100 250

200

150

100

0 1999 2000

Nasdaq S&P-500 Dow Jones

Note: Weekly observations. 56

STOCK INDICES, EUROPE AND JAPAN Chart 27

January 1999=100 350

300

250

200

150

100

0 1999 2000

DAX (Germany) Neuer Markt (Germany) FTSE-100 (UK) Nikkei (Japan)

Note: Weekly observations. years of existence thus took place in 2000, as did four of the ten strongest percentage drops so far. The Nasdaq index rose in the first months of the year, and reached its highest level so far at the beginning of March. However, continuing strong economic indicators for the US economy and prospects of further measures to tighten monetary policy drove investors towards other sectors in the stock market traditionally associated with less risk. This led to strong price drops for IT stocks as from the end of March. This decline gained further momentum from the beginning of September, and by the end of December the Nasdaq reached its lowest level in 2000. The prospects of a slowdown in the US economy, with greater pressure on business earnings, as well as the continued risk of rising inflation – primarily due to the tight labour market and high oil prices – were the main factors contributing to the decline in the autumn. The falling price trends for IT stocks continued in 2001. By the end of February the Nasdaq index had thus dropped by 13 per cent against the level at the end of 2000. The same pattern was apparent in Europe. The Neuer Markt index, which has an overweight of IT stocks, fell during the year, while the more broadly based indices were virtually unchanged, cf. Chart 27. Stocks in telecom enterprises also dropped. The European telecom sector was subject to pressure due to the surge in costs for third-generation mobile telephony licences and a growing need for ongoing expansion 57

STOCK INDICES, NORDIC COUNTRIES Chart 28

January 1999=100

350

300

250

200

150

100

0 1999 2000

OBX (Norway) HEX (Finland) OMX (Sweden) KFX (Denmark)

Note: Weekly observations. and consolidation. In the European Dow Jones Euro Stoxx index the telecom sub-index thus accounted for the strongest decline among all sub-indices in 2000. Besides the falling technology stock prices the Japanese stock market was influenced by events related to the financial sector. A large retail chain went into liquidation during the summer, which heightened concern about the financial situation of the Japanese banks. Among the Nordic countries the stock markets of Finland and Sweden were particularly affected by the price drops for technology stocks. This can be attributed primarily to the very high weighting of respectively Nokia and Ericsson stocks in the Finnish and Swedish indices. The Danish KFX index, which has a relatively small proportion of technology stocks, yielded the highest return among the Nordic indices in 2000, cf. Chart 28. Trends in 2000 were thus in striking contrast to 1999, when especially the Swedish and Finnish stock indices performed significantly better than the KFX index. On 1 September the Copenhagen Stock Exchange introduced the KVX index of growth companies, primarily in the technology sector. The global decline in prices for technology stocks also affected the KVX index, which had dropped by 37 per cent by the turn of the year. 58

The Domestic Financial System

The volume of outstanding domestic krone-denominated bonds rose by 4 per cent in 2000. This reflects a decrease in the circulating volume of government bonds, and an increase in the volume of mortgage-credit bonds. As an element of the Nordic stock-exchange cooperation, NOREX, in October 2000 the Copenhagen Stock Exchange extended the joint trading system, SAXESS, to include bond trading. On 1 January 2000 VP A/S - The Danish Securities Centre was restructured as a limited liability company. For the sixth consecutive year the banks presented a sound surplus. Net income from interest is still the largest source of revenue. There was a certain dampening of activity in the mortgage-credit sector, which is related to a lower influx of new loans and a lower conversion volume. There was a large increase in the capital managed by investment associations.

THE BOND MARKET

The outstanding volume of domestic krone-denominated bonds was nominal kr. 1,982 billion at the end of 2000, which is an increase by 4 per cent on 1999, cf. Table 6. As a consequence of the government budget surplus the circulating volume of government bonds fell by kr. 23 billion, whereas the circulating volume of mortgage-credit bonds increased by a total of kr. 99 billion during the year. As a per cent of GDP the volume of outstanding bonds decreased from 157 per cent of GDP in 1999 to 154 per cent 2000. In 2000 mortgage-credit bonds for kr. 100 billion were redeemed prematurely. For comparison, the figure for 1999 was kr. 231 billion. The

OUTSTANDING VOLUMES OF DOMESTIC KRONE-DENOMINATED BONDS (NOMINAL VALUE) Table 6

Kr. billion 1999 2000

Government bonds ...... 649 626 Mortgage-credit bonds ...... 1,141 1,240 Other bonds ...... 119 116 Total ...... 1,908 1,982

Note: Listed on the Copenhagen Stock Exchange 59

EARLY REDEMPTIONS OF MORTGAGE-CREDIT BONDS AND BOND YIELDS Chart 29

Per cent Kr. billion 12 120

10 100

8 80

6 60

4 40

2 20

0 0 1993 1994 1995 1996 1997 1998 1999 2000 Early redemptions, right-hand axis 10-year government-bond yield 30-year mortgage-credit-bond yield

Note: The leading 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 leading 30-year mortgage-credit bond is not a precise indicator of when it is favourable to remortgage. Figures for early redemptions in 1993 are not available. decrease reflects that changes in interest rates have not been sufficient to justify further conversions, cf. Chart 29. Almost half the circulating volume of krone-denominated bonds is held by financial institutions, insurance companies and pension funds, cf. Chart 30. Non-resident investors hold 18 per cent of the bonds. In 2000 non-resident investors sold krone-denominated bonds for kr. 17 billion. Sales of government bonds totalled kr. 13 billion, while sales of mortgage-credit bonds totalled kr. 4 billion. In 1999 net purchases by non-resident investors were kr. 15 billion. Non-residents' holdings of krone-denominated bonds still predominantly comprise government bonds, but the proportion of mortgage-credit bonds is rising.

The minimum coupon rate1 was raised from 4 to 5 per cent on 1 July 2000, but lowered again to 4 per cent on 1 January 2001. The increase affected the issue of government bonds, as sales of one series with a coupon of 4 per cent had to be discontinued. The development in interest rates in the Danish bond market is described on p. 53ff.

1 A bond complies with the minimum-coupon-rate rule with the designation "blue-stamped" if the coupon rate is greater than or equal to the minimum-coupon rate applying to the period during which the bond is issued. On an increase in the minimum-coupon rate issues in many open series will normally be discontinued. 60

OWNERSHIP OF CIRCULATING KRONE-DENOMINATED BONDS, END-2000 Chart 30

17 per cent

27 per cent

15 per cent

23 per cent 18 per cent

Households etc. Public sector Non-residents Insurance companies and pension funds Financial institutions

Source: Statistics Denmark Note: Statistics Denmark's sector distribution of Danish krone-denominated bonds has been adjusted for repurchase agreements between Danish banks and non-residents. In addition, estimated corrections have been made for residents' safekeeping accounts with foreign banks, e.g. Euroclear. Bond holdings are shown at their market values.

Change in market conventions in the Danish bond market In 1997 a working group of market participants was set up to review EMU and the bond market. One of the recommendations of this working group was that, no matter whether Denmark adopted the euro or not, the Danish market conventions for calculation of the coupon rate on the purchase and sale of bonds should be aligned with international standards. The aim was to make Danish bonds more attractive to international investors. The recommendations were implemented in the bond market in February 2001 and comprise the following elements: the day-count convention in the Danish market is changed from 30/360 to actual/- actual. This means that when bonds are traded the interest is calculated on the basis of the actual number of days from and including the last due date to the value date of the trade. The new convention thus gives a fairer view than the old method of calculation, which operated with 30-day months. In addition, the ex-coupon period has been abolished, so that in future the owner of the bond on the day before the due date will receive the coupon interest for the term in question. Previously, this payment accrued to the owner 30 days before the due date. At the same time, the drawing procedure for mortgage-credit bonds and government serial loans has been changed from a model based on redemption by lot to a purely mathematical model. This means that in future the

21-03-01 17:07 Antal sider: 11 Rev. nr. 8 H:\alle\Aarsberetninger\2000\Engelsk\UK-til- tryk\side-058-68-Domestic financial system.doc Oprettet af Anne Dyrberg 61 same relative share of all investors' bond holdings will be drawn. As a result of the new procedure, the unit size for Danish bonds has been changed from kr. 1,000 to kr. 0.01.

MEASURES IN THE STOCK-EXCHANGE AREA, ETC.

European stock-exchange cooperation, etc. Mergers, acquisitions and cooperation are still on the agenda of the European stock exchanges. However, the planned alliance1 between eight European stock exchanges was abandoned in 2000. In March 2000 the stock exchanges in Paris, Amsterdam and Brussels announced their merger under the name of Euronext with a common trading system. In May 2000 the London Stock Exchange and Deutsche Börse announced that they would be merging.2 However, the attempted merger failed in September 2000. In the autumn of 2000 the Swedish OM Group made an unsuccessful bid for the London Stock Exchange. The consolidation trend among EU securities centres also continues. The background includes the demand for easy and efficient settlement of cross-border trades, as well as a need for joint clearing and settlement when stock exchanges form alliances. The Luxembourg-based international securities centre, Cedel, merged with the German securities centre Deutsche Börse Clearing under the name of Clearstream. French Sicovam merged with the international securities centre Euroclear, which went on to acquire a controlling interest in Dutch Negicef and Belgian CIK. Negicef and CIK have signed letters of intent to merge with Euroclear. This cooperation supports Euronext, which in the longer term will integrate trade, clearing and settlement.

Nordic stock-exchange cooperation In 1998 the Copenhagen Stock Exchange and OM Stockholmsbörsen entered into a cooperation agreement on the establishment of a joint Nordic securities market, NOREX, comprising all types of securities. The Nordic alliance is based on a joint trading system, SAXESS. The Iceland Stock Exchange and the Oslo Stock Exchange joined the NOREX alliance in 2000. The Iceland Stock Exchange switched to the joint trading system in October 2000, while the system is expected to be in operation in Norway before the end of 2001. Once the system has been introduced in Norway, it will be possible to trade securities in all

1 Report and Accounts, 2 For further details see Danmarks Nationalbank, 1999. Later this merger was extended to include the American Nasdaq exchange. 62 four Nordic countries via one system. The three Baltic stock exchanges have signed letters of intent to join NOREX. In February 2001 the Finnish HEX Group offered to acquire a controlling interest in the Estonian stock exchange. In June 1999 the Copenhagen Stock Exchange introduced the joint trading system SAXESS in the share market. In October 2000 SAXESS was extended to include bond trading. After the transfer of bond trading to SAXESS the Copenhagen Stock Exchange can once again offer the Danish securities market share and bond trading on the same system. The Iceland Stock Exchange and OM Stockholmsbörsen have also opened up for trade in both shares and bonds via the SAXESS system.

New regulation of the stock-exchange area, etc. In April 1998 the Securities Market Council set up a working group to prepare an order on best execution on the stock market, based on the Rules of Ethics of the Copenhagen Stock Exchange. A draft order was submitted for general consultation in late 2000. In December 2000 the Folketing (Parliament) passed a bill to amend the taxation of pension yields, cf. the Nationalbank's response on p. 157. The new Act introduces a uniform 15 per cent tax on all pension yields from shares, bonds and real property. In addition, the share ceiling is made more flexible; in future, the financial solvency of the individual institution will determine how large a proportion of the assets can be placed in shares. The new rules on taxation of institutional investors' capital yields are neutral in relation to portfolio restructuring within the sector. With a few exceptions, the Act takes effect as from the 2001 income year.

RESTRUCTURING OF VP A/S - THE DANISH SECURITIES CENTRE AS A LIMITED LIABILITY COMPANY

On 1 January 2000, VP A/S - The Danish Securities Centre, was restructured from a private self-governing institution to a limited liability company. This was done in order to give VP optimum opportunities to establish a more business-oriented profile under changing market conditions, pos- sibly via a merger or other form of closer international cooperation. The decision was taken by the Board of VP and was effected in accordance with the restructuring provisions of the Danish Securities Trading Act. VP's existing equity capital was encapsulated in a new company as an undestributable securities reserve. The shareholders in the new company comprise the stakeholders previously represented on the 63

Board of VP, who also represent VP's most significant customers. Banks and stockbrokers hold 43 per cent of the share capital, mortgage-credit institutes 28 per cent, Danmarks Nationalbank 13 per cent, issuers of shares 8 per cent and investors 8 per cent.

STATUTORY FRAMEWORK FOR THE FINANCIAL SECTOR

Joint Act on Financial Enterprises In August 1997 the government appointed a Committee on "the Finan- cial Sector after the Year 2000". The report of the Committee was published in September 1999. Subsequently a bill was prepared and introduced. It implemented a number of recommendations from the Committee, including a joint Act on Financial Enterprises. On the basis of the greater integration of the financial markets, including the formation of financial conglomerates, it has been deemed necessary to implement a new structure for the financial supervisory acts, cf. the Nationalbank's consultative response, p. 153f. The aim is to ensure that similar financial products are treated in the same way and to introduce a number of measures to simplify and modernise this area. Consequently, related provisions from the Act on Danish Commercial Banks and Savings Banks, the Act on Insurance Companies, the Act on Investment Companies, the Mortgage Credit Act and the Act on Company Pension Funds will be compiled in an Act on Financial Enterprises. The bill compiles the supervisory provisions and other statutory areas where there is presently a high degree of concurrence in the financial acts. These areas are: definitions, rules on good practice, management rules, group rules, accounting rules and rules of supervision. A number of provisions will be adjusted and some will be updated. The sector-specific provisions of the various financial acts will remain in force. However, there are plans subsequently to review the other elements of the financial acts with a view to achieving an even more uniform structure and further simplification of e.g. the provisions on the establishment of financial enterprises, permission to carry on financial activities, solvency, mergers, etc. In connection with the compilation, the accounting provisions are amended in accordance with the proposed amendments in the bill on annual accounts. The latter is inspired by the latest developments in the accounting field, including the EU's recent accounting strategy based on the international accounting standards, IAS, issued by the International Accounting Standards Committee, IASC. It is also proposed that the dual auditor system be abolished. 64

THE NEW CAPITAL-ADEQUACY RULES Box 5

The proposed new regulatory regime rests on three pillars: minimum capital requirements, the supervisory review process and market discipline. In comparison with the first consultation papers from 1999 the new proposal is far more detailed as regards methods for calculating capital requirements in relation to credit risk, credit-risk reducing techniques, management of operational risks, the supervisory review process and market discipline. Pillar 1 operates with 3 methods for determining the minimum capital requirements. One is a reshaping of the standardised approach, providing for the use of the ratings attributed by the external agencies. The other two methods are based on internal ratings where the weighting of the credit risk for each loan is calculated on the basis of the banks' own assessments of their customers. Since the publication of the first consultation paper the latter has been supplemented with a more advanced internal ratings-based approach, giving banks an even greater opportunity to determine for themselves how great a capital buffer they need to provide for unexpected losses on loans. In addition to the capital requirement to cover credit risks, a capital requirement for operational risks will be introduced. Pillar 2 relating to the role of the supervisory authorities and pillar 3 relating to market discipline (banks should provide market participants with more detailed information about, e.g., their risk and capital structures) have been extended considerably in comparison with the original proposals from 1999. It is the aim of the Basle Committee to avoid (average) changes in the overall capital base when using the standard method, taking into account the capital requirements for operational risk. For the internal rating methods the Basle Com- mittee seeks to achieve a minor relaxation in relation to the standard method in order to increase the incentive to use it and thereby achieve more correct risk management.

Status of new capital-adequacy rules In January 2001 the Basle Committee1 issued a new consultative document on new capital requirements for banks2. In February 2001 it was followed up by a new consultative document from the European Commission.3 The reason for introducing new rules is a need to establish a closer relationship between the banks' actual risk profile and the capital requirement. For instance, the existing rules from 1988 do not distin- guish between the credit risk in relation to private borrowers and cor-

1 The Basle Committee, whose secretariat is at the Bank for International Settlements (BIS), was set up in 1975 with the purpose of strengthening the stability of the international financial system. The following countries are represented on the Committee: Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, UK, USA, Switzerland and Luxembourg. 2 See also Suzanne Hyldahl, New Capital-Adequacy Rules for Banks, Danmarks Nationalbank, Monetary Review 3 , 1st Quarter 2001. The first consultative documents on proposed new capital-adequacy rules were published by the Basle Committee in June 1999 and by the European Commission in November 1999. The work of the two bodies has been carried out in parallel, but while the Basle Committee has focused on standards for the large international banks, the European Commission has had a more EU-specific angle, covering both banks and investment companies. However, the two consultative documents are in many ways similar. The consultations for both proposals run until the end of May 2001. The new standards are expected to be implemented in the national legislation of the EU member states in 2004. 65 porate customers, which means that the present standard capital requirement is 8 per cent, irrespective of the composition of this element of the loan portfolio. The proposed new rules will to a greater extent than the existing set of rules take financial innovation, modern risk-management techniques, and internal control procedures, and the new types of risk into account, cf. Box 5. Under the existing rules, capital requirements apply only to credit and market risks. However, capital requirements in relation to operational risks are also proposed. The structure of the new capital- adequacy rules gives the banks an incentive to enhance and improve their own risk management. The underlying philosophy is that the individual bank is best at assessing its own "true" risk profile.

THE BANKS

For the sixth consecutive year the banks' financial statements presented a sound surplus. In 2000, the result after tax was kr. 14.3 billion. Net income from interest, which rose by 6.4 per cent on 1999, is still the largest source of revenue for the banks. Deposits and lending increased by 1 per cent and 13 per cent, respectively. Net income from fees and commission increased by 22.2 per cent, partly as a result of increasing brokerage and administration fees related to customers' increased securities trading. Value adjustment of bonds, shares, foreign exchange and capital interests also contributed to the improved result. Total value adjustment increased from kr. 5.2 billion in 1999 to kr. 9.2 billion in 2000. Losses and provisions rose marginally in 2000, to kr. 3.0 billion from kr. 2.6 billion in 1999, and are still low.

Structural changes The year 2000 also saw a number of structural changes within the banking sector, with the creation of national and cross-border financial conglomerates. In recent years the focus has shifted from the domestic Danish market to a single Nordic market. The term conglomerates is used to describe groups carrying out business in a number of financial market segments (banking, mortgage credit, insurance, etc.), whereas traditional financial groups typically operate in a single market segment. The market share of the financial conglomerates has increased significantly in terms of total balance sheet, cf. Chart 31. In 1989 financial conglomerates accounted for less than 10 per cent of the total balance sheet. This figure had risen to just over 60 per cent by 1999. The largest cross-border merger so far took place in the spring of 2000 when Unidanmark merged with Finnish/Swedish MeritaNordbanken, 66

GROUPS AND CONGLOMERATES' SHARE OF TOTAL BALANCE SHEET Chart 31

Per cent 100

0 1989 1999 Conglomerates Groups Non-groups

Note: A financial group is normally the term used to describe financial enterprises connected by ownership. They consist of the parent company and at least one other financial enterprise. Traditional financial groups typically operate in one market segment, while a conglomerate is a group operating in several financial market segments (banking, mortgage credit, insurance, etc.) Source: The Danish Financial Supervisory Authority. thereby creating the largest financial conglomerate in the Nordic region with a major physical presence in several Nordic countries. The conglomerate was named Nordic Baltic Holding, but has subsequently – after merging in October 2000 with the Norwegian bank, Christiania Bank og Kredit- kasse – been renamed Nordea. Another example of this trend is the merger between Danske Bank and RealDanmark from the autumn of 2000. The merger led to the creation of in the second-largest financial conglomerate in the Nordic region.

THE MORTGAGE-CREDIT INSTITUTES

Activities in the mortgage-credit sector dampened to a degree, which was due mainly to a decrease in re-mortgaging activities and a lower volume of new loans. Conversions, cf. Chart 29, accounted for a large proportion of gross new lending in 1998 and 1999. In 2000 two new mortgage-credit products were launched: interest- rate guarantee for adjustable-rate loans, and reversed mortgage loans. Interest-rate guarantee entails that the borrower pays a premium in return for which a limit is placed on the interest rate on the loan in connection with the annual refinancing of the entire adjustable-rate loan. The reversed mortgage loan product is a variant of the well-known 67 products offering home-owners loans against the free mortgageable value of the home. Examples are supplementary loans and bank loans. In the summer of 2000 a number of general amendments to the Mort- gage Credit Act were adopted, and subsequently an order was issued on the mortgage-credit institutes' bond issues, balance principle and interest and foreign-exchange risks. The order took effect from 1 April 2001, cf. p. 152. The new rules will contribute to greater flexibility in the mortgage-credit sector, without significantly increasing the risk exposure of the mortgage-credit institutes or weakening the special status of mortgage-credit bonds. At the same time, clearer and more up-to- date rules have been introduced in a number of areas.

THE INVESTMENT ASSOCIATIONS

During the last four years there has been a large increase in the capital managed by investment associations, cf. Chart 32. As of 31 December 2000 the assets totalled kr. 257 billion, an increase of kr. 53 billion on 1999. Investment associations based on foreign shares achieved the largest growth in assets, i.e. kr. 32 billion from 1999 to 2000. The increase in value for foreign shares comprises new emissions of kr. 48 billion, and capital losses of kr. 16 billion. The trend is for greater specialisation of the investment associations. Examples are investment associations with focus on IT, ethics or biotech- nology.

ASSETS OF THE INVESTMENT ASSOCIATIONS Chart 32

Kr. billion 300

250

200

150

100

0 1995 1996 1997 1998 1999 2000 Danish bonds Danish shares Foreign bonds Foreign shares

Source: The Federation of Danish Investment Associations, Market statistics, end of 2000. 68

VB FINANS AND HIMMERLANDSBANKEN

VB Finans At the end of 1993 the Nationalbank made available a government- guaranteed overdraft of maximum kr. 4.4 billion to VB Finans, the company responsible for the winding-up of Varde Bank. As described in the 1996 Annual Report, p. 54f, at the beginning of 1996 bankruptcy pro- ceedings were instigated against VB Finans, at the request of the Board of Directors. VB Finans af 1996, which in connection with the winding- up took over all VB Finans' assets and certain liabilities, including the Nationalbank's overdraft facility, worked throughout 2000 on winding up the activities of Varde Bank. During 2000 the company was able to pay approximately kr. 0.1 billion to the Nationalbank as a consequence of the winding-up of exposures and the sale of properties. The company's debt to the Nationalbank had thus been settled by the end of the year. The ongoing winding-up of the company first and foremost concerns the conclusion of a number of court cases filed against the winding-up estate. In the autumn of 2000 the Nationalbank filed two cases against the estate, both related to the preferential position of the subordinate capital in the estate. The administration of the winding-up estate will continue for a few more years. It is therefore still not possible to calculate the total costs of the winding-up of Varde Bank.

Himmerlandsbanken In 2000 no amounts were disbursed under the guarantee provided by the Nationalbank and a number of banks to the winding-up estate of Himmerlandsbanken, cf. the 1993 Annual Accounts p. 48ff. A number of court cases filed against the winding-up estate have not yet been concluded. Consequently, it is still not possible to calculate the total costs of the winding-up of Himmerlandsbanken. 69

Banknotes and Coins

At the end of 2000 banknotes and coins in circulation amounted to kr. 44.8 billion. This represents a decrease of kr. 1.6 billion against the previous year, when particularly the stocks of cash depots and banks were extraordinarily high owing to special year-2000 measures. In April 2000 Danmarks Nationalbank issued a commemorative coin to mark the 60th birthday of Queen Margrethe II. At the request of the government the Nationalbank prepared the preliminary design of Danish euro coins. The withdrawal of old banknotes, Series 1972, is proceeding according to plan, but old banknotes for a value of kr. 3.3 billion are still in circulation.

BANKNOTES AND COINS IN CIRCULATION

The total banknotes and coins in circulation1 at the close of 2000 amounted to kr. 44.8 billion, which represents a decrease of kr. 1.6 billion against the previous year, but an increase of kr. 3.8 billion against 1998. Over a two-year period the circulation of banknotes and coins has thus increased by kr. 1.9 billion per year. This generally corresponds to the trend of the preceding years. The circulation of banknotes was extraordinarily high at the close of 1999 due to the contingency measures in connection with the millennium rollover, cf. the 1999 Annual Report p. 67ff. An increase in the stocks of cash depots and bank branches, including ATMs, accounted for the major part of the increase. The extraordinary measures were phased out during January 2000, so that the circulation of banknotes returned to the normal level. At kr. 40.6 billion, the value of banknotes in circulation at end-2000 was therefore kr. 1.8 billion lower than one year before. The circulation of banknotes in 2000 followed the trend of previous years. Use of the small denominations (50- and 100-krone notes) are used most during the summer months, cf. Chart 33. Circulation of banknotes is influenced by factors such as public holidays and the seasons of the year.

1 Calculated in accordance with the Nationalbank's balance sheet, cf. Table 2a, p. 164 and Table 3a, p. 165. 70

CIRCULATION OF INDIVIDUAL BANKNOTES Chart 33

Index, end-December 1998=100 130

125

120

115

110

105

100

80 1999 2000 50-krone banknote 100-krone banknote 200-krone banknote 500-krone banknote 1,000-krone banknote Total

Note: End of month.

Over the past two years the 200-krone note has seen the greatest increase in circulation. This has been at the expense of the 100-krone note. The main reason is that 200-krone notes have increasingly replaced 100- krone notes in ATMs. The total circulation is shown in Table 2a, p. 164. Pursuant to the Danmarks Nationalbank Act of 1936 the circulation of banknotes must be covered by the Nationalbank's holdings of gold and other assets. Since September 1939 an exception has been made from the gold coverage provision.

Coins in circulation increased by 5.0 per cent to kr. 4.1 billion in 2000. The corresponding figures for 1999 and 1998 were 3.6 per cent and 5.1 per cent, respectively. The total coins in circulation and The Royal Mint's production are presented in Table 3a, p. 165.

Commemorative coin to mark the 60th birthday of Queen Margrethe II It is a tradition in Denmark to issue commemorative coins to mark special royal events. Commemorative coins were therefore issued in connection with Queen Margrethe's 60th birthday on 16 April. The coins were designed by the sculptor, Professor Mogens Møller, cf. Box 6. The Queen was presented with two commemorative coins of fine gold. In addition, 61,000 200-krone coins of fine silver were minted, as well as one million 20-krone coins of the same alloy and size as the ordinary 20-krone coins in circulation. 71

COMMEMORATIVE COINS TO MARK THE 60TH BIRTHDAY Box 6 OF QUEEN MARGRETHE II

The commemorative coins are legal tender, but are purchased mainly by collectors. As encashment is therefore not very likely, the seigniorage from the issue of the 20-krone coin has been calculated at kr. 19 million, half of which has been paid to the Crown and half to the Ministry of Economic Affairs for charitable purposes.

Replacement of Series 1972 by Series 1997 The present series of banknotes was put into circulation in 1997-99. The various denominations have been replaced at varying speeds, reflecting the degree to which the individual banknotes are used and how they are treated by users. The 100-krone note was replaced at a slightly faster rate than the other banknotes. 86 per cent of the old 100-krone notes had been withdrawn from circulation after 13 months, cf. Chart 34, whereas only approximately 78 per cent of the old 50-krone notes had been withdrawn by the end of 2000. The total current circulation of Series-1972 banknotes is kr. 3.3 billion. It must be expected that a proportion of the old banknotes will never be returned to the Nationalbank. There were still 5-, 10- and 20-krone notes for a value of kr. 205 million in circulation at end-20001.

1 Also includes 5-, 10- and 20-krone notes from note series dating back to 1945. 72

REMAINING PROPORTION OF SERIES 1972 IN CIRCULATION Chart 34

Per cent 100

0 -1 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 Months after introduction

50-krone banknote 100-krone banknote 500-krone banknote 1,000-krone banknote

Note: End of month.

COUNTERFEITING

After rising throughout the 1990s, the number of counterfeit banknotes found in circulation has remained more or less unchanged since 1998. From 1999 to 2000 the number of counterfeit banknotes found in circulation decreased moderately from 673 to 665, cf. Chart 35. The most

NUMBER OF COUNTERFEIT BANKNOTES Chart 35

Number 900

800

700

600

500

400

300

200

100

0 1993 1994 1995 1996 1997 1998 1999 2000

Found in circulation Confiscated banknotes not in circulation

Source: The police. 73

COUNTERFEIT BANKNOTES FOUND IN CIRCULATION IN 2000, INTERNATIONAL COMPARISION Chart 36

Counterfeit banknotes per million notes in circulation 30

0 Iceland Finland Denmark Germany Sweden Norway

Sources: National central banks. Note: Figures for Sweden are from 1999.

frequently counterfeited banknote in 2000 was the 500-krone banknote; almost half the counterfeit banknotes found in circulation were 500-krone banknotes. The number of confiscated banknotes which had not been put into circulation varies from year to year. In 2000, 152 counterfeit banknotes were seized, which is 10 less than in 1999. The incidence of counterfeiting is very limited in Denmark. In 2000 there were 5.1 counterfeit banknotes for each million genuine banknotes. This figure is very low in relation to comparable countries, cf. Chart 36. One reason for the low number might be that Danish banknotes are generally of high quality. Worn banknotes which can be more difficult to identify as genuine are withdrawn from circulation when they are received by a bank and are returned to the Nationalbank, where they are replaced with new banknotes. In connection with the issue of the present series the National- bank conducted an information campaign to enhance familiarity with the new banknotes as well as awareness of the security elements used. Although the incidence of counterfeiting is low, the Nationalbank has continuous focus on increasing the security of the Danish banknotes. 74

PROPOSED NATIONAL SIDES OF DANISH EURO COINS Box 7

1, 2 and 10, 20 and 1 euro 2 euro 5 cents 50 cents

PRELIMINARY DESIGN OF DANISH EURO COINS

In connection with the referendum on 28 September on Denmark's adoption of the euro, at the request of the government, the Nationalbank prepared a preliminary design of Danish euro coins, cf. Box 7. All euro coins have a common side, as well as a national side designed by the individual member states. The design was presented at a press conference at the Ministry of Economic Affairs on 22 August 2000. 75

Payment Systems

From 1999 to 2000 the number of VP transactions more than doubled. The joint European payment system, TARGET, has been in operation for two years. Use of the system is increasing steadily, and TARGET has become the standard system for large cross-border payments. In 2000 a scheme was introduced to reimburse TARGET participants for any losses in connection with system downtime. Danmarks Nationalbank is developing a new system for payments in kroner and euro, KRONOS, which in time will become the Danish interface to the TARGET system. Inter- nationally there is growing awareness of safety and efficiency in relation to payment and securities settlement systems.

KRONE PAYMENT SYSTEMS

The Nationalbank is the settlement bank for four payment systems in kroner. The Nationalbank makes available accounts via which the participants exchange payments. Table 7 presents the turnover of the krone payment systems. The DN Inquiry and Transfer System is the Nationalbank's RTGS1 system in which krone payments are settled individually and registered imme- diately2. This system is used primarily for large payments. The number of transactions has been relatively stable in recent years, while the average transaction size is still increasing. The sum clearing system handles retail payments via e.g. Dankort (debit card), cheques and BetalingsService (direct debit). The system is owned by the Danish Bankers' Association and operated by PBS. The sum clearing system is a net settlement system. PBS calculates the net positions of the banks vis-à-vis each other, and the amounts are settled via the banks' accounts with the Nationalbank. Far more transactions pass through the sum clearing system than through the DN Inquiry and Transfer System, but the individual payments are considerably smaller. The number of transactions is increasing steadily, while the average transaction size remains relatively constant at approximately kr. 5,000. The VP System is the system of VP A/S - The Danish Securities Centre, for settlement of trades and other securities transactions. At fixed times

1 RTGS = Real-Time Gross Settlement. 2 For a more detailed description of the types of payment systems, see Danmarks Nationalbank, An- nual Report and Accounts 1998, p. 75. 76

KRONE PAYMENT SYSTEMS Table 7

1997 1998 1999 2000

DN Inquiry and Transfer System Number of transactions, '000 ...... 369 384 368 388 Amount per transaction, kr. million ...... 49.10 56.39 57.03 66.17 Sum clearing Number of transactions, '000 ...... 656,027 713,880 754,309 789,529 Amount per transaction, kr. '000 ...... 4.95 5.16 5.08 5.14 VP settlement Number of trading transactions, '000 ...... 3,296 3,382 3,530 6,815 Amount per transaction, kr. million ...... 4.87 6.80 6.23 3.31 FUTOP settlement Number of contracts, '000 ...... - - 1,735 1,042 Number of old contract size1, '000 ...... 561 421 222 -

Sources: Danmarks Nationalbank, the Danish Bankers' Association, VP A/S - The Danish Securities Centre and the Copenhagen Stock Exchange. 1 On 15 March 1999 the contract size was lowered from kr. 100,000 to kr. 10,000 kr. For comparability, 1999 figures for both contract sizes have been constructed.

each day the participants' net positions in terms of both securities and money are calculated. Net positions in securities are exchanged between the participants' VP safekeeping accounts, while net positions in money are exchanged via accounts with the Nationalbank. The number of trading transactions in VP increased significantly from 1999 to 2000. Especially the number of share trades has increased, while the number of bond trades has generally remained stable. As share trades are typically considerably smaller than bond trades, the average traded amount fell from 1999 to 2000. Trades in options and futures are settled by the FUTOP Clearing Centre via accounts with the Nationalbank. The system used for settlement was restructured in November 2000, so that trade in and clearing of Danish futures and options now takes place in the Swedish derivatives system. Net positions calculated in the Swedish system are settled by the Danish participants and the FUTOP Clearing Centre using the DN Inquiry and Transfer System. The restructuring of the FUTOP system was related to the steadily decreasing turnover in the Danish derivatives market.

EURO PAYMENT SYSTEMS

Danish banks can effect payments in euro via several payment systems, depending on the type of payment. Retail euro transactions can be settled via the sum clearing with separate calculation of the banks' net positions in euro. Sum clearing in euro adheres to the same principles as in kroner, but the turnover in euro 77 is moderate compared to the turnover in kroner. Sum clearing has only domestic participants, and it is therefore not possible to settle cross- border retail payments in euro. Securities trading in euro is handled via the VP System. As for sum clearing, trades in euro are settled according to the same principles as trades in krone. The volume of transactions in euro is relatively moderate. Cross-border securities trades may be settled in VP via VP's links to securities centres abroad.

DEBES and TARGET Cross-border payments in euro can be processed in TARGET1, the joint euro-denominated payment system interlinking the 15 national EU central banks and the European Central Bank. TARGET interlinks the national RTGS systems – in Denmark's case, DEBES. DEBES may also be used for domestic euro transfers between Danish banks. The TARGET system has been in operation for two years. Use of the system increased steadily throughout 1999 and 2000, with regard to both the number of transactions and total transaction value, cf. Table 8. The TARGET system has made it easier to process large cross-border payments and has become the standard system for such payments. In overall terms, less than half of the transaction volume in TARGET relates to cross-border payments, as the system is also used for domestic payments in euro. This average conceals considerable variation among the EU member states, where the use of TARGET varies greatly according to their need to process domestic payments in euro and the existence of alternative euro payment systems. In Denmark's case, TARGET/DEBES is used predominantly for cross-border payments. The same applies to the other member states that do not participate in the euro, while the large EU member states which have adopted the euro use the TARGET system for domestic payments in euro to a very large extent. The central banks are improving the TARGET system on an ongoing basis. In November 2000 the system was thus adapted to the new transparency directive requirements in connection with cross-border customer payments2. In order to improve the participants' access to information on the status of the national RTGS systems interfaced with TARGET, a new information tool was introduced on 23 October 2000. Participants can now retrieve electronic information on subcomponents of TARGET – e.g. whether the national RTGS systems are open or closed, or on any prob-

1 2 Trans-european Automated Real-time Gross settlement Express Transfer system. EC Directive 97/5/EC on cross-border credit transfers. 78

TRANSACTION VOLUMES IN TARGET AND DEBES Table 8

Daily average 1999 2000

TARGET Number of transactions ...... 163,157 188,157 - Of which cross-border, per cent ...... 18 21 Value of transactions, euro billion ...... 925 1,033 - Of which cross-border, per cent ...... 39 42 Of which DEBES Number of transactions ...... 236 314 - Of which cross-border, per cent ...... 92 94 Value of transactions, euro billion ...... 4.8 5.7 - Of which cross-border, per cent ...... 98 98

Source: ECB. lems and when they are expected to be solved. This information tool supplements, but does not replace, the existing national communication channels. In the first two years, TARGET's opening and closing days were fixed on a year-to-year basis. Now a long-term TARGET calendar has been introduced. TARGET is closed on Saturdays and Sundays, New Year's Day, Good Friday, Easter Monday, 1 May, Christmas Day and Boxing Day. An innovation is that the national RTGS systems must now be closed on TARGET closing days.

TARGET reimbursement scheme On 1 January 2001 a new reimbursement scheme for TARGET participants was introduced. This is a requirement if a payment order cannot be effected on the day it is issued due to problems in the TARGET system, so that participants are forced to place funds with or borrow from their national central banks. The reimbursement scheme means that participants are reimbursed for any additional costs incurred from placing funds with or borrowing from their central bank, rather than in the money market. For TARGET participants from non-euro-area EU member states the upper limit to interest on overnight deposits is abolished. If participants have an overnight deposit which is larger than the amount on which interest is normally payable – owing to the TARGET system being down – interest is payable on the entire deposit. The additional interest normally payable for overnight overdrafts at the Nationalbank is also dis- regarded. The reimbursement scheme is described in the publication Documen- tation Basis for Payment Systems in Euro (in Danish), which can be downloaded from the Nationalbank's Web site. 79

Cross-border collateral The EU central banks extend credit only against full collateral. In order to facilitate the provision of collateral in e.g. TARGET, the EU central banks and the ECB have built up the correspondent central banking model, CCBM, for cross-border provision of collateral. Cross-border collateral means collateral in assets placed in another country than where the credit is granted. Within the EU, cross-border collateral is provided mainly via CCBM. In the longer run there are plans to abolish CCBM, on condition that cross-border collateral can be provided effectively in another way. One option might be links between securities centres. By the close of 2000 the EU central banks and the ECB had approved 64 links between EU securities centres as suitable for provision of euro-credit collateral. An alternative solution would be to actually consolidate securities centres. The high degree of consolidation among the European securities centres continued in 2000, cf. p. 61. In the spring of 2001 the European Commission is expected to present a draft collateral directive. The directive will improve the framework for cross-border provision of collateral within the EU. The proposed directive will enhance the provisions for protection in the Directive on settlement finality in payment and securities settlement systems1 to include bilateral outstandings.

KRONOS

The Nationalbank is developing a new RTGS system, KRONOS, which is expected to be ready in the 4th quarter of 2001. KRONOS will replace both the DN Inquiry and Transfer System2, which dates from 1981, and DEBES. The banks will thus gain a combined krone and euro payment system. KRONOS will be the participants' home banking system at the Nationalbank. Participants (banks and mortgage-credit institutes, stock- broking companies, etc.) can send payments in kroner to other participants in Denmark, or payments in euro to TARGET participants in Den- mark and elsewhere in Europe, on an ongoing basis. Participants will also be able to transfer funds between their own accounts with the Nationalbank and to view statements of account, queued payments, news, etc. on-line.

1 European Parliament and Council directive 98/26/EC of 19 May 1998. The directive was implemented in Denmark with effect from 1 May 2000 (Act no. 283 of 26 April 2000). 2 In addition to payment elements which will be replaced by KRONOS, the DN Inquiry and Transfer System comprises a number of other functions, e.g. securitised lending, which will be retained in the DN Inquiry and Transfer System. 80

Participants will be able to send payments via a Web-enabled graphic user interface on their own PCs or via SWIFT1. This makes it easier to integrate KRONOS with the participants' own payment systems. KRONOS will include a number of functions giving participants better liquidity-management facilities than the present systems. Payments are queued automatically if there are insufficient funds to effect them. When the disposable amount is increased, the queue is automatically checked and payments are effected. It will also be possible to submit orders for later payment. In addition, a mechanism will be introduced to facilitate payments settlement in situations where liquidity is tight (a gridlock solution). Several other RTGS systems in TARGET have introduced similar mechanisms. KRONOS will meet the requirements which the future international currency settlement system, CLS, sets for acceptance of a currency. The Danish krone is expected to be included in CLS. A description of CLS is presented in the 1998 Annual Report p. 79.

PAYMENT SYSTEMS IN AN INTERNATIONAL PERSPECTIVE

The central banks' international work in the field of payment systems during the past decade has focused particularly on promoting safety and efficiency in payment systems.2 In June 2000 the central banks of the G-10 countries published the final version of a report on safety and efficiency in payment systems, Core Principles for Systemically Important Payment Systems3. The report sets out ten Core Principles for systemically important payment systems and four principles for the role and responsibility of the central banks in this respect. The Core Principles report is an update of the Lamfalussy report, which is the basis for assessment of payment system risks in most parts of the world and is a benchmark for the objectives to be met by payment systems. The new Core Principles extend further than the Lamfalussy standards. For example, they focus on issues such as management structures and payment system efficiency. The report concentrates on payment systems, but the G-10 central banks are working with the

1 SWIFT = Society for Worldwide Interbank Financial Telecommunication. 2 The role of the central banks in this connection is called oversight. BIS defines oversight as ”a central bank task, principally intended to promote the smooth functioning of payment systems and to protect the financial system against possible 'domino effects' which may occur when one or more participants in the payment system incur credit or liquidity problems. Payment systems oversight aims at a given system (e.g. a funds transfer system) rather than individual participants." Oversight of payment systems is part of the central banks' general work to ensure financial

3 stability. The Report can be downloaded from www.bis.org. 81

IOSCO1 to prepare an equivalent report for securities settlement systems2. More than 100 central banks worldwide, including the Nationalbank, have adopted the standards and are working to implement them.3 The standards are also parameters of the IMF's Financial Sector Assessment Program, cf. p. 90ff.

1 International Organisation of Securities Commissions, the international cooperation between a num-

2 ber of authorities responsible for supervising securities markets. In January 2001 G-10/IOSCO submitted a draft report for consultation. The draft report can be downloaded from www.bis.org. 3 For further discussion of the standards see Tobias Thygesen, International Standards for Payment Systems, Danmarks Nationalbank, Monetary Review, 1st Quarter 2001. 82

International Monetary Cooperation

The bill to adopt the euro was rejected by the referendum in Denmark on 28 September. Denmark's fixed-exchange-rate policy is maintained within the framework of ERM II. As from 1 January 2001 Greece joined the euro area, so that 12 EU member states have now adopted the euro. Since euro banknotes and coins will be put into circulation on 1 January 2002, the full changeover to the euro takes place in 2001. In 2000 the demand for IMF credit declined in view of the higher growth in the global economy and stabilisation of the balances of payments of the emerging market economies. Instead, the IMF concentrated on more long-term reforms of its surveillance and emergency relief.

DENMARK AND THE EURO

In March 2000 the Danish Prime Minister called a referendum for 28 September on Denmark's adoption of the euro, and in May the government submitted the bill. According to the bill, if the outcome of the referendum was in favour of adoption of the euro, Denmark would be able to join the euro area as from 1 January 2002. Euro banknotes and coins would be introduced as from 1 January 2004, after which krone banknotes and coins would be withdrawn. The Nationalbank and the financial sector would have been required to undertake a major technical restructuring up to the introduction of the euro.1 Other sectors in society would also have been required to adjust to the euro, but this changeover would not have had to take place until the introduction of euro banknotes and coins. The bill was rejected by the referendum, with 53 per cent of the votes against the adoption of the euro, and 47 per cent in favour. Immediately thereafter the Danish Government and the Nationalbank issued a joint press release in which it was stated that Denmark's fixed-exchange-rate policy would be maintained within the framework of the narrow fluctuation band of ERM II, the exchange-rate mechanism of the EU.

1 See p. 113f for a brief account of the Nationalbank's preparations for the changeover, and p. 74 for further details of the preliminary design of Danish euro coins. 83

THE EURO AREA

The euro was introduced in 11 EU member states1 on 1 January 1999. On 1 January 2001 the euro was also adopted in Greece. The national central banks of the 12 euro area member states, together with the ECB, constitute the Eurosystem2. Box 8 presents a description of the ECB's organisation.

Inclusion of Greece in the euro area On the selection of the first euro area member states in May 1998 Greece did not fulfil the economic criteria for participation, the convergence criteria. Since then, however, Greece has achieved a higher degree of economic convergence with the euro area member states. Against this background, in the spring of 2000 Greece applied to join the euro area. The ECB and the European Commission each prepared a convergence report on Greece, pointing out such factors as the significant reduction of the Greek inflation rate (CPI) from 20.4 per cent in 1990 to 4.8 per cent in 1998, and 2.6 per cent in 1999. The European Commission's report concluded that Greece now fulfilled the convergence criteria for full participation in the third stage of EMU. In connection with the European Council in Portugal in June the ECOFIN Council approved Greek participation in the euro area as from 1 January 2001. At the same time, Greece was granted immediate access to participate in the meetings of the ECB and the Eurogroup, which is the informal forum for the Ministers of Economic Affairs and Finance of the euro area member states. At the same time, the ECOFIN Council fixed the conversion rate between the Greek drachma and the euro as from 1 January 2001. The conversion rate was fixed as the drachma's existing central rate in ERM II. When Greece joined the euro area on 1 January 2001, the drachma's exchange rate was thus fixed irrevocably at 340.750 drachma per euro.

The last leg of the changeover In 2001 banknotes and coins are still denominated in the euro area member states' national currencies (D-mark, French francs, Finnish marks, and so on). It is possible to hold accounts and transact electronic payments in euro in connection with e.g. securities trading.

1 These are Belgium, Finland, France, Netherlands, Ireland, Italy, Luxembourg, Portugal, Spain, Germany and Austria. 2 The Treaty uses the term the European System of Central Banks (ESCB), which in some contexts comprises the ECB and the national central banks of all 15 EU member states, and in others only the ECB and the national central banks of the euro area member states. The ECB introduced the Eurosystem as the name of the central-bank structure under which the ESCB carries out the tasks related to the third stage of EMU. 84

THE ORGANISATION OF THE ECB Box 8

The European Central Bank, ECB, has three governing bodies: the Executive Board, the Governing Council and the General Council. The Executive Board is responsible for the day-to-day running of the ECB, and the implementation of the monetary-policy decisions. Wim Duisenberg is President of the Executive Board which consists of six members in total. Monetary-policy decisions are taken by the ECB's Governing Council consisting of the central-bank governors of the 12 participating member states, and of the ECB's Executive Board. The Governing Council normally meets every two weeks. The practical execution of the decisions of the Governing Council is predominantly the responsibility of the participating national central banks. The weekly liquidity allotment is a case in point. Should the Governing Council fail to reach agreement the main rule according to the EU Treaty is that the Governing Council's voting procedure shall be by simple majority, whereby each member has one vote. In view of the enlargement of the EU the procedure for amending the voting provisions has been simplified, cf. p. 88f. The General Council consists of the President and Vice President of the Executive Board, as well as the governors of the central banks of all 15 EU member states, including Danmarks Nationalbank. The General Council normally meets briefly every quarter. During 2000 the General Council discussed such issues as the functioning of ERM II, the monetary development in the EU member states not participating in the euro area and the ECB's convergence report on Sweden and Greece. The ECB has 13 committees and subcommittees in which the national central banks and the ECB participate. The national central banks of the EU member states outside the euro area participate only to a limited extent. The Nationalbank's participation in these meetings varies considerably. The committees contribute expertise to the decision- making process within all relevant central-bank areas. The ECB is owned by the national central banks, which have contributed capital. The capital contribution of each central bank depends on the member state's economy and population size. Each national central bank's share of the ECB corresponds to its contribution to the total capital. The ECB's profit or loss is distributed proportionally among the national central banks according to their ownership share. The three EU central banks which are outside the Eurosystem, the Bank of England, Sveriges Riksbank and Danmarks Nationalbank, have paid up 5 per cent of the amount they would have contributed had they joined the Eurosystem. The interest on this amount covers the expenses related to the ECB tasks which concern all 15 member states.

Until 1 January 2002, when euro banknotes and coins are put into circulation, the national currencies are to be regarded as various sub-denominations of the euro. For example, the D-mark is exactly 1/1.95583 euro1.

1 The exchange rates between the national currencies and the euro were fixed on 31 December 1998 for the first 11 participating member states, cf. Table 13, p. 173.

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The financial markets in the euro area already use the euro, while private individuals in the euro area have encountered the euro via e.g. price tags in both the national currency and euro. As from the beginning of 2002 all areas of society in the euro area must be ready to use the euro, even for day-to-day transactions. In 2001 very extensive information campaigns will therefore be launched in the euro area in order to prepare citizens for the changeover. In most euro area member states during the last two weeks of 2001 the general public will be offered start kits containing euro banknotes and coins. The euro banknotes will be identical throughout the euro area, while the coins will have a common and a national side. All participating member states have published the design of the national side of their euro coins. The final design and security features of the banknotes will be published from September 2001. There will be 7 different euro banknotes (5, 10, 20, 50, 100, 200 and 500 euro), and 8 different euro coins (1, 2, 5, 10, 20 and 50 cent, as well as 1 and 2 euro). Up to 1 January 2002, when the first euro banknotes and coins are put into circulation, around 15 billion euro banknotes and 50 billion euro coins are to be manufactured. For a short transition period of up to two months after 1 January 2002 there will be dual circulation of euro banknotes and coins alongside banknotes and coins denominated in national currencies. By 1 March 2002 at the latest the last national banknotes and coins will be withdrawn from circulation, and from this date at the latest they will no longer be legal tender. After this date business entities will only be obliged to accept payment in euro. However, after the expiry of the transition period national banknotes and coins may still be exchanged at the banks of the participating member states (for a few months) and at their central banks (for many years). The period up to the introduction of the euro banknotes and coins will present the major task of transporting euro banknotes and coins to the banks. As from September 2001 the banks will be able to receive euro banknotes and coins in order to build up the necessary initial stocks. The retail sector will also be able to receive euro banknotes and coins before the transition period begins.

Significance to EU cooperation Economic-policy issues have gained a more prominent role in EU cooperation after the changeover to the euro and the single monetary policy. With regard to economic-policy cooperation, Denmark is a full member of the ECOFIN Council where all formal decisions are made. How- ever, a steadily increasing proportion of the discussions, e.g. the exchange 86 of views on economic trends, now takes place within the informal forum for the Ministers of Economic Affairs and Finance of the euro area member states, the Eurogroup. The Eurogroup has gradually gained a stronger role, and has now also become more visible by holding press conferences and issuing press releases. Furthermore, the number of issues on the agenda at meetings is planned to be increased in order to enhance the coordination of economic policy in the euro area. When a non-participating member state has the EU presidency, the next member state to have the EU presidency will serve as President of the Eurogroup. During the Swedish EU presidency in the first half of 2001 Belgium is President of the Eurogroup, since the EU presidency passes to Belgium in the second half of 2001.

THE OTHER NON-PARTICIPATING EU MEMBER STATES AND THE CANDIDATE COUNTRIES

Two other EU member states besides Denmark, the UK and Sweden, do not participate in the euro area. The EU is negotiating membership with 12 countries. When these countries join the EU they will not be able to introduce the euro until they have participated in ERM II for a period.

The UK Like Denmark, the UK has invoked its Treaty-bound right not to participate in the third stage of EMU. The British government has reserved the right to participate at a later stage if this is found to be economically beneficial to the UK. The government has prepared five economic tests to be passed before a decision on participation can be made. For example, sustained convergence must be achieved between the UK economy and the economies of the euro area, and the implications to the financial sector should be evaluated. According to the British government the economic tests will be assessed at the latest two years after the next parliamentary election, which must be held by May 2002. Further- more, the British government has stated that participation must be endorsed by referendum.

Sweden In Sweden the Riksdag (Parliament) in December 1997 adopted the government's recommendation that Sweden does not participate in the third stage of EMU from the start. The Riksdag also adopted the decision that practical preparations for the euro should be made in all sectors of society in order to preserve Sweden's scope for manoeuvre should it decide to participate at a later date. 87

At the extraordinary congress of the Social Democratic Party in March 2000 the party confirmed that it wished Sweden to participate in the euro, but from a later date. Like the UK, the timing of Sweden's participation will depend on when it is assessed to be economically beneficial. In this connection the government has set out certain criteria. These include a certain convergence between economic development in Sweden and the euro area. Sweden's Prime Minister has stated that there will be no referendum on Sweden's participation in the euro before the next elections to the Riksdag in September 2002. In the spring of 2000 the European Commission and the European Central Bank conducted a convergence assessment of Sweden. The Euro- pean Commission finds that Sweden fulfils all of the economic criteria for participation in the euro area, apart from the exchange-rate criterion, since the Swedish krona does not participate in ERM II. The Swedish government has stated that linking the Swedish krona to ERM II will be a logical initial step if Sweden decides to adopt the euro.

The candidate countries 12 countries from central and eastern Europe and the Mediterranean area have initiated accession negotiations with the EU1. The EU initiated negotiations with Cyprus, Estonia, Poland, Slovenia, the Czech Republic and Hungary in March 1998, and with Bulgaria, Latvia, Lithuania, Malta, Romania and Slovakia in February 2000. No official date for the first enlargement has been fixed. However, at the European Council in Nice in December 2000 there were hopes that the first new EU member states would be able to participate in the next elections to the European Parliament in 2004. The conclusion of the European Commission's annual progress report on the accession process from November 2000 is that Cyprus, Estonia, Malta, Poland, Slovenia, the Czech Republic and Hungary are ahead in fulfilling the accession requirements. They are followed by Latvia, Lithuania and Slovakia, while the accession process for Bulgaria and Romania will probably be longer. On accession to the EU these countries will be given the status of derogation countries in the Economic and Monetary Union, EMU. This implies that they will not introduce the euro from the start. In the longer term the countries will be under an obligation to introduce the euro on condition of fulfilment of the convergence criteria for participation in the third stage of EMU. In accordance with one of the criteria the countries are expected to participate in the exchange-rate mecha-

1 At the Helsinki European Council in December 1999 Turkey was also accepted as a candidate country, although accession negotiations have not yet been initiated. 88 nism, ERM II, for at least two years prior to introduction of the euro. The ECOFIN Council has stated that ERM II is a flexible arrangement providing in principle for participation with e.g. a currency board if this is found to function satisfactorily1. Floating exchange rates, crawling pegs and fixed-exchange-rate regimes vis-à-vis other currencies than the euro are found to be incompatible with ERM II. The ECOFIN Council has also stated that unilateral introduction of the euro by means of currency substitution ("euroisation") is incompatible with the spirit of the Treaty's EMU provisions.

THE INTERGOVERNMENTAL CONFERENCE

The European Council in Nice on 7-9 December 2000 concluded the intergovernmental conference. The objective of the intergovernmental conference was a revision of the Treaty provisions concerning the composition and functioning of the EU institutions in view of the future enlargement of the EU. The principal conclusions of the intergovernmental conference concerned the size and composition of the European Commission, the weighting of votes in the EU Council, the extension of qualified majority voting and review of the provisions on closer cooperation. The new Treaty requires ratification in all 15 member states before it can enter into force. Among the results of the intergovernmental conference was that each member state shall have one commissioner as from 2005 until the EU membership comprises 27 member states. On the admission of the 27th EU member state, a rotation system according to an equality principle will be introduced, so that the first commission to be appointed hereafter shall have fewer members than the number of member states. Another result was that the weighting of votes, as well as the decision-making procedure in the EU Council, were amended in several respects. Further provisions for closer cooperation among a group of member states within certain areas were introduced. Under the new Treaty, legal instruments based on approximately 30 EU Treaty provisions now require qualified majority voting rather than the previous unanimity procedure. A single amendment concerning the ECB was made to the ESCB Statute annexed as a protocol to the Treaty. Amendment of the voting procedures in the Governing Council is now made easier under the new Treaty. The voting procedure may now be

1 Participation in ERM II with a currency board will constitute a unilateral obligation on the part of the country in question, whereby the ECB has no other obligations than those specified in the existing ERM II agreement. Currency boards are described in further detail in Ulrik Bie and Niels Peter Hahnemann, Currency Boards, Danmarks Nationalbank, Monetary Review, 2nd Quarter 2000. 89 amended by the Council, meeting in the composition of the heads of state or government, acting unanimously on a recommendation from the European Commission or the ECB. Amendment of the Treaty is thus no longer required.

THE STABILITY AND GROWTH PACT

For the second consecutive year all EU member states comply with a Treaty requirement of a government budget deficit not exceeding 3 per cent of GDP. Budget surpluses are found in several member states, including Denmark, and no member states are close to the 3-per-cent limit. The Stability and Growth Pact entered into force simultaneously with the introduction of the euro and imposes an obligation on all 15 EU member states to aim for a budgetary position "close to balance or in surplus in the medium term". This provision has been interpreted as a budgetary position sufficient to enable the member state to comply with the 3-per-cent limit, even in the event of a normal cyclical down- turn. Each EU member state must prepare a national programme for compliance with the requirements set out in the Stability and Growth Pact in the following three years. The programmes are discussed by the ECOFIN Council, followed by the Council's opinion. In May 2000 the ECOFIN Council completed its review of the updated programmes of all EU member states. With the exception of Austria all programmes were found to comply with the provisions of the Stability and Growth Pact. The Austrian programme envisages a government budget deficit of 1.4 per cent of GDP in 2002, which was found to be insufficient to ensure that the 3-per-cent limit is not exceeded in the event of a cyclical slowdown. The second review of the updated programmes began in November 2000. The ECOFIN Council's conclusion on the German programme was that Germany will not comply with the requirement of a government budgetary position "close to balance or in surplus in the medium term" until 2002. This is due to a temporary deterioration of Germany's government budget in 2001 in connection with the implementation of the tax reform. In Ireland there is prospect of sound government budget surpluses in the coming years, in compliance with the requirements of the Stability and Growth Pact. However, the Irish economy is subject to very high growth rates, at 10 per cent in 2000, and inflation considerably above the EU average. In the Broad Economic Policy Guidelines adopted by the ECOFIN Council in June 2000, the Irish Government was encouraged to 90 counter the risk of overheating. In December 2000 the Irish Government put forward a budget which e.g. via a number of tax cuts (from an already low tax level) would increase the demand pressure on the economy. On this basis, in February 2001 the ECOFIN Council adopted a recommendation to Ireland that the expansionary budget for 2001 would increase the risk of overheating and is in conflict with the Broad Economic Policy Guidelines.

THE INTERNATIONAL MONETARY FUND, IMF

The demand for IMF credit declined in 2000 due to accelerated growth in the global economy and stabilisation of the balances of payments of the emerging market economies. The IMF's liquidity also improved considerably as a result of the increase of the member countries' capital contributions (quotas) which entered into force in 1999. In December 2000 the IMF approved a financing facility of SDR 8.7 billion to Turkey, and in January 2001 a financing facility of SDR 10.6 billion to Argentina. After the financial crises of recent years the IMF's work in 2000 was concentrated on more long-term reforms to prevent financial crises, or limit their extent and scope, through improved surveillance and greater transparency in the member countries' economic policies.

Extension of the IMF's surveillance The IMF and the World Bank have initiated a programme, the Financial Sector Assessment Program, FSAP, for early detection of possible weaknesses in a country's financial system. The programme is also designed to strengthen the coordination and efficiency of the financial cooperation between the two international institutions.

The IMF's contribution to the programme comprises: • Preparation of overall indicators to analyse the relationship between the macroeconomic development and the development in the financial sector of a given country. • Assessment of the soundness of a country's financial sector. • Together with the World Bank, the preparation of an overview of a country's compliance with current international standards and codes of good practice.

The international standards comprise a code of good practice for transparency in monetary and financial policies, banking supervision principles, payment systems, securities trading and insurance supervision.

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The cooperation between the IMF and the World Bank on FSAP is primarily directed at the emerging market economies. The IMF undertakes to assess the soundness of these countries' financial sectors within the framework of the IMF's annual article IV consultations. The IMF's assessment is based on macroeconomic relations and the overall stability of the economies. The World Bank prepares microeconomic assessments of the financial sectors of the emerging market economies, including their banking sectors, based on specific development problems. The IMF has also initiated efforts to improve the surveillance of the countries' external vulnerabilities via assistance to enhance debt management as well as the management of the foreign-exchange reserves, analyses of capital-account issues, and improved statistics on foreign- exchange reserves and debt.

Involving the private sector in crisis prevention and resolution The IMF's efforts to secure greater private-sector involvement in crisis prevention and resolution were initiated in 1997-98 when the IMF granted Thailand, Korea, Russia and Brazil very large loans which exceeded the IMF's access limits. The real implication of the large IMF loans was that private creditors could terminate their credit and withdraw without losses after granting credit at relatively high returns for a number of years. Against this background the aim is to clarify to the authorities of the individual countries, as well as private lenders, that there are limits to the support given to a country by the official community, including the IMF, in the event of a balance-of-payments crisis. This issue is still being discussed within the IMF. However, agreement has been reached on the overall precondition that private-sector involvement must be ensured. Each time a country requires balance-of- payments support the IMF must therefore analyse and describe how the country has ensured the involvement of private creditors in the solution of its financial crisis.

Establishment of an independent evaluation unit The meeting of the International Monetary and Financial Committee, IMFC, in April 2000, approved the establishment of an evaluation unit to assess the IMF's work. The unit must be independent of the IMF's staff and management and will report to the IMF's Executive Board. The evaluation unit is free to choose the aspects of the IMF's work to be analysed and evaluated. The evaluation reports will be published. The unit can also have direct contact with e.g. NGOs and other stakeholders, and is expected to become operational during the spring of 2001. 92

THE IMF'S FINANCING FACILITIES Box 9

• SBA, stand-by arrangements are credit facilities to alleviate short-term balance- of-payments difficulties. SBA loans are normally disbursed quarterly over a period of 1-1½ years and must be repaid over a period of 3¼-5 years. The rate of interest is proportional to the IMF's weekly interest rate for SDR, the IMF's reserve asset, calculated as a weighted average of short-term money-market interest rates in the major currencies. • EFF, Extended Fund Facility, is a credit facility for countries with balance- of-payments imbalances due to persistent structural problems in the economy. EFF loans are disbursed on a quarterly or biannual basis, normally over a three-year period, with a repayment period of 4½-10 years. The rate of interest is identical to the interest rate for SBA loans. • SRF, Supplemental Reserve Facility, is a credit facility supplementing SBA or EFF arrangements to provide financial assistance to members experiencing exceptional short-term, large-scale financing needs due to a financial crisis. An SRF arrangement runs for up to 1 year and the repayment period is 1-2½ years. The rate of interest is identical to the interest rate for SBA loans plus a premium of 300-500 basis points. • CCL, Contingent Credit Lines, constitute a commitment for precautionary financing to a member country with no current borrowing requirement, should a financial crisis occur. The repayment period and interest rate for CCL are identical to the SRF arrangement. • CFF, Compensatory Financing Facility, is a credit facility for member countries to cover short-term reductions in export earnings or excesses in cereal import costs. The repayment period is 3¼-5 years. The rate of interest is identical to that of SBA. • PRGF, Poverty Reduction and Growth Facility, is a special financing facility for a number of poor countries with persistent balance-of-payments problems. The rate of interest is 0.5 per cent p.a. The repayment period starts after 5½ years and must be completed after 10 years. • Assistance after natural disasters and civil wars. These loans will normally be converted to SBA, EFF or PRGF arrangements. The repayment period is 3¼-5 years. The rate of interest is identical to that of SBA loans.

Simplification of the IMF's loan facilities For some time the IMF's agenda has included simplification of the IMF's financing facilities, cf. Box 9, improvement of the incentives for faster repayment of loans, and improvement of the access to assistance in the event of financial crises. Over the years a number of financing facilities have been established, often special-purpose facilities. The number of facilities has become ex- cessive, and the Executive Board has decided to simplify loan structures by abolishing a number of facilities which have not been used for some time. The purpose is to ensure equal treatment of the member countries that borrow from the IMF. 93

In order to avoid long-term utilisation of the IMF's facilities the repayment schemes have been tightened. If a borrowing country's balance of payments takes a favourable course, the country is expected to repay the borrowed funds sooner. As regards pricing of the IMF's facilities, the Executive Board also decided to raise the rate of interest for the proportion of a country's total debt to the IMF exceeding 200 per cent of the country's quota. Furthermore, the commitment fees have now been harmonised for all facilities. In 1999 a new contingency facility, Contingent Credit Lines, CCL, for countries with a sound economic policy that are threatened by circumstances beyond their control, was established. CCL has proved to be too expensive compared to other credit facilities, so that interest rates and commitment fees were reduced.

IMF facilities for low-income countries – the debt initiative, HIPC, and PRGF (poverty reduction and growth facility) At the joint annual meeting of the World Bank and the IMF in 1999 it was decided to implement an enhanced debt relief initiative, whereby debt relief is linked to the developing countries' own efforts to combat poverty, cf. the 1999 Annual Report, pp. 91-92. The countries receiving assistance under this facility must prepare a programme for economic policy and reforms in which a poverty reduction strategy plays an important role. Once a country has obtained a debt-relief commitment financial assistance will be subject to surveillance of its compliance with the economic programme and the poverty reduction strategy. Debt relief is effected on condition of satisfactory compliance with the programme for up to three years. However, the country may obtain debt relief sooner by implementing the reforms more quickly than expected. At the annual meeting in the autumn of 2000, the World Bank and the IMF agreed to speed up the process, so as to enable most poor and heavily indebted countries to obtain debt relief before the end of 2000. It was also decided to keep the HIPC initiative open until the end of 2002. This provides access for countries which have not yet qualified for debt relief due to military conflicts or for other reasons. 94

Statistics

Danmarks Nationalbank is in the process of expanding the Danish financial statistics. This is related to the efforts within especially the EU to standardise the member states' statistics. Danmarks Nationalbank and Statistics Denmark have also intensified their cooperation on improving the quality of the Danish balance-of-payments statistics.

EXPANSION OF THE FINANCIAL STATISTICS

The Nationalbank's work in the area of financial statistics has been stepped up considerably since the autumn of 1999 when the National- bank concluded an agreement in principle with Statistics Denmark to take over the responsibility for expanding the Danish financial statistics in accordance with international guidelines, cf. the 1999 Annual Report p. 100. In the spring of 2000 this agreement was followed by a cooperation agreement between Statistics Denmark and the National- bank in the statistics area, and an amendment of the Statistics Den- mark Act giving the Nationalbank the formal authority to collate financial statistics. The need to expand the financial statistics is based particularly on the cooperation within the EU and the transition to the single currency, which requires a comprehensive picture of the economic and financial development in the individual countries and within the entire EU and euro area. National statistics are therefore being harmonised, so that member states' economic and financial statistical reporting to Eurostat, the statistical body of the European Commission, and the ECB, is brought on a comparable footing. The compilation principles for the financial statistics are determined by the ECB together with the national central banks on the basis of a report on statistical requirements for stage three of EMU1 published in 1996 by the EMI, the predecessor of the ECB. Even though Denmark has not adopted the euro the Nationalbank participates in the ECB's statistical collaboration on an equal footing with the other central banks and must observe the guidelines on EU member states' financial statistical reporting to the ECB.

1 Statistical Requirements for Stage Three of Monetary Union (Implementation Package), EMI, July 1996. The requirements are described in more detail in the document Statistical Information Collected and Compiled by the ESCB, ECB, May 2000, which can be seen at www.ecb.int. 95

In addition to new balance-sheet statistics for monetary financial institutions, MFIs, introduced in the autumn of 2000, the expansion of the financial statistics will include such areas as securities statistics, interest-rate statistics, statistics for investment associations and the preparation of quarterly financial accounts for the key sectors of the economy. As a consequence, in the years to come the Danish financial sector must expect to spend more resources on generating the necessary reporting basis for the expansion of financial statistics.

Balance-sheet statistics for the MFI sector Since 1998 the Nationalbank has worked with the trade organisations in the financial sector, the Danish Financial Supervisory Authority and Statistics Denmark on introducing new balance-sheet statistics for Danish MFIs, i.e. the Nationalbank, banks and mortgage-credit institutes, other credit institutions and money-market funds. This work was completed in October 2000, when regular reporting commenced. Reporting guidelines and forms have been coordinated among the relevant authorities so that financial statistical reporting to the various bodies is integrated into one system administered by the Nationalbank. The new balance-sheet statistics for MFIs1, which replace the former monthly balance-sheet statistics for banks and mortgage-credit institutes, have been published since the beginning of 2001. The MFI statistics differ from the former balance-sheet statistics for banks and mortgage- credit institutes in a number of respects. For example, the balance-sheet items are compiled at market value, in contrast to book value as before, and the distribution by sector, maturity, currency and country is far more detailed than in the former statistics. To give a comprehensive view of balance-sheet trends within the MFI sector, the Nationalbank has prepared and published2 comparable historical data from 1991.

Interest-rate statistics Interest-rate statistics vary greatly among the EU member states, in terms of both method of calculation and coverage. The ECB is therefore working with the national central banks to prepare new, harmonised interest-rate statistics. The purpose is to establish an improved basis for analysis of the monetary transmission mechanism, and furthermore, when combined with the balance-sheet statistics for MFIs, to achieve a

1 For a more detailed description of the balance-sheet statistics for the MFI sector, see Kjeld Ole Nielsen and Anders Mølgaard Pedersen, New Balance-Sheet Statistics for Monetary Financial Monetary Review 2 Institutions, Danmarks Nationalbank, , 4th Quarter 1999. See Financial Statistics – Special Reports, No. 1, 14 February 2001. 96 better insight on the development in the financial structure in the EU and the euro area. The interest-rate statistics will comprise the MFI sector's deposits from and lending to households and non-financial companies by instrument type and maturity. To a great extent they will correspond to the balance- sheet statistics for MFIs. The details of the new interest-rate statistics in the EU member states will probably be determined in the 2nd half of 2001, with reporting from the start of 2003. The introduction of the interest-rate statistics in Denmark will provide a considerably more detailed picture of the development in the interest rates of the MFI sector than the present quarterly interest-rate statistics. Once the precise content is determined, the Nationalbank will establish a working group with representatives from the trade organisations of the financial sector, the Danish Financial Supervisory Authority and Sta- tistics Denmark in order to prepare the introduction of the statistics in Denmark.

Securities statistics Securities statistics are also given high priority internationally. This is mainly due to a need to improve the compilation of cross-border portfolio investments. At present there is a considerable degree of asym- metry between the national statistics, owing to major variations in collection and compilation methods. Detailed statistics on securities portfolios and securities issues will also be an important supplement to the MFI statistics, and a necessary prerequisite for the compilation of financial sector accounts, cf. p. 97. In the longer term the International Monetary Fund, IMF, plans to establish a global securities database, based on either national data or data from international institutions. The ECB is also active in this respect. By the end of 2001 the ECB aims to establish a European securities database, based primarily on information from the EU central banks. The Nationalbank, VP A/S - The Danish Securities Centre and Statistics Denmark are working together to establish a similar database for Den- mark by the end of 2001. This securities database will be based on monthly reports giving detailed information on the individual securities issued by Danish companies in Denmark and abroad. In the longer run, the database will also include information on holders of securities. Most of this information is already registered by VP A/S - The Danish Securities Centre. However, in certain areas additional information will have to be compiled, first and foremost data on the issue of securities abroad by Danish companies and financial institutions. Regular collection of such information directly from the relevant par- 97 ties is planned to start in the 1st half of 2001. Later on, it may also be necessary to collate information on ownership from the institutions administering the securities on behalf of customers.

Investment associations The strong growth in the assets managed by investment associations in recent years has increased the macroeconomic necessity of adequate statistics for this area. The Nationalbank, the Federation of Danish Invest- ment Associations, Statistics Denmark and the Danish Financial Super- visory Authority have therefore decided to expand the existing statistics for investment associations. These statistics will be based on the MFI statistics template, but they will be less detailed. Initial reporting will take place in July 2001 on the basis of information from the 2nd quarter. The ECB is likewise working to establish EU statistics for investment associations. In most other EU member states too they account for the majority of "other financial intermediates than MFIs".

Financial account A financial account gives a comprehensive view of the financial assets and liabilities of a sector at the time of compilation and of the financial transactions during the period in question. It is used for e.g. economic analyses and forecasts. Unlike other financial statistics, which are based on reporting from the financial sector, the preparation of annual and quarterly financial accounts is based on the compilation and analysis of existing statistics from other sources, including MFI balance sheets, capital-account and securities statistics. Both Statistics Denmark and the Nationalbank are establishing a financial account for the key sectors of the Danish economy. The responsibility for the annual financial account lies with Statistics Denmark under the regulation on the European System of Integrated Economic Accounts. Except for accounts for the government sector, the National- bank is responsible for the preparation of the quarterly financial account. The Nationalbank intends to publish the first quarterly financial account in 2002, comprising the period from 1997 to 2001.

Survey of the foreign-exchange and derivatives markets Since 1989, the Bank for International Settlements, BIS, has conducted surveys of the foreign-exchange and derivatives markets every three years. The most recent survey took place in 19981.

1 See Henning Dalgaard, Survey of the Foreign-Exchange Market and the Markets for Financial Derivatives in 1998, Danmarks Nationalbank, Monetary Review, 4th Quarter 1998, and Financial Statistics – Special Reports, No. 4, 30 November 1998. 98

The next survey is due to take place in 2001, with the participation of the Nationalbank and 49 other central banks. The contributions of the individual central banks are based on information collected from the largest national market players. The survey will comprise two elements. The first is the trading volume in April 2001 in both the foreign- exchange market and the markets for currency and interest-rate derivatives. The second is information related to outstanding business as of end-June in currency, gold, interest-rate, share, commodity and credit derivatives. The Nationalbank expects to publish the results of the survey in the autumn of 2001.

QUALITY IMPROVEMENTS TO BALANCE-OF-PAYMENTS STATISTICS

The basis for the compilation of Denmark's external balance of payments is prepared jointly by Statistics Denmark and the Nationalbank. The Nationalbank compiles and publishes information relating to payments between Denmark and other countries, i.e. the payments statistics. This information, together with the foreign-trade statistics, etc., is included in the balance of payments prepared and published by Statistics Denmark. Information related to external payments is sourced mainly from the banks via an electronic reporting system introduced in October 19981. For payments in excess of a certain threshold not only the amount, but also the purpose is reported. This threshold was originally kr. 60,000, but was raised to kr. 100,000 from 1 January 2001. Since payments below this threshold are reported collectively, the increase has reduced the number of reported payments significantly and eased the reporting burden for banks and companies. The introduction of the Nationalbank's new electronic reporting system has created a good basis for cooperation between Statistics Denmark and the Nationalbank with a view to improving the quality of the balance-of-payments statistics. For example, it is now possible to compare the foreign-trade statistics on companies' external trade in goods with payment statistics on payments for goods. A survey based on comparisons in selected periods of 1999 and 2000 was completed in June 2000.2 Comparisons will continue and are to be expanded to cover ser-

1 See Lasse Tryde, The Nationalbank's New Reporting System for Payments Statistics, Danmarks Nationalbank, Monetary Review, 2nd Quarter 1999. 2 Report on the Project to Improve the External-Trade and Payments Statistics (in Danish), published by Statistics Denmark, June 2000. The survey is also described in the article Comparison of Goods Trade and Goods Payments, Danmarks Nationalbank, Monetary Review, 3rd Quarter 2000. 99 vices, whereby the payments statistics will be compared with other relevant statistics. Parallel hereto, the Nationalbank has conducted a survey of transit payments in the payments statistics during the period from January 1999 to March 2000. This survey led to a minor redistribution of respectively goods and services payments and will be repeated at intervals. The Nationalbank intends to conduct similar surveys of selected areas. This applies particularly to areas where no effective payments are made, e.g. when companies set off receivables against amounts payable. From time to time it is also necessary to conduct a more exhaustive assessment of the robustness of the reporting system in relation to the development in the financial markets in general, and the payment patterns in particular. The trend in other EU member states is to phase out the payments-based data collection systems in favour of collecting balance-of-payments information directly from companies. The reporting systems of many countries are outdated, and the balance-of- payments statistics inadequate. Furthermore, the single market and the euro are expected to lead to greater financial integration within the EU, so that it will probably become more and more common for business enterprises to effect payments via foreign banks. This will make it even more difficult for individual central banks to collect data on cross-border payments via the banking system. Finally, Eurostat and the ECB are seeking to harmonise the collection of statistics on the balance of payments of the member states in order to achieve consistency in the overall balance-of-payments statistics for the EU and the euro area. This will also accommodate the wishes of many large European companies for more uniform reporting procedures in the member states. In due course these factors will amplify the present trend for the collection of the balance-of-payments information directly from companies. Compared to other countries, the payments statistics of the National- bank are based on a relatively new reporting system. It has thus been possible from the outset to avoid some of the weaknesses seen elsewhere. It is obvious that the system will eventually come under pressure as a consequence of changing payment patterns. This is one reason that Statistics Denmark and the Nationalbank have embarked on a joint project to establish a basis for assessing any weaknesses in the present reporting system and the need, some years on, to restructure the compilation of the balance-of-payments data. The aim is to achieve balance- of-payments statistics of the best quality possible, as well as a rational compilation method. 100

Organisation and Tasks of the Nationalbank

The announcement of the referendum on Denmark's adoption of the euro had a significant impact on the work of most departments of Dan- marks Nationalbank. Prior to the referendum an internal EMU contingency plan was prepared. It identified a number of projects, especially relating to IT, to be implemented should the result of the referendum be in favour of Denmark's adoption of the euro. In 2000, the Joint Consultation Committee adopted a personnel policy drawn up by a committee comprising managerial and staff representatives. At the close of 2000 the Nationalbank had 605 employees, equivalent to 552 full-time positions.

THE NATIONALBANK'S OBJECTIVES AND VALUES

The 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.

Objectives The overall objectives of the 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 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 the Nationalbank's objectives. • To maintain its financial strength by means of consolidation and risk management.

Values • While safeguarding its traditions, the Nationalbank shall actively renew itself and adapt to trends in society and to the requirements of 101

the surrounding world. The Nationalbank shall protect its credibili- ty by not only displaying professional competence, managerial skills, and sound judgement, but also by maintaining an organisation which lives up to the principles the Nationalbank considers to be significant to society's development: efficiency, cost awareness and readi- ness for change. Focusing on its primary tasks, on an ongoing basis the Nationalbank shall set priorities for its work. • The Nationalbank shall be an attractive workplace capable of attract- ing, motivating and retaining well-qualified employees and offering them working conditions which ensure balance between work and leisure. Key qualities 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. • The 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 tar- gets 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. • The Nationalbank's relations with the financial sector are based on market-oriented solutions, and the costs to the sector and the Natio- nalbank must be weighed against the value of the system or requirement to society. 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 relations with public authorities and players in the financial system, and in international cooperation, the Nationalbank shall seek influence and express attitudes which are in line with the Nationalbank's objectives. In relations with the public the Nationalbank shall, via the media and otherwise, ensure an understanding of the decisions relating to the Nationalbank's own tasks. With regard to financial conditions or economic policy in general, the Nationalbank 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. 102

Personnel policy In 2000 the Joint Consultation Committee adopted a personnel policy drawn up by a committee comprising managerial and staff representatives. The personnel policy comprises a set of values which expand on and supplement the Nationalbank's standpoints. The personnel policy covers all employees, who are all expected to live up to and act in accordance with the policy. Managers hold staff responsibilities and are thus subject to a special obligation to implement the personnel policy.

THE NATIONALBANK'S MANAGEMENT

The Royal Bank Commissioner The Royal Bank Commissioner is the formal link between the Govern- ment and the Nationalbank. The Minister for Economic Affairs and for Nordic Cooperation Ms. Marianne Jelved is the Royal Bank Commis- sioner.

Board of Directors The Board of Directors has 25 members, of whom 8 are elected by the Folketing (Parliament) from among its members, and 2 are appointed by the Minister for Economic Affairs. 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 professions, 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 2001 is shown in Box 10.

The Committee of Directors The Committee of Directors has 7 members. The two members of the Board of Directors appointed by the Minister for Economic Affairs are permanent members. On the election of the other 5 members of the Committee of Directors, it is customary for the Board of Directors to elect two MPs representing the government and the opposition parties, respectively. The Committee of Directors usually meets 10 times a year. The Committee of Directors of Danmarks Nationalbank as of 1 March 2001 is shown in Box 11.

Board of Governors The Board of Governors has 3 members. The governors are charged with the day-to-day management of the Nationalbank and are responsible for the formulation and ongoing adjustment of monetary policy. As 103

THE BOARD OF DIRECTORS OF DANMARKS NATIONALBANK, 1 MARCH 2001 Box 10

Chairman: Hans E. Zeuthen, Professor Deputy Chairman: Helle Bechgaard, Regional Manager, Ph.D. (Pharm.)

Elected by the Folketing for the period ending 31 March 2001: Elisabeth Arnold, MP Pia Christmas-Møller, MP Pernille Blach Hansen, MP Jes Lunde, MP Christian Mejdahl, MP Jan Petersen, MP Anders Fogh Rasmussen, MP Gitte Seeberg, MP

Appointed by the Royal Bank Commissioner for the period ending 31 March 2001: Michael Dithmer, Permanent Secretary, Ministry of Economic Affairs Karsten Olsen, Former Deputy Permanent Secretary

Elected by the Board of Directors: For periods ending 31 March Johannes Fløystrup Jensen, Managing Director 2001 Finn Thorgrimson, Former President of the Trade Union Federation 2001 Margit Vognsen, Vice-President of the Danish Trade Union of Public Employees 2001 Jette W. Knudsen, Managing Director 2002 Kjeld Larsen, Farmer 2002 Kirsten Nielsen, President of the Consumer Council 2002 Søren Bjerre-Nielsen, Group President 2003 Knud Koch Jensen, Engineer 2003 Helge Sørensen, Civil Engineer 2003 Bent le Fèvre, General Manager 2004 Jens Rostrup-Nielsen, Director, R&D Division, dr. techn. 2004 Hans E. Zeuthen, Professor 2004 Helle Bechgaard, Regional Manager, Ph.D. (Pharm.) 2005 B. Frank Nielsen, General Manager 2005 Kirsten Stallknecht, Chairman of ICN 2005

Governor by Royal Appointment Ms. Bodil Nyboe Andersen is Chairman of the Board of Governors. 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.

Auditors The appointed external auditors of the Nationalbank are State- Authorised Public Accountant Mr. Bjarne Fabienke and State-Authorised Public Accountant Mr. Svend Ørjan Jensen. 104

THE COMMITTEE OF DIRECTORS OF DANMARKS NATIONALBANK, 1 MARCH 2001 Box 11

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

Elected by the Board of Directors for the period ending 31 March 2001: Søren Bjerre-Nielsen, Group President Pernille Blach Hansen, MP Anders Fogh Rasmussen, MP Margit Vognsen, Vice-President of the Danish Trade Union of Public Employees Hans E. Zeuthen, Professor

Appointed by the Royal Bank Commissioner for the period ending 31 March 2001: Michael Dithmer, Permanent Secretary, Ministry of Economic Affairs Karsten Olsen, Former Deputy Permanent Secretary

DEPARTMENTS

The Nationalbank has 16 departments, cf. the organisation chart on p. 107. The tasks of the individual departments are as follow:

• 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 the Nationalbank's payroll administration and prepares its budgets and accounts. It also undertakes settlement and bookkeeping of transactions concerning the Nationalbank's foreign-exchange and bond portfolios, and the central-government debt. • Audit undertakes the audit of the Nationalbank's accounts, including the Nationalbank's Pension Fund and various foundations, in cooperation with the appointed external auditors. It also audits the Guarantee Fund for Depositors and Investors, the Social Pension Fund and the government debt management in cooperation with the Auditor General. • Banking Services supplies banknotes to Denmark, the Faroe Islands and 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 105

Banknote Printing Works also participates in international cooperation on improving the security of banknotes. • Economics assesses economic development in Denmark and in the industrialised countries, with special focus on monetary and foreign- exchange policy issues. The economic model MONA has been developed by the bank for analysis of domestic cyclical trends. Economics edits the Nationalbank's quarterly Monetary Review. • Facility Services is responsible for the administration and maintenance of the Nationalbank's properties and for messengers, postal services, watchmen, cleaning and canteen services, etc. • Financial Markets is responsible for evaluation and management of the Nationalbank's positions and the related market analyses. The department prepares outline strategies for the government debt management and analyses trends on the financial markets and in the Danish financial sector. It also assists in the preparation of legislation in these areas. Financial Markets publishes Government Borrowing and Debt and an annual analysis of Financial Stability in the quarterly Monetary Review. • International Relations is responsible for relations with international economic organisations, including the European Central Bank within the European System of Central Banks, and the International Monet- ary Fund. • IT is responsible for the bank's IT strategy and for purchasing, installing, operating and maintaining the Nationalbank's local area networks and PC workstations. It is also responsible for the Nationalbank's program development, and participates in the IT development projects of the other departments of the bank, is co- responsible for IT supplier relations and undertakes administration of users of the Nationalbank's local area networks and financial systems. • Market Operations undertakes the day-to-day administration of the Nationalbank's foreign-exchange policy and monetary and liquidity policy, including intervention in the foreign-exchange and money markets. It is responsible for the administration of the Nationalbank's bond portfolio and foreign-exchange reserve. On behalf of the Ministry of Finance it undertakes domestic and foreign borrowing for the central government. • Payment Systems handles policy issues relating to payment systems. It cooperates with owners and operators of the Danish retail payment and settlement systems and develops and maintains the Nationalbank's real-time gross settlement systems for large krone- and euro-denominated payments. 106

• Personnel and Organisation is responsible for personnel policy and staff development, collective agreements and other contracts, as well as personnel administration. The department also has general organisational duties such as administration of internal training. • The Royal Mint manufactures Danish coins and supplies banks in Denmark, the Faroe Islands and Greenland with coins. In addition to ordinary coins in circulation, commemorative 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 the Nationalbank's Web site, intranet and library. The Information Desk responds to general external enquiries. The Secretariat also comprises the Nationalbank's central archives. Legal Affairs handles general legal issues, including EU law. The Secretariat edits Danmarks Nationalbank's Report and Accounts. • Security is responsible for the bank's security, including IT security. • Statistics prepares statistics for the financial sector, registers and analyses payments to and from abroad for use in the compilation of the balance of payments, and compiles Denmark's foreign debt and direct investments. Statistics edits and publishes the Nyt series and other regular statistical publications. 107

ORGANISATION CHART 1 MARCH 2001

Accounting Board of Directors Director, Chief Accountant 25 members Henrik Larsen Head of Division Jan Thorndal Committee of Directors Audit Government Debt 7 members Accounting Chief Auditor Peter Jochimsen Head of Division Viggo Sørensen*) Board of Governors Secretariat Banking Services Governor by Royal Appointment, Head of Secretariat Chairman Chief Cashier Bjarne Skafte Tage Heering Bodil Nyboe Andersen Head of Division Legal Affairs Mogens Brink Head of Division Kirsten Rohde Jensen Governor Torben Nielsen Banknote Printing Works Economics Director, General Manager Governor Hans Kloch Director, Head of Economics Jens Thomsen Head of Division Anders Møller Christensen Flemming Gernsøe Head of Division Head of Division Hugo Frey Jensen Leif Yde

Financial Markets Facility Services Head of Financial Markets Head of Facility Services Benny Andersen Ejner Petersen Head of Division Head of Division Ib Hansen Erik Lundgreen Head of Division Security Ove Sten Jensen Head of Security Head of Division Leif Kjærgaard IT Jens Lundager Head of IT Søren Lundsby Hansen Statistics International Relations Assistant Governor, Director, Head of Payment Systems Head of Statistics International Relations Jørgen Ovi Kai Aaen Hansen Head of Payment Systems Head of Division Karsten Biltoft Head of Division Lars Gerrild Sørensen Niels Bartholdy

Personnel and The Royal Mint Organisation Market Operations General Manager Head of Market Operations Head of Personnel and Laust Grove Hans Denkov Organisation Flemming Farup Head of Division Ole Christian Hansen Head of Division John Larsen Head of Division Frank Nielsen Head of Division *) Viggo Sørensen, Head of Division, is also Head of the Secretariat for The Erik Pedersen Guarantee Fund for Depositors and Investors. 108

STAFF GROUPS Chart 37

16 per cent 23 per cent

15 per cent

23 per cent

Academic staff Bank staff IT/clerical staff Craftsmen/technicians Service staff

STAFF

Number, staff groups, seniority, age, etc. At the close of 2000 the Nationalbank had 605 employees, equivalent to 552 full-time positions. The bank has fairly equal numbers of academic staff, bank staff and IT/clerical staff, while craftsmen/technicians and service staff each account for a slightly smaller share, cf. Chart 37. During the past few years the proportion of academic staff, bank staff and IT/clerical staff has increased, reflecting an increase in the number of analytical tasks, the expansion of the financial statistics, and greater international cooperation. On the other hand, the craftsmen/technicians and service staff groups have diminished as a result of rationalisation measures, cf. Table 9.

STAFF GROUPS Tabel 9

Number of employees 1997 1998 1999 2000

Academic staff/bank staff/clerical staff ...... 333 341 357 373 Craftsmen/technicians/service staff ...... 249 228 202 179 Total ...... 582 569 559 552

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

22-03-01 08:43 Antal sider: 19 Rev. nr. 5 H:\alle\Aarsberetninger\2000\Engelsk\UK- til-tryk\side-100-118-Organisation and Tasks of the Nationalbank.doc Oprettet af Ulrikke Ekelund 109

SENIORITY Chart 38

Number 200

180

160

140

120

100

0 -5 years 5-9 years 10-14 years 15-19 years 20-24 years 25- years

In 2000, 53 new employees were taken on, and 65 left the Nationalbank, 16 of whom took their retirement. This is equivalent to a staff turnover rate of 11 per cent. The bank has a large number of staff with low seniority, cf. Chart 38. This inter alia reflects that many new staff members with an academic background have been recruited in recent years. In addition, the bank also employs more student assistants than previously. The high number of staff with more than 20 years' seniority shows that employment by the Nationalbank is often "for life". 46 per cent of the staff are women and 54 per cent men, cf. Chart 39. The proportion of women in managerial positions1 is 14 per cent.

Staff development It is in the joint interests, and the joint responsibility, of the management and staff that all employees develop their personal and professional skills on an ongoing basis. This is achieved through competence-enhancing, stimulating tasks, as well as supplementary training. Another key element is compulsory employee appraisal interviews. Academic staff and bank and clerical staff are subject to an internal job rotation scheme. It entails that ideally they should move on to new

1 Defined as at least Assistant Head of Division. 110

DISTRIBUTION BY AGE AND GENDER Chart 39

Number 180

160

140

120

100

0 - 30 years 30-39 years 40-49 years 50-59 years 60 - years Men Women

areas of work once or twice within the first 5 years of employment. This is planned in cooperation with the employee concerned. Em- ployees who have served the bank longer may also rotate to a new position. Employee development may also be shorter or longer periods of secondment to international financial institutions. At the close of 2000, 15 employees were on leave in connection with secondment. Expenditure on courses and supplementary training has increased in recent years. In 2000, kr. 8.8 million was spent on education and training, equivalent to 4.2 per cent of the total payroll costs. The average number of training days was 4 per employee. The breakdown of course expenditure is 42 per cent for professional courses, 24 per cent for personal development courses, 9 per cent for IT courses, and the rest for other courses and internal seminars. In 2000 the bank established an internal instructor team to hold both professional courses and courses in personal development. Average training costs were approximately kr. 15,000 per employee in 2000. Employees with higher or intermediate educational qualifications account for the largest proportion of expenditure on courses, while course expenditure for employees with other educational backgrounds was considerably lower, cf. Chart 40. The high average expenditure in the first- mentioned group relates to managerial training and professional courses, some of which took place abroad. However, the bank's 111

AVERAGE COURSE EXPENDITURE PER EMPLOYEE Chart 40

Kr. 25,000

20,000

15,000

10,000

5,000

0 Academic staff Bank staff IT staff Technical staff Others

greater use of the project model, cf. p. 113, has resulted in higher expenditure on project manager training for employees with higher or intermediate educational qualifications. Since lifelong skills development within and outside the bank is part of the bank's personnel policy, the training of employees with lower educational qualifications will continue to receive priority. Annual appraisal interviews are held with each employee by his/her superior in order to discuss the work situation of the employee. This system comprises all employees and was reviewed in 1999, and now includes setting goals for each employee in order to achieve a balance between the expectations of each employee and the skills and expertise required for the job. For employees covered by the job rotation scheme, planning interviews are also held, starting after approximately 2 years' employment. Participants are the employee and his/her superior, but also a re- presentative from Personnel and Organisation. The purpose of the inter- view is to hear and assess the wishes, expectations and opportunities of each employee, in order to plan his/her professional and personal development in as much detail as possible.

Absence due to illness In 2000 absence due to illness was an average of 8.1 days per employee. More attention has been paid to absence due to illness, e.g. via inter- 112 views with employees who are absent on grounds of illness for many days of the year.

Salary and employment conditions All employees of the Nationalbank – except those employed by the Banknote Printing Works – are subject to a collective agreement between the Nationalbank and the Nationalbank's Staff Association. The agreement is based on the terms and conditions applying to the financial sector. The agreement is subject to renegotiation in 2001. In 2000 the collective agreement for employees of the Banknote Printing Works was renegotiated, and a 4-year agreement was signed with the Industry sector of the Union of Commercial and Clerical Employees in Denmark (HK).

INFORMATION TECHNOLOGY

The Nationalbank regards information technology as a fundamental prerequisite for the high-quality, efficient and secure performance of the bank's business functions. The bank's IT strategy lays down the overall rules for the use of IT within the Nationalbank. In addition, the IT strategy determines future areas of IT application. In 2001 these include enhancement and modernisation of the bank's local area network, ongoing improvement of the helpdesk and support for internal users, and strengthening of IT project work within the Natio- nalbank. The high IT security requirements to which the Nationalbank is subject will continue to be expanded in accordance with the guidelines laid down by Security.

Organisation IT functions within the Nationalbank are split into two areas. The local area network is operated by Information Technology, which employs almost 30 people. A number of business-critical systems are developed in cooperation with, and operated by, Bankernes Edb Central, BEC. In addition, the Nationalbank, like the other non-euro-area EU central banks, exchanges various data with the ECB in Frankfurt. During 2000 the Nationalbank carried out the reorganisation of Infor- mation Technology in order to ensure optimum service to users. Information Technology is currently upgrading and modernising the local area network by laying new IT cables, establishing new server rooms and a server complex, and upgrading the bank's PCs to the latest versions of operating and office systems. 113

Systems development and choice of solutions In future the Nationalbank will seek to use standard systems and technologies, rather than customised solutions, when this is professionally and technically justifiable. In the areas where the Nationalbank uses and will use standard systems and technologies, these should be as close as possible to the current market standard within the area. The objective is to achieve a homogeneous complex of systems which is independent of particular individuals and suppliers.

Projects and the project organisation The Nationalbank will conclude a number of large IT projects related to payment systems and statistics in 2001, cf. pp. 79f and 95. In recent years the Nationalbank has focused on the organisation of IT projects. The aim is to ensure that the overall priorities correspond to the business priorities, and that projects take place within the framework laid down. An overall body to allocate priority to the Nationalbank's IT projects and handle general IT issues has been set up. A practical and feasible IT project model and related IT project reporting has been defined. This is to significantly reduce the risk of stranded IT projects. The responsibility for completion of IT projects has been moved from Information Technology to the various business areas, in order to ensure better fulfilment of business requirements.

SPECIAL TASKS IN 2000

Euro The referendum on Denmark's adoption of the single currency, the euro, which was called in March 2000, had a significant impact on the work of most departments of the Nationalbank. Had Denmark decided to adopt the euro, the Nationalbank would have been required to undertake extensive restructuring measures within a very short period. In 1999 the Nationalbank participated in the preparation of a changeover plan detailing Denmark's changeover to the euro in the event of Danish participation, cf. the 1999 Annual Report, p. 81. In May 2000 the government presented a bill on Denmark's adoption of the single currency. The bill meant that in the event of a referendum result in favour of adoption of the euro Denmark would be able to join the euro area from 1 January 2002. Euro banknotes and coins would be introduced from 1 January 2004, after which krone-denominated bank- 114 notes and coins would be withdrawn from circulation. This would have given the Nationalbank just over one year to make the necessary changes prior to the introduction of the euro in Denmark, and a further two years to produce the required initial stock of euro banknotes and coins. In view of the short time available for preparation after a referendum result in favour of adoption of the euro an internal EMU contingency plan was drawn up prior to the referendum. The plan identified the projects, especially in the IT area, that would be required. Some of these would have had to be carried out anyway – partly as a result of the ongoing work on international standards, and partly as an element of the general upgrading of the IT systems, but the timing of these projects was critically dependent on the outcome of the referendum. After the referendum outcome not to adopt the euro on 28 September 2000 these projects therefore continued, but the time schedules were revised, and in some cases also the structure of the projects. However, the majority of the projects under the EMU contingency plan were shelved. As part of these preparations the Nationalbank also presented a preliminary design of Danish euro coins, cf. p. 74. The referendum is presented in detail on p. 82.

REPRESENTATION ON COMMITTEES, ETC.

As of 1 March 2001 the Nationalbank is represented on the following committees, etc.:

Financing institutes • Danish Ship Finance Former Governor Ole Thomasen is a member of the Board of Directors and the Board of Representatives. Mr. Max Bæhring and Professor Michael Møller are members of the Board of Representatives. • GrønlandsBANKEN A/S Former Governor Ole Thomasen is elected to the Board of Directors. • The Nordic Investment Bank Hans Denkov, Head of Market Operations, is an alternate member of the Board of Directors.

Securities market institutions • The Securities Market Council Governor Jens Thomsen. Ove Sten Jensen, Head of Division, is an alternate member. • VP A/S - The Danish Securities Centre Governor Torben Nielsen is Vice Chairman of the Board of Directors. 115

Other institutions • Managing Committee for the Social Pension Fund Hans Denkov, Head of Market Operations. • The Economic Council Governor Jens Thomsen.

REPRESENTATION IN INTERNATIONAL ORGANISATIONS

As a element 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 Economic and Financial Committee Governor Jens Thomsen (with Michael Dithmer, Permanent Secretary, Ministry of Economic Affairs). Niels Bartholdy, Head of Division, is an alternate member of the Com- mittee (with Henrik Fugmann, Deputy Secretary, Ministry of Economic Affairs). • The Economic Policy Committee Hugo Frey Jensen, Head of Division, (with Per Bremer Rasmussen, Deputy Secretary, and Thomas Alslev Christensen, Director, Ministry of Economic Affairs, and Per Callesen, Deputy Secretary, Ministry of Finance). • The Banking Advisory Committee Benny Andersen, Head of Financial Markets (with Torben Garne, Director, Ministry of Economic Affairs, and Henrik Bjerre-Nielsen, Director General, Financial Supervisory Authority). • The Working Group of Mint Directors Laust Grove, General Manager, the Royal Mint, and Thomas Enevold- sen, Head of Section.

The European Central Bank, ECB • The General Council Governor Bodil Nyboe Andersen.

The Nationalbank participates partly in the following ECB committees: • Accounting Committee Henrik Larsen, Director, Chief Accountant, and Lisbeth Sundin, Assis- tant Head of Division. 116

• Banking Supervision Committee Benny Andersen, Head of Financial Markets (with Henrik Bjerre-Nielsen, Director General, Financial Supervisory Authority). • Banknote Committee Hans Kloch, Director, General Manager, and Tage Heering, Head of Division. • External Communications Committee Bjarne Skafte, Head of Secretariat, and Winnie Jakobsen, Assistant Head of Division. • Information Technology Committee Søren Lundsby Hansen, Head of Information Technology, and Kristian Kjeldsen, Assistant Head of Division. • Internal Auditors Committee Peter Jochimsen, Chief Auditor, and Stephan Green Löwe, Head of Sec- tion. • International Relations Committee Governor Jens Thomsen and Kai Aaen Hansen, Director, Head of Inter- national Relations. • Legal Committee Kirsten Rohde Jensen, Head of Division. • Market Operations Committee Frank Nielsen, Head of Division. • Monetary Policy Committee Hugo Frey Jensen, Head of Division. • Payment Systems Committee Karsten Biltoft, Head of Payment Systems, and Allan Damm Christensen, Adviser. • Statistics Committee Jørgen Ovi, Assistant Governor, Head of Statistics.

The International Monetary Fund, IMF • Board of Governors Governor Bodil Nyboe Andersen is the Danish member. (Michael Dith- mer, Permanent Secretary, Ministry of Economic Affairs, is an alternate member). • The Nordic/Baltic Monetary and Financial Committee Governor Jens Thomsen (with Michael Dithmer, Permanent Secretary, Ministry of Economic Affairs) and Kai Aaen Hansen, Director, Head of International Relations, who is Chairman of the Group of Alternate Members. 117

Senior Adviser Ole Hollensen is a member of the Group of Alternate Members (with Henrik Fugmann, Deputy Secretary, Ministry of Economic Affairs).

Organisation for Economic Cooperation and Development, OECD • The Economic Policy Committee Governor Jens Thomsen (with Michael Dithmer, Permanent Secretary, Ministry of Economic Affairs, and Anders Eldrup, Permanent Secretary, Ministry of Finance).

DANMARKS NATIONALBANK'S ANNIVERSARY FOUNDATION OF 1968

In 2000 the Foundation's honorary grant was awarded to Mr. Austin Grandjean, graphic designer, who received kr. 100,000. The honorary grant was presented at the Danish Museum of Decorative Art in Copen- hagen in connection with the opening of "Syn for sagn" – an exhibition of Austin Grandjean's typography and other expressions of graphic design. The purpose of the Anniversary Foundation is to extend financial support for the promotion and development of the artistic design and presentation of Danish products and to support other artistic areas, mainly decorative art, architecture and design, but also music and dance. In 2000 total grants amounted to kr. 4.8 million. Of 1,297 applications, 156 were granted. In addition 8 grants without prior application were made. On 1 March 2001 the Board of the Foundation comprised Governor Bodil Nyboe Andersen (Chairman), Professor Hans E. Zeuthen (Deputy Chairman), Director Bodil Busk Laursen, Attorney-at-law Per Magid, Art historian Bente Scavenius and Arcitect, industrial designer Teit Wey- landt. Ms. Bente Scavenius retires on 31 March 2001 and is replaced by Ceramist Karen Bennicke.

THE NATIONALBANK'S GUEST APARTMENTS AT NYHAVN 18

The 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 from three months up to one year. In 2000 the guest apartments at Nyhavn 18 were allocated to 13 vi- sitors. 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. 118

THE ERIK HOFFMEYER TRAVEL GRANT FOUNDATION

In 2000 the Erik Hoffmeyer Travel Grant Foundation awarded grants to the pianist Nikolaj Koppel and the goldsmith Quan Duc Tien. They each received a grant of kr. 40,000 for further studies abroad. The Erik Hoffmeyer Travel Grant Foundation was established by the Board of Directors of the Nationalbank in 1995 as a tribute to Mr. Erik Hoffmeyer for 30 years' outstanding service as Chairman of the Natio- nalbank's Board of Governors. The establishment and objective of the Foundation are described in the 1995 Annual Report. The Board of the Travel Grant Foundation comprises Professor Hans E. Zeuthen (Chairman), Former Governor Erik Hoffmeyer and Former Chief Rabbi Bent Melchior. 119

Report on Danmarks Nationalbank's Accounts

The Nationalbank's financial risks mainly comprise market risks. The market risk is related primarily to the interest-rate and foreign- exchange sensitivity. The interest-rate sensitivity was augmented during the year. Euro-denominated assets account for the major part of the foreign-exchange sensitivity. The credit risk is very small, since the Nationalbank exclusively holds claims on counterparties with a high credit standing, and to a significant extent requires the pledging of collateral. The Nationalbank's accounts for 2000 show a profit of kr. 5.7 billion, compared to kr. 1.5 billion in 1999. The improvement is related mainly to the increase in value adjustments by kr. 4.4 billion to kr. 1.3 billion. Of the profit for the year, kr. 3.1 billion is payable to the central government. The Nationalbank's net capital has increased by kr. 2.7 billion to kr. 44.4 billion in 2000.

THE NATIONALBANK'S MANAGEMENT OF FINANCIAL RISKS

The Nationalbank holds financial assets and liabilities. This entails that the Nationalbank is exposed to a number of financial risks which can af- fect the financial result. The principal assets are foreign deposits and securities, domestic bonds and loans to Danish banks. The principal liabilities are banknotes and coins in circulation, deposits and certificates of deposit, and the deposits of the central government. The Nationalbank is primarily exposed to market risks and to a lesser degree to other types of risk, e.g. credit risks.

Market risk The market risk is the risk of the Nationalbank suffering a loss as a consequence of price fluctuations on the financial markets. The nature of the Nationalbank's financial assets and liabilities entails that losses will arise primarily as a consequence of fluctuations in interest and exchange rates. Generally, a distinction is drawn between sensitivity and risk. Sensi- tivity is the extent to which the Nationalbank will incur losses on a given change in a specific risk factor, such as the interest rate. The compilation 120

INTEREST-RATE SENSITIVITY OF THE NATIONALBANK Table 10

Capital loss in kr. billion on a general 1-per-cent increase in interest rates End-1999 End-2000

Kroner ...... 1.1 1.3 Euro ...... 0.9 1.1 Pound sterling ...... 0.2 0.2 Dollar ...... 0.5 0.8 Yen ...... 0.2 0.1 Total ...... 2.8 3.4

of the foreign-exchange sensitivity is based on market values of foreign- exchange outstandings. Interest-rate sensitivity indicates the capital loss to the Nationalbank as a consequence of an increase in interest rates by 1 percentage point. On compiling the risk the probability of losses is evaluated by combining sensitivity with the probability of a change in the risk factor concerned. For example, Value-at-Risk is used to compile the total market risk. It indicates the maximum loss that with a given probability can be expected within a given time frame.

Interest-rate risk The interest-rate risk indicates the capital loss which the Nationalbank will suffer as a consequence of a change in interest rates. For the Nationalbank, which holds significantly more fixed-rate assets than liabilities, an increase in interest rates will impose a loss. Experience shows that in the long term fixed-rate bonds yield higher returns than placements at floating interest rates. Over an extended period, the bank will therefore increase its return by assuming a certain interest- rate risk.

At the beginning of 2000 the interest-rate sensitivity of the domestic and foreign portfolios was augmented by kr. 0.5 billion to kr. 3.4 billion, cf. Table 10. The sensitivity to changes in interest rates of the foreign portfolio was 63 per cent of the total interest-rate sensitivity at the end of 2000. The sensitivity to changes in Danish interest rates can be related to the Nationalbank's portfolio of securities, comprising government bonds, Danish Ship Finance bonds, and municipal- and mortgage-credit bonds. Mortgage-credit bonds are usually callable, and the compilation of the interest-rate sensitivity of these bonds takes the bonds' call option into account. 121

FOREIGN-EXCHANGE EXPOSURE OF THE NATIONALBANK Table 11

End-2000

End-1999 Forward Market value, kr. billion total Placements contracts Total

Euro ...... 164 70 57 127 Pound sterling ...... 1 9 - 7 2 Dollar ...... 0 36 - 37 -2 Yen ...... 2 9 - 8 1 Gold ...... 5 5 0 5 Total ...... 172 130 5 134

Note: Negative amounts indicate that the Nationalbank holds liabilities. The value of SDR is distributed on the respective currencies.

Foreign-exchange risk Foreign-exchange risk is the risk of capital losses as a consequence of fluctuations in exchange rates. The Nationalbank holds considerable foreign-exchange assets, first and foremost the foreign-exchange reserve. Like other central banks, the Nationalbank therefore cannot avoid exposure to a foreign-exchange risk. The exchange-rate risk on the foreign-exchange-denominated assets is limited by forward sale of dollars, sterling and yen against euro. This re- duces the exchange-rate risk on the Nationalbank's bond and money- market placements in those currencies. For example, at the close of 2000 the Nationalbank held pound sterling assets for kr. 9 billion, but had sold sterling forward for kr. 7 billion. The total net sterling outstandings thereby amounted to kr. 2 billion in net terms. The Nationalbank's foreign-exchange sensitivity almost entirely concerns the euro, cf. Table 11. The bank's profit is thus to only a moderate degree affected by fluctuations in the krone's exchange rate vis-à-vis the dollar, yen and pound sterling. The Nationalbank's foreign-exchange outstandings had fallen by kr. 38 billion to kr. 134 billion at end-2000. This decline is related mainly to the foreign-exchange reserve. Since 1992 the Nationalbank's foreign-exchange risk has been subject to coordinated management with the foreign-exchange risk of the central government's foreign debt. The net position, i.e. the difference between the Nationalbank's foreign-exchange-denominated assets and the central government's foreign-exchange-denominated liabilities, has in recent years been primarily in the euro. In view of the Danish fixed-exchange-rate policy the euro is found to be the currency entailing the lowest risk. As the exchange-rate risk on the central government's liabilities and the Nationalbank's assets is primarily in 122

THE NATIONALBANK'S VALUE-AT-RISK Table 12

Value-at-Risk in kr. billion with a 1-year horizon End-1999 End-2000

Interest-rate risk...... 3.6 3.0 Exchange-rate risk...... 1.1 1.2 Gold...... 1.6 1.0 Reduction due to diversification ...... -2.2 -1.9 Total ...... 4.1 3.2

Note: For the sake of comparison the same calculation technique for both 1999 and 2000 is used. Therefore the figures for 1999 deviate from the equivalent VaR figures in the 1999 Annual Report, cf. also footnote 1.

euro, the coordinated management was discontinued at the beginning of 2001. It is still the objective not to raise loans in one currency and then place the proceeds in another currency and thus not to expose the central government to a considerable indirect exchange-rate risk via the Nationalbank.

Calculation of market risk In order to evaluate the market risk the Nationalbank employs various risk measures. One of these is Value-at-Risk (VaR), which besides the probability of interest and exchange-rate losses based on historical fluctuations also includes the covariation between them. VaR is supplemented with stress scenarios to calculate the impact on the portfolio of extreme fluctuations in interest and exchange rates. At the close of 2000 the Nationalbank's VaR was kr. 3.2 billion1, cf. Table 12. There was thus only a 5 per cent probability that during the coming year the Nationalbank will have total losses exceeding kr. 3.2 billion. At the close of 1999 VaR was kr. 4.1 billion. The decrease in VaR is related to the reduced volatility of the financial markets in 2000 compared to 1999. The exchange-rate risk on the euro is not a traditional market risk, since the Nationalbank not only may, but is also obliged to, influence the krone/euro rate. The Nationalbank will only sustain a loss if the krone strengthens against the euro. It can therefore be of interest to evaluate VaR without the exchange-rate risk related to the euro. VaR excluding the exchange-rate risk on the euro is kr. 2.8 billion. Elimination of the exchange-rate risk related to the euro thus entails a decrease in VaR by 10 per cent.

1 VaR is calculated on the basis of estimated volatilities and correlations between relevant risk factors for the last 160 days. VaR is determined by combining these estimates with the portfolio composition at end-2000. The implementation of new software in 2000 to calculate VaR has made it possible to include the gold stock in the VaR calculations. 123

Liquidity risk The principal purpose of the foreign-exchange reserve is for the Nationalbank 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 quickly be converted to liquid funds. Therefore a large proportion of the reserve is placed in the money market or in bonds with a high degree of security and liquidity, so that they can easily be realised or used as collateral in various liquid markets. The placement of the domestic securities portfolio does not take the liquidity aspect into consideration. The Nationalbank also has access to liquidity via the central government's Commercial Paper programme amounting to 12 billion dollars. Moreover, there is an opportunity to borrow at the ECB in accordance with the ERM II agreement.

Credit risk The credit risk is the risk of loss due to a counterparty's default on obligations. To reduce the credit risk the Nationalbank seeks to spread its assets among counterparties with a high credit standing. Moreover, to a large extent collateral is required. The credit risk is therefore very small. The credit risk on the foreign claims, i.e. claims on foreign governments, banks, etc., is managed on the basis of the ratings given by international rating agencies. Moreover, all significant outstandings are subject to maximum limits. For deposits with foreign banks repo agreements with government bonds as collateral are used to a great extent. Should a repo counterparty be subject to compulsory liquidation, the Nationalbank's deposit is covered by the collateral provided. The Nationalbank's foreign bond holdings are issued or guaranteed1 by states with a high rating, or issued by supranational institutions. The Nationalbank thus does not hold corporate bonds or bonds issued by governments with a low credit rating. The credit risk on domestic assets is reduced via collateral requirements. When Danish banks borrow at the Nationalbank, they provide bonds as collateral. This applies to loans related to the monetary-policy operations, the banks' intra-day credits and cash depots.

1 The government-guaranteed securities include securities with an implicit government guarantee. 124

TOTAL CREDIT EXPOSURE ON THE FOREIGN-EXCHANGE RESERVE AND THE DOMESTIC SECURITIES PORTFOLIO, ETC., END-2000 Table 13

Bonds Bank claims Supra- national 1999 Govern- Collater- Uncollater- institu- Kr. billion Total ments Others alised alised tions Total

Aaa ...... 73.4 51.4 10.7 - 2.8 1.6 66.6 Aa1 ...... 17.2 5.9 1.2 0.4 3.4 - 11.0 Aa2 ...... 13.5 0 0.9 5.0 6.5 - 12.4 Aa3 ...... 63.4 11.7 13.4 14.7 12.9 - 52.8 A1 ...... 3.8 - - 3.4 1.8 - 5.1 A2 ...... 3.0 - - - 2.2 - 2.2 A3 ...... 0.2 - - 2.4 - - 2.4 Not rating ...... 28.8 - 6.6 1 1.4 0.2 7.5 2 15.7

Total ...... 203.3 69.1 32.7 27.3 29.8 9.1 168.0

Note: Moody's credit rating is used. 1 A few Danish mortgage-credit institutes and similar. 2 Solely covers BIS and IMF.

On placement of the domestic securities portfolio great weight is at- tached to the high credit standing of the issuers. The securities portfolio thus almost exclusively comprises government bonds, mortgage-credit bonds and Danish Ship Finance bonds. Since approximately 90 per cent of the foreign-exchange reserve and the domestic securities portfolio are placed with supranational institutions or in assets with a rating of Aa3 or higher, the credit risk is very small, cf. Table 13.

PRESENTATION OF THE NATIONALBANK'S ACCOUNTS

The Nationalbank's Accounts with notes are shown on pp. 131-139. The accounts for 2000 have been prepared in accordance with the same accounting policies as in the previous year. The accounts reflect that the Nationalbank issues banknotes and coins, administers the foreign-exchange reserve and functions as banker to the banks and the mortgage-credit institutes, and to the central government. In 2000 the profit from financial items was kr. 6,299 million and thereby kr. 4,366 million higher than in 1999. The significant increase primarily reflects positive value adjustments of kr. 1,343 million, compared to negative value adjustments of kr. 3,081 million in 1999, equivalent to an improvement by kr. 4,424 million in total. After expenses of kr. 556 million and other expenditure on ordinary operations of kr. 20 million, the profit for the year was kr. 5,724 million, or kr. 4,252 million more than in 1999. 125

The balance sheet has decreased from kr. 281.8 billion to kr. 237.0 billion, primarily reflecting the bank's sales of foreign exchange.

The profit and loss account Net income from interest Net income from interest totalled kr. 4,956 million, which is kr. 58 million less than in 1999. Income from interest on foreign assets rose by kr. 296 million to kr. 5,815 million. The increase is a consequence of generally higher interest rates than in 1999, while the foreign-exchange reserve on average was kr. 20 billion less in 2000 than in 1999. Net interest to banks and mortgage-credit institutes (interest on deposits and certificates of deposits less interest on lending) was kr. 983 million, compared to kr. 1,148 million in 1999. The rates of interest for certificates of deposits and lending are identical, while the rate of interest for deposits is lower. The interest rates have all been significantly higher than the equivalent rates for 1999. The decrease in the total net interest expenditure of kr. 165 million is related to the fact that the average net position of the banks and mortgage-credit institutes vis-à-vis the Nationalbank has been significantly lower in 2000 than in 1999, cf. p. 38. This is, however, partly setoff by higher interest rates. The Nationalbanks interest expenditure on the central government's deposit rose by kr. 364 million to kr. 2,192 million. The deposit was on average lower than in the preceding year, while the discount rate, which is the rate of interest on the deposit, was higher. Interest on loans to other borrowers fell by kr. 12 billion to kr. 175 million. The change can be attributed to a decrease by kr. 72 million because the Danish Export Finance Corporation redeemed all loans during 1999, and an increase of kr. 60 million from currency swaps with theDanish Ship Finance. The increase of kr. 60 million is related mainly to the settlement of income from interest at a higher dollar rate than in 1999. Interest to other depositors, etc., rose by kr. 84 million to kr. 294 million, primarily as a consequence of the fact that the Nationalbank took over additional amounts under the existing commitments vis-à-vis the Danish Ship Finance, i.e. index-linked loans for a total value of kr. 3,066 million in 1999 and kr. 500 million in 2000, cf. also the 1997 Annual Report, p. 96. Interest and dividend on bonds and shares, etc. are by and large unchanged at kr. 2,563 million.

Value adjustments, etc. Value adjustments, etc., resulted in a gain of kr. 1,343 million. 126

Value adjustment of the Nationalbank's gold stock gave a gain of kr. 116 million, which is related to a an increase in the dollar by 8.4 per cent, while the price of gold in dollars fell by 5.4 per cent. The value adjustment of foreign-exchange positions comprises the value adjustment of the foreign-exchange reserve, as well as value adjustment of 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. The value adjustment gave a gain of kr. 1,126 million, which can be attributed to an exchange-rate gain of kr. 280 million and a market-value gain of kr. 846 million. The exchange-rate gain is related primarily to an exchange-rate gain in euro and SDR and an exchange-rate loss in dollar. The value adjustment of (domestic) bonds and shares gave a total gain of kr. 101 million, of which the gain on bonds was kr. 68 million, while the gain on sale of shares in Dansk Udviklingsfinansering A/S realised kr. 39 million. This was equivalent to the sales proceeds, since the Nationalbank's share portfolio was included in the accounts at kr. 1 per shareholding. Moreover, share acquisitions in VP A/S-The Danish Se- curities Centre and SWIFT were written down by a total of kr. 6 million, to kr. 1 per shareholding. The market-value gain on domestic and foreign bonds can be related to the general decrease in long-term interest rates, which is set off partly by 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.

Expenses Total expenses increased by kr. 11 million to kr. 556 million, or 2.0 per cent. Staff expenses fell by kr. 5 million to kr. 293 million. Of this decrease kr. 9 million, equivalent to 3.2 per cent, constitutes an increase in wages, salaries and fees, and other staff expenses, and kr. 14 million a decrease in the provision carried as expenditure for support and severance schemes. Other expenses rose by kr. 16 million to kr. 263 million, equivalent to an increase of 6.5 per cent.

Other expenditure on ordinary operations A commemorative coin was issued on the occasion of Queen Margrethe's 60th birthday on 16 April 2000. Since claims for encashment of the com- 127 memorative coin are considered unlikely, on the issue of the commemorative coin an estimated profit of kr. 19 million is distributed at half to the Crown and at half to the Ministry of Economic Affairs for charitable purposes, cf. p. 70.

Result for the year The result for the year is a profit of kr. 5,724 million, against a profit of kr. 1,472 million in 1999. In accordance with the practice for allocation of profits the gain on value adjustments of kr. 1,343 million is allocated to the Value Adjustment Reserve, which hereafter amounts to kr. 1,363 million. An amount of kr. 1,314 million is allocated to the General Reserves, corresponding to 30 per cent of the profit excluding value adjustments. The General Reserves hereafter total kr. 42,753 million. The remainder of kr. 3,066 million is payable to the central government.

The balance sheet Stock of gold The stock of gold amounted to kr. 4.7 billion at the end of the year, compared to kr. 4.6 billion in 1999. The increase is related to the increase in the price of gold in kroner during 2000.

Foreign assets Assets amounted to kr. 110.8 billion at the end of the year, compared to kr. 154.7 billion in 1999. This is equivalent to a decrease of 28 per cent. The assets are placed in euro, dollars, pound sterling and yen. The positions are held mainly in highly-rated government bonds, government-guaranteed bonds, deposits with central banks and commercial banks, or as lending against collateral in government bonds. Foreign assets are the most significant item of the foreign-exchange reserve, together with the stock of gold, claims on the IMF and foreign liabilities.

Claims on the International Monetary Fund (IMF) The balance-sheet item comprises Danmark's IMF quota less the IMF's holdings of Danish kroner at the Nationalbank, with addition of the banks' holdings of Special Drawing Rights (SDR). During the year this asset decreased by kr. 3.3 billion to kr. 5.1 billion, which is related to the fact that at the request of the IMF a number of member countries have acquired SDR assets from the Nationalbank within the agreed limit, cf. the 1998 Annual Report, p. 93. More- 128 over, there was also an increase as a consequence of value adjustments.

Loans, etc. Loans mainly comprise accounts with banks and mortgage-credit institutes and must be evaluated together with the item deposits, etc., and certificates of deposit. The net assets of the banks and mortgage- credit institutes with the Nationalbank decreased during the year from kr. 68.3 billion to kr. 32.0 billion. This includes loans related to cash depots, which decreased from kr. 5.0 billion to kr. 2.7 billion.

Bonds and shares, etc. The holdings comprise domestic securities and constitute kr. 39.8 billion, which is an increase of kr. 2.1 billion from 1999. The holdings are primarily municipal-credit and mortgage-credit bonds (kr. 20.3 billion), government bonds (kr. 14.8 billion) and Danish Ship Finance bonds (kr. 4.7 billion). Shares and equivalent investments with an estimated market value of kr. 908 billion are included at kr. 1 per shareholding.

Banknotes and coins in circulation Banknotes in circulation decreased by kr. 1.8 billion to kr. 40.6 billion, while coins in circulation increased by kr. 0.1 billion to kr. 4.1 billion. Banknotes in circulation include Faroese notes at kr. 276 billion. A large proportion of the decrease in banknotes in circulation is related to the extraordinary large holdings by the banks in 1999 in connection with the safeguarding of cash supplies at the millennium rollover, cf. p. 69.

Foreign liabilities The liabilities increased by kr. 0.7 billion to kr. 3.1 billion and comprise krone deposits with the Nationalbank from supranational institutions and other central banks.

Counterpart of Special Drawing Rights (SDR) allocated by the IMF The allocation was unchanged during the year and the increase in the item by kr. 0.1 billion to kr. 1.9 billion solely reflects the value adjustment for the year.

Deposits, etc. Besides deposits from banks and mortgage-credit institutes of kr. 45.1 billion this item includes other deposits of kr. 7.3 billion, of which the account of the Danish Ship Finance is the largest at kr. 3.8 billion. 129

Certificates of deposit Certificates of deposit, which are the Nationalbank's short-term debt securities sold to banks and mortgage-credit institutes, fell by kr. 48.0 billion to kr. 51.9 billion.

Central government The central-government deposit decreased from kr. 39.7 billion to kr. 37.7 billion. The central government's share of the profit of the Nationalbank is included in this amount.

Net capital The net capital amounts to kr. 44,416 million, which is the net capital at the beginning of the year of kr. 41,758 million with addition of positive value adjustments of kr. 1,343 million and addition of a share of kr. 1,314 million of the result before value adjustments.

Copenhagen, end-February 2001

Bodil Nyboe Andersen Torben Nielsen Jens Thomsen

At its meeting of the Board of Directors held on 20 March 2001 the Board of Governors reported on the activities of the Nationalbank in 2000. The report was noted.

The Nationalbank's accounts for 2000 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.

131

Accounts for the Year 2000 132

PROFIT AND LOSS ACCOUNT FOR THE YEAR 2000

Note 2000 1999 kr. '000 kr. '000

Income from interest, etc.: Interest on foreign assets ...... 5,815,210 5,518,638 1 Interest on loans, etc...... 2,196,500 1,008,982 Interest and dividend on bonds and shares, etc..... 2,563,058 2,543,921 Commission and other income ...... 6,059 15,624 ______10,580,827 9,087,165 Expenditure on interest, etc.: Interest on foreign liabilities ...... 133,450 65,099 2 Interest on deposits, etc. and certificates of deposit ...... 5,491,211 4,007,796 ______5,624,661 4,072,895 ______Net income from interest ...... 4,956,166 5,014,270

Value adjustments, etc.: Value adjustment of gold ...... 115,818 635,925 Value adjustment of foreign assets ...... 1,126,223 -2,683,684 3 Value adjustment of bonds and shares, etc...... 100,891 -1,033,727 ______1,342,932 -3,081,486 ______Profit from financial items ...... 6,299,098 1,932,784 133

PROFIT AND LOSS ACCOUNT FOR THE YEAR 2000

Note 2000 1999 kr. '000 kr. '000

Profit from financial items ...... 6,299,098 1,932,784

Other income from ordinary operations ...... - 84,284

Expenses: 4 Staff expenses ...... 292,818 297,999 5 Other expenses ...... 263,241 246,926 ______556,059 544,925

6 Other expenditure on ordinary operations ...... 19,532 - ______Profit for the year...... 5,723,507 1,472,143

which is allocated as follows: Transfer to the Value Adjustment Reserve ...... 1,342,932 -3,081,486 Allocation to General Reserves ...... 1,314,172 1,366,089 ______Payable to the central government ...... 3,066,403 3,187,540 ______

Pursuant to the Danmarks Nationalbank Act the profit for the year after allocations is payable to the central government.

Comments on the Profit and Loss Account will be found on pp. 124-129 134

BALANCE SHEET AT 31 DECEMBER 2000

Note 2000 1999 kr. '000 kr. '000 Assets Stock of gold ...... 4,682,768 4,566,951 Foreign assets ...... 110,851,284 154,715,301 7 Claims on the International Monetary Fund (IMF) ...... 5,126,649 8,441,266 8 Loans , etc...... 67,634,540 72,945,688 9 Bonds and shares, etc...... 39,847,026 37,696,381 10 Other assets ...... 8,843,737 3,417,368 Accruals ...... 20,888 19,401 ______Total assets ...... 237,006,892 281,802,356 ______135

BALANCE SHEET AT 31 DECEMBER 2000

Note 2000 1999 kr. '000 kr. '000 Liabilities Banknotes ...... 40,649,923 42,429,943 Coins ...... 4,148,455 3,951,719 Foreign liabilities ...... 3,143,427 2,424,958 Counterpart of Special Drawing Rights allocated by the International Monetary Fund (SDR) ...... 1,868,986 1,814,683 11 Deposits, etc...... 52,460,337 46,403,909 Certificates of deposit ...... 51,874,000 99,896,000 Central government ...... 37,717,606 39,677,540 Other liabilities ...... 728,582 3,445,132 ______Total creditors ...... 192,591,316 240,043,884

General Capital Fund ...... 50,000 50,000 Statutory Reserve ...... 250,000 250,000 Value Adjustment Reserve ...... 1,362,896 19,964 General Reserves ...... 42,752,680 41,438,508 ______Total net capital ...... 44,415,576 41,758,472 ______Total liabilities ...... 237,006,892 281,802,356 ______

12 Off-balance-sheet items: Guarantees ...... 197,793 475,172 Other liabilities ...... 65,895,427 71,758,304 ______66,093,220 72,233,476 ______136

NOTES ON THE ACCOUNTS FOR 2000

2000 1999 kr. '000 kr. '000 Accounting policies The accounts for 2000 have been prepared in accordance with the same accounting policies as for the previous year.

Gold is entered at market value at year-end.

Assets and liabilities in foreign exchange are entered at the official exchange rates and the market prices prevailing at year-end.

Bonds and shares. The bond portfolio is entered at the official market prices at year-end. Shares are entered at kr. 1 per shareholding.

Properties, machinery and equipment are entered as expenditure in the year of acquisition. At the most recent official assessment the bank's properties were valued at kr. 738.2 million.

Note

1 Interest on loans, etc. Interest on to domestic banks and mortgage-credit institutes ...... 2,021,971 821,504 Interest on loans to other borrowers ...... 174,529 187,478 ______2,196,500 1,008,982 ______

2 Interest on deposits, etc. and certificates of deposit Interest on deposits from domestic banks and mortgage-credit institutes ...... 271,340 192,391 Interest on the central government's deposits ...... 2,192,201 1,828,169 Interest to other depositors, etc...... 294,327 209,620 Interest on certificates of deposit ...... 2,733,343 1,777,616 ______5,491,211 4,007,796 ______

3 Value adjustment of bonds and shares, etc. This includes sales proceeds of kr. 39.1 million on the sale of the bank's shareholding in Finance for Danish Industry. 137

NOTES ON THE ACCOUNTS FOR 2000

Note 2000 1999 kr. '000 kr. '000 4 Staff expenses Salaries and remuneration ...... 221,983 215,966 Other staff expenses ...... 59,835 57,033 Allocations to support and severance schemes ...... 11,000 25,000 ______292,818 297,999 ______

5 Other expenses Purchases of materials, note production ...... 17,223 21,591 Purchases of materials, coin production ...... 14,235 14,201 Purchases of machinery and equipment ...... 35,801 47,004 Real property, current expenses ...... 85,667 57,280 Data processing and expenses incidental to VP A/S – The Danish Securities Centre ...... 57,728 46,529 Other expenses ...... 56,347 63,553 Income from sale of coin sets and medals, etc...... -3,760 -3,232 ______263,241 246,926 ______

6 Other expenditure on ordinary operations The amount primarily comprises a disbursement of kr. 19 million in connection with the issue of a commemorative coin. Since claims for encashment of the commemorative coin are considered unlikely the profit is distributed at half to the Crown and half to the Ministry of Economic Affairs for charitable purposes.

7 Claims on the International Monetary Fund (IMF) Denmark's IMF quota ...... 17,165,946 16,667,192 The IMF's holdings of Danish kroner ...... 12,567,132 10,761,718 ______Reserve position with the IMF ...... 4,598,814 5,905,474 Holdings of Special Drawing Rights ...... 527,835 2,535,792 ______5,126,649 8,441,266 ______

8 Loans, etc. Banks and mortgage-credit institutes ...... 65,053,125 70,290,159 Other borrowers ...... 2,581,415 2,655,529 ______67,634,540 72,945,688 ______

22-03-01 10:19 Antal sider: 10 Oprettet af Mette Kristensen 137 138

NOTES ON THE ACCOUNT FOR 2000

Note 2000 1999 kr. '000 kr. '000 9 Bonds and shares, etc. As of 31 December 2000 the estimated market value of the bank's holdings of shares and similar investments, including in the accounts at kr. 1 per shareholding, was kr. 908 million. The portfolio comprises shares, etc. in Bank for International Settle- ments (BIS), SAS Danmark, The Bank of Greenland, Bella Cen- ter, The Danish Steel Works, VP A/S – The Danish Securities Centre, Herning-Hallen, ECB-capital contribution and SWIFT.

10 Other assets This amount includes outstanding interest of kr. 2,488 million. (1999: kr. 2,590 million)

11 Deposits, etc. Banks and mortgage-credit institutes ...... 45,137,725 38,712,350 Other depositors ...... 7,322,612 7,691,559 ______52,460,337 46,403,909 ______

12 Off-balance-sheet items Guarantees of kr. 198 million mainly comprise guarantees concerning VP A/S - The Danish Securities Centre of kr. 134 million and Danish Ship Finance of kr. 63 million.

The bank is liable for obligations in the Danmarks National- banks Pension Fund.

The bank provides a price guarantee to the central banks of other EU member states in the event of the realisation of Danish securities pledged as collateral in connection with intra-day credit in the TARGET payment system.

Other liabilities comprise unsettled forward purchases, the market value of unsettled currency swaps and the non- utilised portion of credit facilities made available to the IMF and the Poverty Reduction and Growth Facility Trust (PRGF). The Kingdom of Denmark has provided a guarantee concerning the PRGF credit facility.

In addition, the bank has entered into intervention agreements with the ECB and with Nordic central banks.

138 139

SIGNATURES AND AUDIT REPORTS

Danmarks Nationalbank Copenhagen, 12 February 2001

Bodil Nyboe Andersen Torben Nielsen Jens Thomsen /Henrik Larsen, Chief Accountant

Report of the internal audit We have audited the annual accounts of Danmarks Nationalbank for the year 1999 presented by the Management. Basis of opinion We have conducted the audit on the basis of the Danmarks Nationalbank Act and Danmarks Nationalbank’s by-laws and in accordance with the auditing standards generally accepted in Denmark. Based on an evaluation of materiality and risk we have assessed whether the Bank’s procedures and internal control systems provide adequate security, just as we have tested the basis and documentation for the amounts and other information presented in the annual accounts. This included an assessment of the applied accounting policies and the accounting estimates made, as well as an assessment of the adequacy of the information presented in the annual accounts. The audit has not resulted in any qualifications. Opinion In our opinion the annual accounts have been prepared in accordance with the Danmarks Nationalbank Act and Danmarks Nationalbank’s by-laws and reflect the income and expenses for the year and the assets and liabilities of Danmarks National- bank as at 31 December 1999.

Copenhagen, 12 February 2001

Peter Jochimsen, Chief Auditor

Report of the external auditors As auditors appointed by the Royal Bank Commissioner we have audited the annual accounts for the year ended 31 December 1999 of Danmarks Nationalbank. Basis of opinion We planned and conducted our audit in continuation of the audit performed by the Bank’s internal audit and in accordance with the auditing standards generally accepted in Denmark to obtain reasonable assurance that the annual accounts are free of material misstatements. Based on an evaluation of materiality and risk, we have tested the basis and documentation for the amounts and disclosures in the annual accounts. Our audit included an assessment of the accounting policies applied and estimates made. In addition we have evaluated the overall adequacy of the presentation of information in the annual accounts. Our audit has not resulted in any qualifications. Opinion In our opinion the annual accounts have been prepared in accordance with the Danmarks Nationalbank Act and Danmarks Nationalbank’s by-laws and reflect the income and expenses for the year and the assets and liabilities as at 31 December 1999.

Copenhagen, 12 February 2001

Svend Ørjan Jensen, State-Authorised Public Accountant Bjarne Fabienke, 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 2001

Hans E. Zeuthen Helle Bechgaard Michael Dithmer

Elisabeth Arnold Søren Bjerre-Nielsen Pia Christmas-Møller Bent le Fèvre Pernille Blach Hansen J. Fløystrup Jensen Knud Koch Jensen Jette W. Knudsen Kjeld Larsen Jes Lunde Christian Mejdahl B. Frank Nielsen Kirsten Nielsen Karsten Olsen Jan Petersen Anders Fogh Rasmussen Jens Rostrup-Nielsen Gitte Seeberg Kirsten Stallknecht Helge Sørensen Finn Thorgrimson Margit Vognsen

Appendix 142

Press releases

STATEMENT BY GOVERNOR BODIL NYBOE ANDERSEN ON THE OUTCOME OF THE DANISH REFERENDUM ON THE ADOPTION OF THE EURO

28 September 2000 "Danmarks Nationalbank takes note of the result of the referendum", governor Bodil Nyboe Andersen states in a comment on the result of the Danish referendum on the adoption of the single currency, the euro. "After the "no", Danmarks Nationalbank will keep the exchange rate of the Danish krone stable vis-à-vis the euro, as has been the case since 1 January 1999 and until then vis-à-vis the D-mark. The fixed-exchange rate policy has served Denmark well for the last two decades, and it is extremely important that this policy be maintained unchanged", Bodil Nyboe Andersen states.

PRESS RELEASE FROM THE DANISH GOVERNMENT AND DANMARKS NATIONALBANK

28 September 2000 Given the result of the referendum Denmark shall not abrogate its exemption from Danish participation in the euro. Denmarks EU-membership remains unchanged. Denmark will continue the present fixed exchange rate policy vis-a- vis the euro within the framework of the narrow band of EU's exchange rate mechansim, ERM2. The Danish economy is fundamentally sound. Danmarks Nationalbank and the Government will follow developments in financial markets closely and stand ready if need be to take measures in order to maintain and continue the fixed exchange rate policy. The Fiscal Bill for 2001 is based on Danish participation in the euro. The negotiations on the budget will start next week, and in this context the Government is ready to tighten fiscal policy if this should prove necessary to maintain Denmark's fixed exchange rate policy. 143

INTEREST-RATE CHANGES

3 February 2000 on interest rate increase The discount rate is raised by 0.25 per cent to 3.25 per cent. Likewise the rate of interest on the banks' current accounts with the Nationalbank is raised by 0.25 per cent to 3.25 per cent. The Nationalbank's lending rate and the rate of interest on certificates of deposit are raised by 0.30 per cent to 3.60 per cent. The increase will have effect as from 4 February 2000. The interest rate increase should be viewed against the background of the European Central Bank's raising of interest rates.

16 March 2000 on interest rate increase The discount rate is raised by 0.25 per cent to 3.50 per cent. Likewise the rate of interest on the banks' current accounts with the Nationalbank is raised by 0.25 per cent to 3.50 per cent. The Nationalbank's lending rate and the rate of interest on certificates of deposit are raised by 0.25 per cent to 3.85 per cent. The increase will have effect as from 17 March 2000. The interest rate increase should be viewed against the background of the European Central Bank's raising of interest rates.

27 April 2000 on interest rate increase The discount rate is raised by 0.25 per cent to 3.75 per cent. Likewise the rate of interest on the banks' current accounts with the Nationalbank is raised by 0.25 per cent to 3.75 per cent. The Nationalbank's lending rate and the rate of interest on certificates of deposit are raised by 0.25 per cent to 4.10 per cent. The increase will have effect as from 28 April 2000. The interest rate increase should be viewed against the background of the European Central Bank's raising of interest rates.

8 June 2000 on interest rate increase The discount rate is raised by 0.5 per cent to 4.25 per cent. Likewise the rate of interest on the banks' current accounts with the Nationalbank is raised by 0.5 per cent to 4.25 per cent. The Nationalbank's lending rate and the rate of interest on certificates of deposit are raised by 0.60 per cent to 4.70 per cent. The increase will have effect as from 9 June 2000. The interest rate increase should be viewed mainly against the background of the European Central Bank's raising of interest rates of 0.50 per cent. However, the Nationalbank raises the lending rate and the interest rate on certificates of deposit by a little more than the ECBs rate 144 increases. The reason is that during recent months the Nationalbank has sold foreign exchange, and since 30 May for around DKK 10 billion.

22 August 2000 on interest rate increase Danmarks Nationalbank's lending rate and the rate of interest on certificates of deposit are raised by 0.20 per cent to 4.90 per cent. The increase will have effect as from 23 August 2000. On 8 June the Nationalbank raised the lending rate and the rate of interest on certificates of deposit in connection with the increase of the European Central Bank's main refinancing rate to 4.25 per cent. Simul- taneously the ECB announced that the main refinancing operations would be carried out as variable rate tenders as from 28 June. In these tenders – most recently at today's tender – the marginal interest rate has increased to 4,47 per cent. The Nationalbank's interest rate increase is a consequence of this development.

29 August 2000 on interest rate increase Danmarks Nationalbank's lending rate and the rate of interest on certificates of deposit are raised by 0.20 per cent to 5.10 per cent. The increase will have effect as from 30 August 2000. The Nationalbank's interest rate increase is a consequence of the rate increase of the main refinancing operations of the European Central Bank.

31 August 2000 on interest rate increase The discount rate is raised by 0.25 per cent to 4.50 per cent. Likewise the rate of interest on the banks' current accounts with the Nationalbank is raised by 0.25 per cent to 4.50 per cent. The increase will have effect as from 1 September 2000. The interest rate increase is a consequence of the increase in the Euro- pean Central Bank's minimum bid rate on the main refinancing operations by 0.25 per cent to 4.50 per cent. The Nationalbank's lending rate and the rate of interest on certificates of deposit remain unchanged at 5.10 per cent.

5 September on interest rate reduction Danmarks Nationalbank's lending rate and the rate of interest on certificates of deposit are lowered by 0.10 per cent to 5.00 per cent. The decrease will have effect as from 6 September 2000. The Nationalbank's interest rate decrease is a consequence of the rate decrease on the main refinancing operations of the European Central Bank. The discount rate and the rate of interest on the banks' current accounts with the Nationalbank remain unchanged at 4.50 per cent. 145

26 September on interest rate increase Danmarks Nationalbank's lending rate and the rate of interest on certificates of deposit are raised by 0.10 per cent to 5.10 per cent. The increase will have effect as from 27 September 2000. The interest rate increase is a consequence of today's tender operations of the European Central Bank, resulting in an increase in the marginal rate. The discount rate and the rate of interest on the banks' current accounts with the Nationalbank remain unchanged at 4.50 per cent.

29 September 2000 on Interest rate increase The Danish fixed-exchange-rate policy will be maintained after yester- day's referendum. There has recently been some pressure against the Danish krone. This has resulted in short-term interest rates that are significantly higher than the Nationalbank's official interest rates, and intervention in support of the krone by the Nationalbank. In order to avoid uncertainty concerning the krone the Nationalbank's lending rate and the rate of interest on certificates of deposit are raised by 0.50 per cent to 5.60 per cent with effect from 29 September 2000. The discount rate and the rate of interest on the banks' current accounts with the Nationalbank remain unchanged at 4.50 per cent.

5 October 2000 on interest rate increase The discount rate is raised by 0.25 per cent to 4.75 per cent. Likewise the rate of interest on the banks' current accounts with the Nationalbank is raised by 0.25 per cent to 4.75 per cent. The increase will have effect as from 6 October 2000. The interest rate increase is a consequence of the increase by 0.25 per cent in the European Central Bank's minimum bid rate on the main refinancing operations. The Nationalbank's lending rate and the rate of interest on certificates of deposit remain unchanged at 5.60 per cent.

COMMEMORATIVE COINS TO MARK QUEEN MARGRETHE'S 60TH BIRTHDAY ON 16 APRIL 2000

6 March 2000 There is a longstanding tradition in Denmark to issue commemorative coins to mark special events in the Royal Family. The Queen's 60th birthday on 16 April 2000 will therefore be marked with the issue of two commemorative coins. 146

A 20-krone coin and a 200-krone coin will be issued. The 20-krone coin is of the same size and metal as the ordinary 20-krone coin in circulation. It is minted in an edition of one million coins. The 200-krone coin has a diameter of 38 mm and is minted of fine silver in an edition of maximum 60,000 coins. The coins are designed by the sculptor Professor Mogens Møller and minted by the Royal Mint. The motif on the face of the coin is a right-side profile of the Queen. Behind the queen a stylised marguerite can be discerned. The portrait is placed in a small hollow in the coin so that the relief appears especially high. On the reverse appear a crown and a bunch of marguerites together with the coin denomination and the years 1940 and 2000. This version of the crown was used on the ½-, 1- and 2-krone coins dating from the period 1924-41. As from 3 April the coins may be purchased at their nominal value from banks, coin dealers, post offices and at the Nationalbank. The 200-krone coin may also be purchased – subject to prepayment – from the Royal Mint, Solmarksvej 5, 2605 Brøndby. The price is kr. 200 per coin, plus post- age charges of kr. 50. The amount is payable to post giro account no. 5 51 05 70 or by bank transfer to account with the Nationalbank (reg. no. 1005 account 63539), including details of the recipient's name and address.

SUPPLEMENTARY NEW STATISTICS FOR DANMARKS NATIONALBANK'S FOREIGN-EXCHANGE RESERVE

28 April 2000 Today Danmarks Nationalbank publishes a supplementary new compilation of the foreign-exchange reserve. Initially the new statistics cover the months from December 1999 to March 2000. In future, on the last banking day of each month equivalent statistics for the preceding month will be published. The new statistics are a supplement to the compilation of the Nationalbank's foreign-exchange reserve which is published two banking days after the close of the month in conjunction with the publication of the bank's monthly balance sheet. The supplementary new statistics are significantly more detailed than those published two days after the close of the month. The statistics also differ in that the assets are compiled at market value in the new statistics, while in the statistics published on the 2nd banking day of the month value adjustments are made only once a year. The new statistics also include information on short-term liabilities concerning the central government's foreign borrowing. 147

The statistics are prepared in accordance with the new guidelines of the International Monetary Fund (IMF) for central banks' publication of foreign-exchange reserves. These guidelines are set out in the IMF's data dissemination standard (SDDS) which is designed to improve the basis for evaluation of a country's economic and financial position. Together with 46 other countries Denmark is committed to complying with these guidelines. The new statistics for the foreign-exchange reserve will be published at approximately 4.00 p.m. on the last banking day of the month on Danmarks Nationalbank's Web site at www.nationalbanken.dk under the category Statistics, SDDS. This information will also be presented in the Nationalbank's Monetary Financial Statistics, which are published at the same time. The IMF's data dissemination standard and the international cooperation on statistics are described in the Nationalbank's 1999 Annual Re- port, p. 94ff. 148

The Statutory Basis for the Financial Sector

EU DIRECTIVES

Directive 2000/46/EC on the taking up, pursuit and prudential supervision of the business of electronic money institutions In 1998 the European Commission submitted a directive proposal in this area. The directive was finally adopted on 18 September 2000 and must be implemented by 27 April 2002. The directive is directed primarily at issuers of electronic money and aims at coordination and harmonisation of the member states' legislation on the pursuit and supervision of the business of electronic money institutions. This entails that such institutions will be subject to financial supervision and to the rules on the "EU passport", i.e. the free right of establishment, free exchange of services and mutual recognition of supervision. Issuers of electronic money will be subject to simple and more lenient capital requirements, but also to more re- strictive placement rules than credit institutions. The background is the different balance-sheet structure of such institutions whereby the liabilities consist of unredeemed electronic money. Very liquid placement of assets is an equivalent requirement. According to the proposal a member state may stipulate more lenient requirements for small national systems, but such systems will not be subject to the rules on the "EU passport". See also the proposal for implementation in Danish legislation on p. 155.

Directive 2000/31/EC on electronic commerce On 8 June 2000 a directive regulating certain legal aspects of electronic commerce was finally adopted. The directive must be implemented by 17 January 2002. Its objective is to contribute to ensuring a well- functioning internal market. The directive is based on the "principle of country of origin", whereby enterprises acting as providers of goods and services are subject to home country regulation supervision. This principle will facilitate business enterprises' opportunities for cross- border sales and marketing activities. However, the principle may be subject to exemption with reference to consumer protection.

Proposal for a directive on reconstruction and liquidation of credit institutions (Winding up) The directive proposal was first submitted in 1985. Progress on the directive proposal has been difficult in view of the aspects related to bank- 149 ruptcy law. The negotiations were suspended in 1993. In 1999, the proposal was subject to reconsideration. The EU member states then reached agreement on the proposal at the meeting of the ECOFIN Council on 8 May 2000. The directive is applicable to credit institutions and their branches established in another member state than that of the credit institution's head office. The underlying principle of the directive is that credit institutions are reconstructed/liquidated subject to the principle of unity and universality in the reconstruction/liquidation. This grants exclusive competence to the authorities of the home country. Decisions made by authorities in the home country must be recognised by the other member states. These decisions have immediate legal enforceability. The objective is to ensure uniform treatment of any rights vested in the creditors of the credit institution under reconstruction or liquidation, irrespective of whether the creditors are residents of the home country of the credit institution, or the host country. Further- more, the directive will also ensure that these measures can be enforced vis-à-vis a credit institution's branches in other member states under the regulations of the home country, unless otherwise stipulated in the directive.

Proposal for a directive on amendment of directive 91/308/EC on money laundering At the meeting of the ECOFIN Council on 30 November 2000 agreement was reached on a joint position concerning the proposal for a directive to amend the money-laundering directive. The directive contains provisions to expand its scope as well as to update the directive, against the background of experience of its application hitherto. The definition of crimes related to money laundering is extended and the definition of natural or legal persons is expanded to include accountants, attorneys, real-estate agents, etc.

Proposal for amendment of directive 85/611/EEC in the field of undertakings for collective investment in transferable securities (UCITS) In July 1998 the European Commission submitted two separate directive proposals to amend the current directive from 1985. The first proposal focuses on the product offered, while the second proposal focuses on the provider. The objective of the product proposal is to extend the scope of the directive to include institutions investing in money-market instruments, bank deposits, shares in other non- harmonised investment institutions and standardised futures and options traded in regulated markets, as well as OTC instruments. The proposal provides for the composition of the asset portfolio to 150 resemble a stock or bond index. Investment associations covered by this proposal will thus also gain the right to provide their products in all EU/EEA member states (the European passport). The objective of the second proposal (the administration company proposal) is to introduce regulation of administration companies granting such companies access to operate in other member states by establishment or by free exchange of services (the European passport). The current restrictions on the activities of the administration companies are to be relaxed to allow the administration companies to undertake individual portfolio management and other accessory activities. Finally, simplified prospec- tuses are introduced. Political agreement on the first amendment proposal (the product directive) was reached at the meeting of the ECOFIN Council in October 2000. At the meeting it was agreed to adopt the two proposals simultaneously. The Swedish presidency will submit the second amendment proposal to the ECOFIN Council in March 2001 with a view to adoption of a joint position on both proposals at a later stage in the first half of 2001.

Proposal for a directive on distance marketing of financial services In 1997 the ECOFIN Council and the European Parliament adopted a directive on the protection of consumers in respect of distance selling. Distance selling concerning financial services were exempt from this directive. A directive has been under way for several years. The objective of this directive is to enhance transparency vis-à-vis the consumer, and the right to reverse any distant contract concerning financial services. A central issue is disagreement in the European Commission and the member states on whether the directive should provide for minimum regulation or harmonisation. The European Commission maintains its view that it should be a harmonisation directive. This position should be viewed against the background of the ample opportunities to market financial services across national borders. The European Commission finds that great variation in the regulation of marketing of financial services in the various member states will create problems for business enterprises and act as a barrier to the internal market. The work continues in 2001.

ACTS, ETC.

The Act on Danish Commercial Banks and Savings Banks In May 2000 the Folketing (Parliament) adopted a number of amendments to the Act on Danish Commercial Banks and Savings Banks with effect from 1 June 2000. The objective was to accommodate some of the 151 recommendations of the Committee on the Financial Sector after the Year 2000. The amendments are as follows: • A requirement for approval by the Danish Financial Supervisory Authority of major shareholders in holding companies. • Separation of financial enterprises into sub-groups under a holding company as required by the Financial Supervisory Authority. • Divestment by the holding company of capital interests in financial enterprises as required by the Financial Supervisory Authority. • A requirement for fit and proper management of holding companies. • Dissemination of customer data to the parent company of a bank with a view to the group's risk management, and the prohibition of the parent company from using such information for marketing or advisory purposes vis-à-vis customers. • Expansion of the regulations on intra-group transactions, including a requirement for reversal of intra-group transactions and return of any services provided if the transaction is estimated not to be in compliance with market terms as stated in the Executive Order of the Financial Supervisory Authority on intra-group transactions. • A requirement for tax-related assets to be deducted from liable capital. • More lenient rules on the access of financial enterprises to hold a controlling interest in non-financial enterprises.

The Securities Trading Act This Act was amended twice in 2000. In the spring the Folketing (Parlia- ment) adopted amendments with three central elements: adjustment of regulations on financial groups, accountability vis-à-vis authorised marketplaces and the implementation of directive 98/26/EC of 19 May 1998 on settlement finality in payment and securities settlement systems. The objective of the directive is to establish a common legal framework so as to reduce the systemic risk of payment and settlement systems by ensuring the finality of a payment request which can be carried out automatically by the system even in the event of insolvency, and by ensuring that collateral provided to the system is not affected by liquidation or suspension of payments. In addition, it is possible to choose the national law to be applied to the system. A registration and notification procedure is introduced whereby systems approved/ registered in one member state are notified to the Commission. A conse- quential innovation for Denmark is the introduction of a registration scheme for payment systems. As a consequence, the regulations on netting and provision of collateral apply solely to such systems, as well as payment system activities by Danmarks Nationalbank and by securities clearing houses approved by the Danish Financial Supervisory Authority. 152

In December the Folketing (Parliament) adopted amendments of which the principal elements are listed below: • Membership of a stock exchange or a central securities depository for entities from a non-EU/EEA member state shall be subject to approval by the Danish Financial Supervisory Authority. • The regulations on insider trading and price manipulation are extended to include trading concerning securities accepted for listing on the stock exchange and authorised marketplaces in non-EU/EEA member states. • Expansion of the access for clearing houses and clearing participants to establish right of pledge/collateral to include settlement in payment systems.

The Mortgage Credit Act This Act was adopted in the spring of 2000 and introduced regulations on holding companies, cf. above concerning the Act on Danish Com- mercial Banks and Savings Banks. It also abolished the limitations of voting rights in the articles of association of mortgage-credit limited- liability companies for other shareholders than the fund or the institute. Modelled on the Act on Danish Commercial Banks and Savings Banks, this Act furthermore introduces restructuring provisions, so that mortgage-credit institutes which are structured as holding funds can be restructured as limited liability companies in accordance with the "encapsulation model". This Act also updates the balance principle by introducing more flexible provisions on issue of mortgage-credit bonds.

The Act on a Guarantee Fund for Depositors and Investors In May 2000 the Folketing (Parliament) adopted a bill to amend the Act on a Guarantee Fund for Depositors and Investors. The amendments are intended to solve the outstanding problems in the Act in relation to the provisions of EU legislation on government subsidies. The government subsidy issue, and thereby the requirements concerning notification to and approval by the European Commission of the Guarantee Fund's contribution to the winding up of a credit institution, prevented the guarantee scheme from functioning appropriately in connection with liquidation. These amendments establish a number of special procedures to be observed by the Guarantee Fund in order to prevent a situation which might lead to considerations concerning government subsidies. According to the explanatory notes to the Act the government subsidy issue, according to the European Commission, can be avoided if: 153

• A tender procedure approved by the European Commission is established. • The Guarantee Fund has unrestricted scope for business decisions. • The sector representatives on the Board of the Guarantee Fund may veto the Guarantee Fund's financial assistance on the winding up of the credit institution.

It also appears from the explanatory notes that in connection with the tender procedure the Guarantee Fund will be able to provide an un- limited guarantee in relation to the commitments of the credit institution in jeopardy until winding up and transfer have taken place. This guarantee will prevent a "run" on a credit institution in jeopardy which is expected to continue to operate during the winding up period.

CONSULTATION RESPONSES

Concerning proposal for an Act on Financial Enterprises The proposal is described in further detail on p. 63.

On 5 January 2001 Danmarks Nationalbank submitted the following consultation response: On the basis of the greater integration of the financial markets, including the formation of financial conglomerates, it has been deemed necessary to implement a new structure for the financial supervisory acts. The aim is to ensure that similar financial products are treated in the same way and to introduce a number of measures to simplify and modernise this area. The restructuring of the financial supervisory acts is the response to the recommendation to this effect in Report no. 1376 entitled "The Financial Sector after the Year 2000" by the Committee on the Financial Sector after the Year 2000 of the Ministry of Economic Affairs. The bill compiles the supervisory provisions and other statutory areas. In general, Danmarks Nationalbank endorses this legislation initiative and finds that the preparation of a joint act will simplify the structure of the provisions and be the first step towards ensuring that similar financial products are treated in the same way to a higher degree within the various financial areas. Danmarks Nationalbank has noted that the special characteristics of the various financial sectors are preserved in the sector-specific acts, but that there are plans subsequently to review the remaining elements of the financial acts with a view to achieving an even more uniform 154 structure and further simplification of e.g. the provisions on establishment of financial enterprises, permission to carry on financial activities, solvency, mergers, etc. Danmarks Nationalbank finds that this is a unique opportunity to create a more forward-looking and pertinent legal basis for the financial sector. This should take place on the basis of careful preparation within a reasonable time frame. In connection with the compilation a number of provisions are adjusted or updated. In connection with the compiling of the provisions on good practice in Chapter 2 a new provision is introduced whereby the Danish Financial Supervisory Authority may stipulate rules on good practice within different areas of activity. In the explanatory notes to the bill it is emphasised that the guidelines must be issued in close cooperation with trade and consumer organisations. In this connection it must be ensured that regulations to the same effect are not issued by several public authorities. Chapter 4 on management rules generally constitutes a compilation of the existing rules, while maintaining the sector-specific provisions. These rules account for almost one third of the act, and modernisation and simplification of the rules may therefore be considered. Such rules are also unique to Denmark, and are the result of proliferation over many years. There may be cases of dual regulation after the introduction of "fit and proper" provisions based on the directives. The accounting provisions in Chapter 6 are to the highest possible degree formulated to accord with parallel provisions in the concurrent annual accounts bill. This provides for uniform accounting policies and rules for companies in the financial sector and other companies. In more technical terms, the provisions are amended from transaction-based accounts to value-based accounts. As a result, the actual evaluation of assets and liabilities (fair-value principle) will play a more important role. Danmarks Nationalbank endorses the general introduction of the new accounting policies in line with international development, with a view to national and international harmonisation of accounting provisions. The provisions on presentation of accounts applying to Danish financial enterprises should be updated on a continuous basis to correspond to European accounting standards for equivalent enterprises. However, it must be emphasised that in certain important respects the international provisions are less advanced than the proposed Danish provisions. At the same time, all the implications of the new provisions must be identified. Danmarks Nationalbank therefore endorses postponement of the entry into force until the work of the proposed committee is com- 155 pleted, including in particular the implications of the fair-value principle for the level of provisions in connection with lending, including incentives for provisions to be made. Danmarks Nationalbank also supports the abolishment of the dual auditor system. In this connection it is significant that the proposal is recommended by the Danish Financial Supervisory Authority and that there is not considered to be any need to introduce other provisions to ensure the independence of auditors. Danmarks Nationalbank has no further comments on the bill.

Concerning proposal for an Act on Electronic Money Institutions The bill is intended to implement directive 2000/46/EC of the European Parliament and of the Council of 18 September 2000 on the taking-up, pursuit of and prudential supervision of the business of electronic money institutions. The directive is described in further detail on p. 148. In contrast to the directive, the bill proposes that the maximum limit for issue of electronic money by electronic money institutions shall be euro 300. This should be viewed against the background that electronic money must be regarded as an electronic substitute for coins and banknotes stored on an electronic device and normally used for electronic payments of limited amounts. Furthermore, the proposal applies a lower limit to amounts to be exempted from the scope of the directive. The bill is based on the current rules on issuers of prepaid cards in the Act on Savings Institutions and Issuers of Prepaid Cards. This entails that the bill does not introduce provisions on supervision in an area not already subject to regulation.

On 1 December 2000 Danmarks Nationalbank submitted the following consultation response: This bill implements directive 2000/46/EC of the European Parlia- ment and of the Council of 18 September 2000 on the taking-up, pursuit and prudential supervision of the business of electronic money institutions. The directive is intended to harmonise the provisions on the taking-up, pursuit and prudential supervision of the business of electronic money institutions, providing for the granting of a single licence recognised throughout the Community, in compliance with the principle of home country prudential supervision. In connection with regulation of electronic money institutions, Danmarks Nationalbank finds it important to ensure that the elements of financial legislation are necessary and sufficient as regards the supply of electronic money and the management of the associated risks. 156

In this connection the maximum limit stipulated in Section 3 of the bill of euro 300 for amounts stored in the electronic devices is confusing, since this limit is not stipulated in the directive. The limit would apply only to Danish electronic money institutions, whereas no limits would apply to electronic money institutions licensed in other EU member states as regards cross-border activities. Furthermore, Danmarks Nationalbank notes that Section 1, subsection 5 of the bill applies lower limits to amounts to be exempted than stated in the directive. Danmarks Nationalbank has no further comments on the bill.

Concerning proposal for amendment of the Act on Danish Commercial Banks and Savings Banks, etc., the Mortgage Credit Act and the Act on Investment Companies The two central elements of the bills are the access to use internal models and the specification that subordinate capital is not included in the calculation of a bank's capital solvency. Under the CAD II directive of 1998 the authorities may implement legislation allow- ing financial institutions to use internal models to calculate the capital adequacy requirement for exposure to market risk. The background to this amendment is that certain institutions have developed sophisticated Value-at-Risk (VaR) models for more accurate measurement of market risks in comparison to the current standard method today available to the institutions. The option to use internal models gives the banks a stronger incentive to develop risk management models.

On 29 November 2000 Danmarks Nationalbank submitted the following consultation response: Danmarks Nationalbank endorses the granting of access for financial institutions to use internal models – in accordance with the CAD II directive – in their calculation of weighted items exposed to market risk. This enhances the incentives for financial institutions to apply good risk management models. Danmarks Nationalbank finds it important to emphasise that the bill adheres to the spirit of the CAD II directive in that the level of capital adequacy level is not affected. Furthermore, Danmarks Nationalbank welcomes the specification of the concept of insolvency whereby future issue of subordinate capital are not included the compilation of solvency. This is in accordance with the recommendation most recently stated in the report entitled "The Financial Sector after the Year 2000". 157

Concerning proposal for amendment of the Act on Taxation of Pension Yields This proposal is described in further detail on p. 62.

On 10 November 2000 Danmarks Nationalbank submitted the following consultation response: In a letter of 1 November 2000 the Ministry of Economic Affairs submitted the bill to amend the Act on Insurance Activities, the Labour Market Supplementary Pension Fund Act, the Act on the Employees' Capital Pension Fund and the Occupational Safety Act to Danmarks Nationalbank for consultation. The bill should be viewed in conjunction with the bill to amend the Act on Taxation of Pension Yields, the Capital Gains Act and the Corporate Tax Act. Danmarks Nationalbank's comments apply to the entire legislative package. Danmarks Nationalbank welcomes the fact that the package seeks to simplify the taxation of pension yields by introducing a uniform tax and providing for more unrestricted planning of investment policies by pension institutions. The expected expansion of the prudential supervision by the Danish Financial Supervisory Authority of the total balance- sheet structure of the pension institutions and their risk management is seen as an important supplement to the less restricted investment opportunities. In this connection special attention should be drawn to the considerable risk assumed by the pension institutions on providing nominal after-tax interest-rate guarantees, and also to how this risk is hedged.

Concerning proposal to amend the Securities Trading Act The proposal is described in further detail on p. 151f.

On 1 September Danmarks Nationalbank submitted the following consultation response: The bill provides for the acceptance of a member from a non-EU/EEA member state to a stock exchange or a central securities depository, subject to approval by the Danish Financial Supervisory Authority. Danmarks Nationalbank endorses extended access to stock exchanges and central securities depositories in order to ensure free competition and an efficient market. In connection with the implementation of the investment services directive and Stock Exchange Reform II in 1995, providing for remote membership of the Copenhagen Stock Exchange for EU institutions, this development was welcomed, but it was emphasised that a "level playing field" should be ensured. It was especially emphasised that the institu- 158 tions should be subject to joint European regulations on capital adequacy, and that they should observe the current rules for trading in the marketplace and that sanctions could be imposed in the event of non-compliance. These considerations will in particular also apply to third-country members. In addition it must be ensured in particular that provisions on insider trading and price manipulation are in force and enforceable in the relevant countries prior to membership of the Copenhagen Stock Exchange. In accordance with the principle of reciprocity Danish institutions must also be granted access to a stock exchange or a central securities depository in the relevant country. Furthermore, Danmarks Nationalbank endorses the extension of the prohibitions on insider trading and price manipulation to include securities accepted for listing or trading on stock exchanges, or which are traded in another regulated marketplace outside the EU/EEA. In view of the greater internationalisation and the rapid technological progress "national borders" no longer apply in the fight against insider trading and price manipulation, since the securities market is regarded as a global market. There is thus a need for "global" provisions against abuse of insider knowledge and price manipulation, in order to enhance confidence in the market. Furthermore, Danmarks Nationalbank welcomes the bill's provisions to grant access to use the right of pledge/collateral in connection with settlement in registered payment systems and Danmarks Nationalbank's own systems. This will contribute to reducing the systemic risks in the systems, to the benefit of financial stability. Danmarks Nationalbank has no further comments on the bill. 159

Appendix of Tables 160

ANNUAL ACCOUNTS AND MONTHLY BALANCE SHEETS OF DANMARKS NATIONALBANK Table 1

Assets

Assets deposited with the Euro- Stock of Foreign pean Monetary Net assets Kr. million gold assets Institute with the IMF1 Lending2

1990...... 3,720 52,707 5,200 3,053 6,246 1991...... 3,464 38,588 2,814 3,585 5,320 1992...... 3,456 63,540 2,757 3,503 29,132 1993...... 4,339 62,818 4,947 3,456 81,689 1994...... 3,790 44,658 3,460 3,723 61,749 1995...... 3,531 53,577 4,521 4,177 49,670 1996...... 3,652 73,624 4,979 4,598 49,659 1997...... 3,331 115,844 4,790 6,602 37,116 1998...... 3,934 89,416 • 9,330 40,225 1999...... 4,567 154,715 • 8,441 72,946 2000...... 4,683 110,851 • 5,127 67,635 1999 Jan ...... 3,936 104,016 • 8,655 41,858 Feb ...... 3,938 116,216 • 7,311 44,953 March ...... 3,939 130,657 • 7,884 56,227 April ...... 3,939 131,528 • 8,207 50,572 May ...... 3,942 131,645 • 8,262 43,599 June ...... 3,942 148,564 • 8,737 42,313 July ...... 3,931 151,309 • 5,960 47,768 Aug ...... 3,931 155,503 • 6,039 32,324 Sept ...... 3,931 160,471 • 5,654 42,218 Oct ...... 3,931 158,079 • 6,129 52,572 Nov ...... 3,931 160,036 • 6,075 46,900 Dec ...... 3,931 156,676 • 7,483 72,946 2000 Jan ...... 4,567 136,478 • 7,945 51,534 Feb ...... 4,567 129,437 • 7,960 44,199 March ...... 4,567 126,501 • 7,846 57,236 April ...... 4,567 122,997 • 6,691 81,145 May ...... 4,567 121,543 • 7,115 65,919 June ...... 4,567 111,957 • 7,064 57,203 July ...... 4,567 109,863 • 6,916 76,047 Aug ...... 4,567 109,583 • 6,971 83,896 Sept ...... 4,567 110,362 • 6,894 102,244 Oct ...... 4,567 119,243 • 5,223 72,024 Nov ...... 4,567 116,641 • 5,213 68,456 Dec ...... 4,567 116,138 • 4,777 67,642

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 A specification of Denmark's account with the IMF is given in Table 11. 2 A specification of the account of banks and mortgage-credit institutes with the Nationalbank is given in Table 4. 3 Until end-1991 including bonds acquired in connection with bond-repurchase agreements. 4 In 1992 written down by kr. 100 million, equivalent to the value of uncashed 5- and 10-øre coins. Discontinued at end-1994 in accordance with the Maastricht Treaty and related Council regulation. 5 As from 1992 guarantees are not included in the balance sheet. 6 Until end-1991 including uncovered forward transactions not entered in the balance sheet as from 1992. 7 Until end-1990 including Post Giro funds. 161

ANNUAL ACCOUNTS AND MONTHLY BALANCE SHEETS OF DANMARKS NATIONALBANK Table 1

Assets

Government Bonds guarantee and for coin in Other shares3 circulation4 Guarantees5 assets, etc.6 Total Kr. million

37,717 639 569 18,469 128,320 ...... 1990 44,361 639 433 12,327 111,531 ...... 1991 32,018 539 • 3,327 138,272 ...... 1992 41,235 539 • 4,502 203,525 ...... 1993 39,505 ••2,274 159,159 ...... 1994 34,096 ••2,348 151,920 ...... 1995 35,108 ••2,383 174,003 ...... 1996 33,766 ••2,822 204,271 ...... 1997 37,487 ••2,402 182,794 ...... 1998 37,696 ••3,437 281,802 ...... 1999 39,847 ••8,865 237,007 ...... 2000 37,812 ••1,884 198,160 ...... Jan 1999 38,550 ••1,589 212,558 ...... Feb 39,415 ••1,535 239,657 ...... March 38,539 ••1,309 234,094 ...... April 38,859 ••1,493 227,799 ...... May 39,812 ••2,149 245,516 ...... June 38,750 ••1,977 249,695 ...... July 39,158 ••2,047 239,002 ...... Aug 39,527 ••2,892 254,694 ...... Sept 39,718 ••2,684 263,113 ...... Oct 40,519 ••2,425 259,886 ...... Nov 39,102 ••2,873 283,010 ...... Dec 38,161 ••2,615 241,300 ...... Jan 2000 38,694 ••2,595 227,452 ...... Feb 38,714 ••3,025 237,889 ...... March 38,673 ••2,863 256,936 ...... April 38,946 ••3,100 241,191 ...... May 39,028 ••3,444 223,262 ...... June 39,108 ••3,151 239,652 ...... July 39,411 ••3,328 247,756 ...... Aug 39,764 ••4,588 268,419 ...... Sept 38,652 ••4,656 244,365 ...... Oct 39,192 ••4,561 238,631 ...... Nov 39,725 ••4,970 237,818 ...... Dec 162

ANNUAL ACCOUNTS AND MONTHLY BALANCE SHEETS OF DANMARKS NATIONALBANK Table 1

Liabilities

Contribution to Notes in Coin in allocation of circula- circula- Foreign SDRs in the Certificates Kr. million tion tion liabilities IMF1 Deposits2 of deposit2

1990 ...... 24,453 2,530 1,361 1,470 13,114 • 1991 ...... 25,565 2,646 3,888 1,514 18,125 • 1992 ...... 25,391 2,629 28,292 1,539 4,800 5,743 1993 ...... 26,880 2,776 790 1,664 5,455 27,812 1994 ...... 29,708 2,980 1,537 1,589 4,591 25,979 1995 ...... 31,434 3,222 2,200 1,474 3,219 33,813 1996 ...... 33,187 3,426 1,634 1,527 28,068 30,865 1997 ...... 35,079 3,631 876 1,648 33,863 52,738 1998 ...... 37,199 3,816 1,253 1,606 21,231 34,752 1999 ...... 42,430 3,952 2,425 1,815 46,404 99,896 2000 ...... 40,650 4,148 3,143 1,869 52,460 51,874 1999 Jan ...... 35,371 3,726 852 1,606 23,074 45,413 Feb ...... 35,102 3,716 494 1,606 23,127 40,833 March ...... 35,835 3,741 656 1,606 34,618 50,132 April ...... 36,402 3,756 885 1,606 27,185 50,341 May ...... 37,002 3,825 1,177 1,606 29,112 49,637 June ...... 37,327 3,851 1,021 1,606 40,153 54,492 July ...... 37,715 3,843 732 1,606 29,831 58,326 Aug ...... 36,835 3,844 1,010 1,606 32,887 52,633 Sept ...... 36,534 3,844 1,450 1,606 41,639 50,903 Oct ...... 36,641 3,847 1,836 1,606 50,544 56,087 Nov ...... 38,109 3,888 2,124 1,606 38,584 71,278 Dec ...... 42,430 3,952 2,425 1,606 46,582 99,896 2000 Jan ...... 37,760 3,876 432 1,815 33,685 67,941 Feb ...... 37,333 3,855 543 1,815 35,591 61,642 March ...... 37,404 3,896 71 1,815 28,822 57,503 April ...... 39,585 3,965 445 1,815 30,072 79,787 May ...... 39,182 4,043 465 1,815 38,800 58,812 June ...... 39,572 4,055 755 1,815 29,281 47,276 July ...... 39,782 4,050 1,122 1,815 30,289 49,711 Aug ...... 39,154 4,047 1,729 1,815 31,659 64,487 Sept ...... 38,545 4,072 13,748 1,815 32,879 65,219 Oct ...... 38,307 4,055 2,257 1,815 41,119 48,867 Nov ...... 38,890 4,074 2,767 1,815 38,170 66,266 Dec ...... 40,650 4,148 3,143 1,815 52,453 51,874

Cf. the Note and notes to the Table of Assets. 163

ANNUAL ACCOUNTS AND MONTHLY BALANCE SHEETS OF DANMARKS NATIONALBANK Table 1

Liabilities

General Capital Fund and Value Central Other Statutory Adjustment General Government7 Guarantees5 liabilities6 Reserve Reserve Reserves Total Kr. million

38,405 569 17,362 300 • 28,756 128,320 ...... 1990 16,010 433 10,698 300 • 32,352 111,531 ...... 1991 35,075 • 495 300 • 34,008 138,272 ...... 1992 94,548 • 573 300 • 42,727 203,525 ...... 1993 56,910 • 1,080 300 • 34,485 159,159 ...... 1994 38,808 • 1,523 300 • 35,927 151,920 ...... 1995 34,995 • 1,548 300 1,093 37,359 174,003 ...... 1996 33,954 • 1,333 300 2,107 38,742 204,271 ...... 1997 37,131 • 2,333 300 3,101 40,072 182,794 ...... 1998 39,678 • 3,445 300 20 41,439 281,802 ...... 1999 37,718 • 729 300 1,363 42,753 237,007 ...... 2000 39,420 • 7,548 300 2,107 38,742 198,160 ...... Jan 1999 58,980 • 7,551 300 2,107 38,742 212,558 ...... Feb 67,480 • 2,116 300 3,101 40,072 239,657 ...... March 68,329 • 2,116 300 3,101 40,072 234,094 ...... April 59,320 • 2,646 300 3,101 40,072 227,799 ...... May 60,555 • 3,038 300 3,101 40,072 245,516 ...... June 70,544 • 3,624 300 3,101 40,072 249,695 ...... July 62,743 • 3,971 300 3,101 40,072 239,002 ...... Aug 70,748 • 4,496 300 3,101 40,072 254,694 ...... Sept 64,142 • 4,936 300 3,101 40,072 263,113 ...... Oct 55,374 • 5,449 300 3,101 40,072 259,886 ...... Nov 36,490 • 6,156 300 3,101 40,072 283,010 ...... Dec 47,596 • 4,722 300 3,101 40,072 241,300 ...... Jan 2000 38,483 • 4,716 300 3,101 40,072 227,452 ...... Feb 63,389 • 3,231 300 20 41,439 237,889 ...... March 55,968 • 3,540 300 20 41,439 256,936 ...... April 52,234 • 4,082 300 20 41,439 241,191 ...... May 54,355 • 4,396 300 20 41,439 223,262 ...... June 66,018 • 5,107 300 20 41,439 239,652 ...... July 57,406 • 5,700 300 20 41,439 247,756 ...... Aug 64,214 • 6,169 300 20 41,439 268,419 ...... Sept 59,766 • 6,419 300 20 41,439 244,365 ...... Oct 37,982 • 6,911 300 20 41,439 238,631 ...... Nov 34,651 • 7,325 300 20 41,439 237,818 ...... Dec 164

SPECIFICATION OF BANKNOTES IN CIRCULATION Table 2a

Total, Kr. million 1000-kr. 500-kr. 200-kr. 100-kr. 50-kr. Total1 mio.pieces

1990 ...... 13,167 3,688 • 6,544 588 23,987 97 1991 ...... 14,029 3,851 • 6,668 629 25,177 100 1992 ...... 14,164 3,806 • 6,402 618 24,990 97 1993 ...... 15,386 3,983 • 6,495 655 26,519 101 1994 ...... 17,294 4,693 • 6,646 695 29,328 107 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 40,472 130

Note: End of year. Banknotes in circulation as entered in the Nationalbank's balance sheet furthermore includes the special notes circulating on the Faroe Island (on 31 December 2000: kr. 197 million) and 20,- 10- and 5-krone notes.

ISSUE OF NEW BANKNOTES Table 2b

Kr. million 1,000 kr. 500 kr. 200 kr. 100 kr. 50 kr. Total

1989 ...... 4,690 2,185 • 6,244 622 14,049 1990 ...... 4,535 1,630 • 4,408 679 11,538 1991 ...... 3,260 2,151 • 1,973 612 7,995 1992 ...... 5,663 1,925 • 2,659 761 11,008 1993 ...... 5,319 3,102 • 3,721 757 12,899 1994 ...... 3,666 2,673 • 6,397 870 13,605 1995 ...... 3,021 1,435 • 3,556 800 8,812 1996 ...... 1,739 6,518 1 2,5061 2,048 886 13,696 1997 ...... 10,5861 1,859 841 2,114 662 16,063 1998 ...... 10,139 2,303 611 5,5391 1,0921 19,683 1999 ...... 1,476 1,425 883 2,696 506 6,985

1 The increase in the issue of new banknotes is a consequence of the issue of the new banknote series. 165

SPECIFICATION OF COIN IN CIRCULATION Table 3a

Total, Kr. million 20-kr. 10-kr. 5-kr. 2-kr. 1-kr. 50-øre 25-øre Total1 mio.pieces

1990 ...... 746 601 392 • 459 64 126 2,388 1,267 1991 ...... 845 596 392 • 467 77 131 2,508 1,325 1992 ...... 893 599 394 • 471 88 134 2,579 1,268 1993 ...... 932 613 399 170 381 94 138 2,727 1,393 1994 ...... 1,013 656 421 214 378 105 145 2,932 1,476 1995 ...... 1,122 697 442 248 385 112 152 3,158 1,555 1996 ...... 1,211 738 462 280 393 121 158 3,363 1,635 1997 ...... 1,299 773 483 310 401 126 163 3,555 1,700 1998 ...... 1,371 813 504 337 413 134 169 3,741 1,774 1999 ...... 1,421 842 523 358 422 139 171 3,876 1,823 2000 ...... 1,522 874 540 374 435 1.41 175 4,060 1,876

Note: End of year. Coin in circulation as entered in the Nationalbank's balance sheet furthermore includes 200-krone coins (commemorative coins) and 2-krone coins put into circulation up to end-1959. At the end of 1999 the circulation af 200-krone coins was kr. 65 million.

PRODUCTION OF COINS (MINTING) Table 3b

Kr. million 20 kr. 10 kr. 5 kr. 2 kr. 1 kr. 50 øre 25 øre Total

1989 ...... 707 122 234 • 0 32 27 1,122 1990 ...... 231 10 19 • 45 6 26 337 1991 ...... 20 5 12 83 82 7 2 211 1992 ...... 13 11 8 88 16 7 4 147 1993 ...... 51 41 40 55 24 12 9 232 1994 ...... 72 94 29 40 35 8 10 288 1995 ...... 193 0 13 6 10 6 11 239 1996 ...... 48 37 26 53 7 7 7 185 1997 ...... 79 60 32 9 13 7 4 204 1998 ...... 83 40 24 41 6 7 5 206 1999 ...... 21 0 14 20 21 8 4 88

Note: The production of 200-krone coins (commemorative coins) began in 1990. In 1990, 132,655 coins were minted for a value of kr. 26,5 million, in 1992 100,300 coins for a value of kr. 20,1 million, in 1995 80.827 coins for a value of kr. 17,9 million and in 1996/97 60,022 coins for a value of kr. 12 million. 166

THE BALANCES OF THE BANKS AND MORTGAGE-CREDIT INSTITUTES WITH THE NATIONALBANK Table 4

Total Lending Bond Certificates net concerning repurchase Kr. million of deposit1 Deposits Loans2 position cash depots accounts3

1990 ...... • 1,748 3,055 -1,307 1,013 8,764 1991 ...... • 14,369 5 14,364 1,085 2,016 1992 ...... 5,741 3,338 23,781 -14,702 1,073 • 1993 ...... 27,783 3,387 77,937 -46,767 1,267 • 1994 ...... 25,851 2,685 55,937 -27,401 1,338 • 1995 ...... 33,570 1,867 43,969 -8,532 1,361 • 1996 ...... 30,617 15,215 33,735 12,097 1,438 • 1997 ...... 52,111 17,976 19,817 50,270 1,655 • 1998 ...... 34,218 12,407 29,587 17,038 2,912 • 1999 ...... 99,447 5,949 33,027 72,369 4,991 • 2000 ...... 51,169 7,822 25,165 33,826 2,677 • 1999 Jan ...... 44,673 2,114 21,790 24,997 2,196 • Feb ...... 40,251 3,276 26,184 17,343 2,280 • March ...... 49,234 3,545 26,068 26,711 1,783 • April ...... 49,622 3,424 27,543 25,503 2,021 • May ...... 49,011 7,662 22,850 33,823 2,478 • June ...... 53,585 18,169 21,575 50,179 2,426 • July ...... 57,859 4,762 24,454 38,167 2,630 • Aug ...... 51,695 13,034 14,433 50,296 2,580 • Sept ...... 50,235 19,623 22,169 47,689 2,479 • Oct ...... 55,566 16,627 21,404 50,789 2,246 • Nov ...... 70,792 13,616 24,493 59,915 3,051 • Dec ...... 99,447 5,959 33,027 72,379 4,991 • 2000 Jan ...... 67,309 6,904 27,409 46,804 2,714 • Feb ...... 61,083 15,948 27,313 49,718 2,793 • March ...... 56,819 3,435 34,829 25,425 2,098 • April ...... 79,246 4,681 57,635 26,292 3,286 • May ...... 58,135 16,020 45,830 28,325 2,542 • June ...... 46,384 5,531 35,647 16,268 2,469 • July ...... 49,114 8,424 55,748 1,790 2,885 • Aug ...... 63,794 7,579 61,973 9,400 3,086 • Sept ...... 64,657 5,928 77,652 -7,067 2,707 • Oct ...... 48,281 15,310 48,696 14,895 2,461 • Nov ...... 65,619 11,107 43,776 32,950 2,514 • Dec ...... 51,169 7,817 25,173 33,813 2,677 •

Note: End of period. The annual figures are from the annual accounts of the Nationalbank. The monthly figures (also at end-December) are from the monthly balance sheets. The figures exclude transactions concerning settlement accounts. With effect from 21 June 1999 the group of monetary-policy counterparties was widened to include mortgage-credit institutes. Up to that date the statistics for the sector's net position with the Nationalbank therefore solely include banks. 1 Nominal value. 2 Collateralised loans. Previously included current-account drawings (up to March 1992) and repurchase agreements (in the period as from April 1992 up to 20 June 1999). 3 Proceeds from established bond-repurchase agreements, which were included in line with general deeds of pledges as security for current account drawings. 167

MONEY STOCK Table 5

Deposits with the banks2

Year-on-year Notes and Money increase Kr. billion coin1 On demand At notice Time deposits3 stock in money stock

1990 ...... 23.6 202.8 42.4 122.2 391.0 6.3 1991 ...... 24.2 224.7 36.9 93.1 379.0 4.2 1992 ...... 25.0 218.5 33.6 97.6 374.6 - 1.2 1993 ...... 25.8 246.4 29.7 114.7 416.6 11.2 1994 ...... 28.9 243.4 27.0 94.6 394.0 - 5.4 1995 ...... 30.6 251.7 31.8 96.0 410.1 4.1 1996 ...... 31.6 278.4 32.8 97.0 439.8 7.2 1997 ...... 33.2 295.1 30.8 103.4 462.6 5.2 1998 ...... 34,5 316.8 30.7 94.7 476.7 2.9 1999 ...... 36.9 334.6 28.8 96.6 496.9 4.2 2000 ...... 37.7 345.4 23.8 99.1 505.9 1.8 1999 Jan ...... 33.6 332.4 30.4 109.2 505.5 4.1 Feb ...... 33.4 327.3 31.4 104.4 496.5 4.9 March ...... 34.3 321.8 30.6 99.6 486.3 6.1 April ...... 34.9 348.7 31.5 101.0 516.1 4.3 May ...... 34.7 353.6 32.5 93.6 514.3 5.7 June ...... 34.9 337.1 29.4 93.4 494.7 6.3 July ...... 35.4 351.5 29.3 105.8 522.1 3.7 Aug ...... 34.4 352.9 32.2 99.7 519.2 5.8 Sept ...... 34.5 338.2 29.4 101.7 503.8 2.6 Oct ...... 34.9 348.0 29.8 107.4 520.1 2.0 Nov ...... 35.0 344.6 29.2 106.5 515.3 6.5 Dec ...... 36.9 334.7 28.8 96.4 496.8 4.3 2000 Jan ...... 35.3 342.2 29.0 101.9 508.3 0.6 Feb ...... 34.8 338.7 28.5 102.3 504.3 1.6 March ...... 35.8 339.9 26.1 100.7 502.6 3.4 April ...... 36.2 348.0 26.3 99.4 509.9 -1.2 May ...... 36.7 349.6 25.7 110.4 522.4 1.6 June ...... 37.1 341.8 25.6 102.9 507.4 2.6 July ...... 36.6 346.7 25.5 112.5 521.3 -0.2 Aug ...... 36.1 345.3 24.6 121.7 527.8 1.7 Sept ...... 36.2 349.6 20.8 114.5 521.1 3.4 Oct ...... 35.6 359.3 21.4 117.2 533.5 2.6 Nov ...... 36.4 346.5 23.2 111.9 518.1 0.5 Dec ...... 37.7 345.4 23.8 99.1 505.9 1.8

Note: End of period. On calculation of the rates of increase adjustment is made for breaks in series. In 1990 including mortgage-credit institutes' deposits with the banks. 1 Notes and coin in circulation, excluding the banks' holdings. 2 Accounts with residents in resident units in kroner and foreign exchange excluding special deposit schemes apart from premium-savings accounts. Until end-1990 including Post Giro deposits. 3 Including bonds, etc. with an original maturity of up to 2 years. 168

THE OFFICIAL INTEREST RATES OF DANMARKS NATIONALBANK Table 6

Lending Lending Current and certifi- Current and certifi- Discount account cates Discount account cates Per cent per annum rate desposits1 of deposit2 Per cent per annum rate deposits1 of deposit2

1991 ...... 9.50 9.50 • 1996 1. April..... 3.75 3.75 3.90 1992 ...... 9.50 9.50 13.00 19. - ..... 3.25 3.25 3.80 1993 ...... 6.25 6.25 6.75 6. June..... 3.70 1994 ...... 5.00 5.00 5.50 23. Aug ..... 3.50 1995 ...... 4.25 4.25 4.60 1997 10. Oct ..... 3.50 3.50 3.75 1996 ...... 3.25 3.25 3.50 1997 ...... 3.50 3.50 3.75 1998 6. May ..... 4.00 4.00 4.25 1998 ...... 3.50 3.50 3.95 29. - ..... 3.75 3.75 4.00 21. Sept ..... 4.25 4.25 5.00 1994 6. Jan ...... 6.00 6.00 6.50 8. Oct ..... 4.75 19. - ...... 5.75 5.75 6.25 22. - ..... 4.65 18. Feb ...... 5.50 5.50 6.00 5. Nov ..... 4.00 4.00 4.40 15. April...... 5.25 5.25 5.90 26. - ..... 4.25 2. May ...... 5.80 4. Dec ..... 3.50 3.50 3.95 11. - ...... 5.70 13. - ...... 5.00 5.00 1999 7. Jan ..... 3.75 19. - ...... 5.60 4. Feb ..... 3.25 3.25 3.50 7. July ...... 5.50 1. March .. 3.40 9. April..... 2.75 2.75 2.90 1995 8. March..... 6.00 6.00 7.00 17. June..... 2.85 6. April...... 6.75 5. Nov ..... 3.00 3.00 3.30 27. - ...... 6.50 18. May ...... 6.35 2000 4. Feb ..... 3.25 3.25 3.60 6. july ...... 5.75 5.75 6.20 17. March .. 3.50 3.50 3.85 27. - ...... 6.05 28. April..... 3.75 3.75 4.10 3. Aug ...... 5.50 5.50 5.90 9. June..... 4.25 4.25 4.70 25. - ...... 5.00 5.00 5.65 23. Aug ..... 4.90 7. Sept ...... 5.50 30. - ..... 5.10 28. - ...... 5.40 1. Sept ..... 4.50 4.50 5. Oct ...... 5.30 6. - ..... 5.00 9. Nov ...... 4.75 4.75 5.15 27. - ..... 5.10 23. - ...... 5.00 29. - ..... 5.60 15. Dec ...... 4.25 4.25 4.75 6. Oct ..... 4.75 4.75 28. - ...... 4.60 13. - ..... 5.50 27. - ..... 5.40 1996 11. Jan ...... 4.50 25. - ...... 4.00 4.00 4.35 2001 9. Feb ..... 5.30 8. Feb ...... 4.25 7. March..... 3.75 3.75 4.10 21. - ...... 4.00

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 The Nationalbanken'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 started exclude this premium. Until 21 June 1999 the Nationalbank's lending rate was called the repo rate. 169

THE OFFICIAL INTEREST RATES OF THE EUROPEAN CENTRAL BANK Table 7a

Main refinancing operations

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

1999 1. Jan ...... 2.00 3.00 - 4.50 4. - 2) ...... 2.75 3.00 - 3.25 22. - ...... 2.00 3.00 - 4.50 9. Apr ...... 1.50 2.50 - 3.50 5. Nov ...... 2.00 3.00 - 4.00 2000 4. Feb ...... 2.25 3.25 - 4.25 17. March ...... 2.50 3.50 - 4.50 28. April ...... 2.75 3.75 - 4.75 9. June ...... 3.25 4.25 - 5.25 28. - 3) ...... 3.25 - 4.25 5.25 1. Sep ...... 3.50 - 4.50 5.50 6. Oct ...... 3.75 - 4.75 5.75

Source: ECB. 1 The date refers to the deposit and marginal lending facilities. For main refinancing operations, unless otherwise indicated, changes in the rate are effective from the first operation following the date indicated. 2 On 22 December 1998 the ECB announced that, as an exceptional measure between 4 and 21 January 1999, a narrow corridor of 50 ba sis points would be applied between the interest rates for the marginal lending facility and the deposit facility, aimed at facilitating the transition to the new regime by market participants. 3 On 8 June 2000 the ECB announced that, starting from the operation to be settled on 28 June 2000, the main refinancing operatio n of the Eurosystem would be conducted as variable rate tenders. The minimum bid rate refers to the minium interest rate at which counterparties may place their bids.

EUROSYSTEM MONETARY POLICY OPERATIONS ALLOTTED THOUGH TENDERS Table 7b

Variabel rate tenders Variabel rate tenders

Date of settlement Minimum bid rate Marginal rate Date of settlement Minimum bid rate Marginal rate

2000 28. June .... 4.25 4.29 2000 1. Nov .... 4.75 4.84 5. July ..... 4.29 8. - .... 4.83 12. - ...... 4.29 15. - .... 4.78 19. - ...... 4.29 22. - .... 4.80 26. - ...... 4.30 29. - .... 4.82 2. Aug ..... 4.31 6. Dec .... 4.75 9. - ...... 4.30 13. - .... 4.76 16. - ...... 4.35 20. - .... 4.80 23. - ...... 4.47 27. - .... 4.79 30. - ...... 4.68 2001 3. Jan ..... 4.76 6. Sep ...... 4.50 4.55 10. - .... 4.75 13. - ...... 4.58 17. - .... 4.75 20. - ...... 4.56 24. - .... 4.75 27. - ...... 4.65 31. - .... 4.76 4. Oct ...... 4.67 7. Feb .... 4.75 11. - ...... 4.75 4.76 14. - .... 4.75 18. - ...... 4.75 21. - .... 4.78 25. - ...... 4.80 26. - .... 4.78

Source: ECB. Note: Footnote 3, table 7a. The marginal rate refers to the lowest rate at which funds were allotted. 170

THE FOREIGN-EXCHANGE RESERVE Table 8

Assets deposited with the Special Reserve European Drawing position Stock of Foreign Monetary Rights in the Total Foreign Total Kr. million Gold assets Institute (SDR) IMF1 gross liabilities net2

1990 ...... 3,720 52,707 5,200 1,246 1,807 64,680 1,361 63,319 1991 ...... 3,464 38,588 2,814 1,430 2,155 48,451 3,888 44,563 1992 ...... 3,456 63,540 2,757 528 2,975 73,256 28,292 44,964 1993 ...... 4,339 62,818 4,947 580 2,876 75,560 790 74,770 1994 ...... 3,790 44,658 3,460 1,107 2,616 55,631 1,537 54,094 1995 ...... 3,531 53,577 4,521 880 3,297 65,806 2,200 63,606 1996 ...... 3,652 73,624 4,979 997 3,601 86,853 1,634 85,219 1997 ...... 3,331 115,844 4,790 2,291 4,311 130,567 876 129,691 1998 ...... 3,934 89,416 • 2,208 7,122 102,680 1,253 101,427 1999 ...... 4,567 154,715 • 2,536 5,905 167,724 2,425 165,299 2000 ...... 4,683 110,851 • 528 4,599 120,661 3,143 117,517 1999 Jan ...... 3,936 104,016 • 1,676 6,978 116,606 852 115,754 Feb ...... 3,938 116,216 • 438 6,873 127,465 494 126,971 March ...... 3,939 130,657 • 1,237 6,647 142,480 656 141,824 April ...... 3,939 131,528 • 1,895 6,312 143,674 885 142,789 May ...... 3,942 131,645 • 1,949 6,312 143,848 1,177 142,671 June ...... 3,942 148,564 • 2,263 6,473 161,242 1,021 160,221 July ...... 3,931 151,309 • 216 5,743 161,199 732 160,467 Aug ...... 3,931 155,503 • 282 5,756 165,472 1,010 164,462 Sept ...... 3,931 160,471 • 282 5,371 170,055 1,450 168,605 Oct ...... 3,931 158,079 • 757 5,371 168,138 1,836 166,302 Nov ...... 3,931 160,036 • 792 5,283 170,042 2,124 167,918 Dec ...... 3,931 156,676 • 2,386 5,096 168,089 2,425 165,665 2000 Jan ...... 4,567 136,478 • 2,039 5,905 148,990 432 148,558 Feb ...... 4,567 129,437 • 2,089 5,871 141,964 543 141,421 March ...... 4,567 126,501 • 1,975 5,871 138,914 71 138,843 April ...... 4,567 122,997 • 1,453 5,238 134,255 445 133,809 May ...... 4,567 121,543 • 2,046 5,069 133,225 465 132,761 June ...... 4,567 111,957 • 1,995 5,069 123,587 755 122,832 July ...... 4,567 109,863 • 1,847 5,069 121,346 1,122 120,224 Aug ...... 4,567 109,583 • 2,368 4,602 121,121 1,729 119,392 Sept ...... 4,567 110,362 • 2,368 4,525 121,823 13,748 108,075 Oct ...... 4,567 119,243 • 704 4,518 129,033 2,257 126,776 Nov ...... 4,567 116,641 • 695 4,518 126,421 2,767 123,655 Dec ...... 4,567 116,138 • 394 4,382 125,481 3,143 122,338

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 Denmark's quota (latest raise in January 1999 to SDR 1,643 million) less IMF holdings of Danish kroner. Value adjustment on the basis of the SDR rate at the time of compilation. 2 As a result of exchange-rate adjustments the foreign-exchange reserve declined by kr. 3,147 million in 1990, increased by kr. 2,082 million in 1991, by kr. 1,529 million in 1992, by kr. 4,965 million in 1993, declined by kr. 7,715 million in 1994, 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 and by kr. 4,821 million in 2000. 171

PRINCIPAL ITEMS OF THE BALANCE OF PAYMENTS (NET REVENUES) Table 9

Wages and Total Goods and property Current current Kr. billion Goods (fob) Services services income transfers account

1990 ...... 32.6 11.0 43.6 -32.3 -4.3 7.0 1991 ...... 33.1 19.2 52.3 -33.7 -6.9 11.7 1992 ...... 44.7 15.5 60.2 -30.2 -7.1 22.9 1993 ...... 50.5 12.3 62.8 -25.9 -7.6 29.3 1994 ...... 47.2 4.4 51.5 -24.8 -9.1 17.7 1995 ...... 36.3 4.7 41.1 -21.4 -9.6 10.0 1996 ...... 43.9 8.4 52.3 -21.9 -11.7 18.7 1997 ...... 38.4 0.8 39.2 -22.5 -12.3 4.4 1998 ...... 26.2 -3.5 22.7 -18.8 -13.6 -9.7 1999 ...... 46.9 9.7 56.6 -17.3 -18.7 20.6 2000 ...... 50.8 19.1 69.9 -24.8 -25.9 19.1 1999 Jan ...... 1.9 0.3 2,2 0.0 2.0 4.1 Feb ...... 3.0 0.6 3.6 -0.3 -1.4 1.8 March ...... 3.1 0.2 3.3 -1.7 -1.9 -0.4 April ...... 3.6 1.2 4.7 -2.0 -1.4 1.4 May ...... 4.5 0.5 5.0 -0.6 -1.4 3.0 June ...... 3.2 0.8 4.0 0.5 -1.5 3.0 July ...... 4.0 1.1 5.1 -1.2 -2.8 1.1 Aug ...... 4.1 1.1 5.2 -0.4 -1.7 3.0 Sept ...... 5.0 0.1 5.1 -0.8 -2.2 2.1 Oct ...... 5.7 1.7 7.3 -2.0 -2.3 3.0 Nov ...... 5.4 0.7 6.1 -6.5 -1.6 -2.0 Dec ...... 3.5 1.6 5.1 -2.3 2.4 0.3 2000 Jan ...... 1.3 -1.2 0.1 -1.6 1.1 -0.4 Feb ...... 4.1 -0.1 4.0 -1.1 -0.8 2.1 March ...... 3.9 1.1 4.9 -2.1 -1.3 1.6 April ...... 3.5 0.9 4.4 -4.5 -2.2 -2.3 May ...... 5.0 1.9 6.9 -1.1 -1.8 4.0 June ...... 4.2 0.6 4.7 1.1 -3.0 2.9 July ...... 5.3 1.5 6.8 -1.2 -2.0 3.5 Aug ...... 4.6 2.5 7.1 -0.4 -3.6 3.1 Sept ...... 6.1 2.5 8.6 -1.6 -2.3 4.7 Oct ...... 4.6 2.5 7.1 -2.8 -3.1 1.3 Nov ...... 3.3 3.5 6.8 -5.5 -3.4 -2.1 Dec ...... 5.0 3.3 8.3 -4.0 -3.5 0.8

Source: Statistics Denmark. 172

DENMARK'S FOREIGN ASSETS AND LIABILITIES Table 10

Public sector Private sector Public and private Danmarks The central Other public Other private sectors, National- Kr. billion government sector The banks sector total bank Total

Assets 1991 ...... 16 1 291 271 579 48 628 1992 ...... 17 4 290 293 603 73 676 1993 ...... 16 4 392 297 710 76 785 1994 ...... 17 6 310 310 642 56 698 1995 ...... 14 9 318 310 651 66 717 1996 ...... 13 15 377 399 804 87 892 1997 ...... 13 22 451 473 959 131 1,090 1998 ...... 18 29 499 578 1,124 103 1,227 1999 ...... 22 53 570 807 1,451 168 1,619 Liabilities 1991 ...... 223 18 289 426 956 4 960 1992 ...... 290 18 236 416 960 28 988 1993 ...... 442 14 192 427 1,075 1 1,076 1994 ...... 299 19 193 443 955 2 957 1995 ...... 331 16 195 439 981 2 983 1996 ...... 368 16 260 499 1,143 2 1,145 1997 ...... 398 15 400 561 1,374 1 1,375 1998 ...... 370 14 455 693 1,531 1 1,532 1999 ...... 337 12 579 863 1,791 2 1,793 Net liabilities 1991 ...... 207 17 -2 155 377 -45 332 1992 ...... 273 14 -54 123 357 -45 312 1993 ...... 426 10 -200 130 366 -75 291 1994 ...... 282 13 -117 133 313 -54 259 1995 ...... 317 7 -123 129 330 -64 266 1996 ...... 355 1 -117 100 338 -85 253 1997 ...... 385 -7 -51 88 415 -130 285 1998 ...... 352 -15 -44 115 407 -101 306 1999 ...... 315 -41 9 57 339 -165 174

Note: End of period. The statistics for 1991, 1994, 1996, 1998 and 1999 are based on i.a. questionnaire surveys, whereas the figures for 1992, 1993, 1995 and 1997 have been calculated on the basis of the external payments statistics and value adjustments. The provisional statistics for 2000 will be published on 30 March 2001 in the Nationalbank's publication series "Financial Statistics – Nyt". 173

DENMARK'S ACCOUNT WITH THE INTERNATIONAL MONETARY FUND Table 11

The Fund's Denmark's Denmark's quota 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

1990 ...... 711 5,844 491 4,037 220 1,807 179 1,470 152 1,246 1991 ...... 711 6,018 456 3,863 255 2,155 179 1,514 169 1,430 1992 ...... 1,070 9,208 724 6,233 346 2,975 179 1,539 61 528 1993 ...... 1,070 9,953 761 7,077 309 2,876 179 1,664 62 580 1994 ...... 1,070 9,502 775 6,886 295 2,616 179 1,589 125 1,107 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

Note: End of period. Conversion from SDR to Danish kroner is made at the year-end SDR-rate. 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 12

Per 100 euro Denmark

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

CONVERSION RATE TO EURO Table 13

1 euro =

Belgian francs ...... 40.3399 Finnish marks ...... 5.94573 French francs ...... 6.55957 Greek drachmas ...... 340.750 Dutch guilders ...... 2.20371 Irish pounds ...... 0.787564 Italian lire ...... 1,936.27 Luxembourg francs ...... 40.3399 Portuguese escudos ...... 200.482 Spanish pesetas ...... 166.386 German marks ...... 1.95583 Austrian schillings ...... 13.7603

Note: Conversion rates are given to 6 significant digits. Source: The European Central Bank. 174

EXCHANGE RATES Table 14

Pounds Greek Swedish Euro US dollars Japanese yen sterling drachmas kronor Danish kroner per 100 units (EUR) (USD) (JPY) (GBP) (GRD) (SEK)

1990 ...... • 618.53 4.2846 1,102.04 3.907 104.50 1991 ...... • 640.34 4.7604 1,128.13 3.514 105.72 1992 ...... • 602.73 4.7606 1,062.91 3.167 103.94 1993 ...... • 649.45 5.8736 974.42 2.828 83.33 1994 ...... • 635.23 6.2171 972.32 2.619 82.32 1995 ...... • 560.53 5.9799 884.61 2.420 78.65 1996 ...... • 579.59 5.3316 905.17 2.409 86.47 1997 ...... • 660.86 5.4761 1,082.32 2.420 86.54 1998 ...... • 669.70 5.1339 1,109.36 2.270 84.23 1999 ...... 743.56 698.34 6.1755 1,129.49 2.283 84.46 2000 ...... 745.37 809.03 7.5081 1,223.32 2.214 88.26 1999 Jan ...... 744.12 640.77 5.6660 1,057.66 2.300 81.91 Feb ...... 743.52 663.45 5.6861 1,080.42 2.309 83.47 March ...... 743.25 682.52 5.7065 1,105.83 2.305 83.12 April ...... 743.29 694.10 5.8054 1,117.92 2.285 83.35 May ...... 743.32 699.14 5.7399 1,128.45 2.285 82.83 June ...... 743.15 715.83 5.9250 1,142.68 2.292 84.13 July ...... 743.87 718.70 6.0094 1,131.47 2.290 85.07 Aug ...... 743.77 701.27 6.1943 1,126.10 2.279 84.93 Sept ...... 743.39 707.76 6.6144 1,148.45 2.273 86.09 Oct ...... 743.34 693.72 6.5451 1,150.25 2.258 85.15 Nov ...... 743.65 718.71 6.8613 1,166.73 2.263 86.14 Dec ...... 744.05 735.52 7.1738 1,186.70 2.257 86.63 2000 Jan ...... 744.40 733.58 6.9842 1,203.58 2.249 86.58 Feb ...... 744.53 756.23 6.9117 1,211.21 2.235 87.48 March ...... 744.74 771.57 7.2447 1,218.89 2.230 88.74 April ...... 745.02 785.65 7.4550 1,244.33 2.223 90.12 May ...... 745.68 820.97 7.5842 1,240.71 2.216 90.50 June ...... 746.01 785.11 7.4111 1,184.87 2.217 89.74 July ...... 745.88 793.22 7.3535 1,196.80 2.214 88.71 Aug ...... 745.78 824.04 7.6257 1,227.00 2.211 88.85 Sept ...... 746.23 856.51 8.0238 1,227.99 2.204 88.70 Oct ...... 744.73 870.72 8.0302 1,264.01 2.194 87.37 Nov ...... 745.67 870.68 7.9930 1,241.53 2.192 86.42 Dec ...... 745.78 831.13 7.4139 1,214.95 2.189 86.11

Note: Yearly and monthly averages. Apart from SDRs, the exchange rates listed are fixed on the basis of market rates at 11.30 a.m. Until end-1991 the exchange rates listed are middle rates quoted in Copenhagen. The SDR rate is calculated on the basis of the market rates of the currencies included in the basket. 175

EXCHANGE RATES Table 14

New Nominal Norwegian Icelandic Swiss Canadian Australian Zealand effective kroner kroner francs dollars dollars dollars SDRs krone rate (NOK) (ISK) (CHF) (CAD) (AUD) (NZD) (XDR) (1980=100)

98.85 10.65 446.16 530.19 ...... 838.80 96.3 98.64 10.87 446.30 559.29 ...... 874.70 94.6 97.15 10.47 429.85 499.19 443.10 324.29 848.77 96.9 91.38 9.59 439.43 503.09 440.77 351.63 906.68 99.9 90.07 9.08 465.26 465.51 464.62 377.06 909.23 99.9 88.45 8.65 474.22 408.39 415.80 367.64 849.63 103.9 89.79 8.69 469.65 425.08 453.67 398.76 841.42 102.9 93.36 9.31 455.35 477.44 490.90 437.20 909.13 100.0 88.70 9.41 462.37 452.28 421.66 359.66 908.10 101.3 89.47 9.64 464.63 470.26 450.86 369.27 954.73 99.6 91.89 10.27 478.68 544.49 469.29 367.89 1,065.90 95.6 86.00 9.23 463.45 421.44 404.81 344.66 900.02 101.9 85.87 9.35 465.19 443.04 424.27 360.74 915.95 101.2 87.33 9.45 465.96 449.98 430.50 363.28 930.18 100.8 89.31 9.49 464.04 466.26 445.67 377.08 940.89 100.3 90.24 9.48 463.82 478.40 462.87 386.48 943.16 100.1 90.96 9.63 465.93 487.23 470.07 381.76 959.34 99.4 90.96 9.65 463.77 483.66 472.62 378.54 962.39 99.2 89.97 9.62 464.72 469.63 452.21 369.05 956.67 99.4 90.35 9.75 464.12 479.02 459.30 370.16 974.08 98.7 89.62 9.80 466.27 469.82 452.41 357.30 964.20 99.1 90.72 10.01 463.41 489.86 459.60 368.37 989.19 98.2 91.85 10.15 464.60 499.13 471.14 374.26 1,009.71 97.3 91.60 10.14 462.37 506.55 482.38 377.38 1,005.32 97.3 91.92 10.34 463.29 521.04 475.74 371.08 1,017.38 96.9 91.77 10.48 464.11 528.42 470.42 378.39 1,036.25 96.2 91.36 10.63 473.29 536.03 468.66 389.67 1,052.93 95.5 90.91 10.75 478.70 549.31 475.06 386.86 1,076.86 95.0 90.53 10.30 478.42 531.63 467.88 369.68 1,045.52 96.1 91.21 10.16 481.02 536.50 466.85 365.71 1,049.89 95.9 92.08 10.30 480.90 555.91 478.93 367.53 1,078.37 95.1 92.92 10.31 487.62 577.16 474.34 358.01 1,108.36 94.4 93.05 10.23 492.11 576.17 459.81 348.72 1,120.06 94.3 93.26 9.97 490.06 564.86 455.12 347.96 1,117.00 94.5 91.69 9.65 492.60 545.28 454.50 356.96 1,075.47 95.6 176

EXCHANGE RATES FOR EURO AREA MEMBER STATES Table 15

Belgian Finnish French Dutch Irish Danish kroner francs marks francs guilders pounds per 100 units (BEF) (FIM) (FRF) (NLG) (IEP)

1990 ...... 18.523 161.89 113.65 339.84 1,023.56 1991 ...... 18.734 158.32 113.41 342.26 1,030.27 1992 ...... 18.775 135.08 114.02 343.29 1,026.49 1993 ...... 18.760 113.54 114.47 349.23 949.92 1994 ...... 19.020 121.96 114.59 349.50 950.44 1995 ...... 19.010 128.39 112.30 349.17 898.54 1996 ...... 18.728 126.31 113.34 343.95 927.87 1997 ...... 18.463 127.27 113.17 338.51 1,001.55 1998 ...... 18.462 125.36 113.60 337.86 953.82 1999 ...... 18.432 125.06 113.36 337.41 944.13 2000 ...... 18.477 125.36 113.63 338.23 946.42 1999 Jan ...... 18.446 125.15 113.44 337.67 944.84 Feb ...... 18.431 125.05 113.35 337.40 944.08 March ...... 18.425 125.01 113.31 337.27 943.74 April ...... 18.426 125.01 113.31 337.29 943.79 May ...... 18.427 125.02 113.32 337.31 943.83 June ...... 18.422 124.99 113.29 337.23 943.60 July ...... 18.440 125.11 113.40 337.56 944.53 Aug ...... 18.437 125.09 113.39 337.51 944.39 Sept ...... 18.428 125.03 113.33 337.34 943.91 Oct ...... 18.427 125.02 113.32 337.31 943.85 Nov ...... 18.435 125.07 113.37 337.46 944.25 Dec ...... 18.445 125.14 113.43 337.63 944.74 2000 Jan ...... 18.453 125.20 113.48 337.79 945.19 Feb ...... 18.456 125.22 113.50 337.85 945.35 March ...... 18.462 125.26 113.54 337.95 945.63 April ...... 18.469 125.30 113.58 338.08 945.99 May ...... 18.485 125.41 113.68 338.38 946.82 June ...... 18.493 125.47 113.73 338.53 947.24 July ...... 18.490 125.45 113.71 338.46 947.07 Aug ...... 18.487 125.43 113.69 338.42 946.94 Sept ...... 18.499 125.51 113.76 338.63 947.52 Oct ...... 18.461 125.25 113.54 337.95 945.62 Nov ...... 18.485 125.41 113.68 338.37 946.81 Dec ...... 18.487 125.43 113.69 338.42 946.94

Note: Yearly and monthly averages. The figures as from 1999 are exchange rates calculated on the basis of the actual exchange rate against the euro and the mutually fixed conversion rates, cf. Table 13. In the years 1992-98 exchange rates fixed by the Nationalbank on the basis of the market rates at 11.30 a.m. Prior to 1992 the exchange rates are the middle rates listed in Copenhagen. On the transition to the single currency the euro replaced ECU in the ratio 1:1. 177

EXCHANGE RATES FOR EURO AREA MEMBER STATES Table 15

Italian Portuguese Spanish German Austrian lire escudos pesetas marks schillings ECU (ITL) (PTE) (ESP) (DEM) (ATS) (XEU)

0.5163 4.341 6.074 382.89 54.420 787.37 0.5158 4.429 6.157 385.67 54.811 791.55 0.4911 4.471 5.905 386.53 54.928 779.97 0.4126 4.037 5.102 392.31 55.760 758.19 0.3939 3.831 4.746 391.94 55.711 752.22 0.3444 3.737 4.495 391.13 55.596 724.60 0.3758 3.759 4.578 385.42 54.783 726.24 0.3879 3.769 4.511 380.96 54.135 746.26 0.3858 3.718 4.486 380.84 54.129 751.37 0.3840 3.709 4.469 380.18 54.037 • 0.3849 3.718 4.480 381.10 54.168 • 0.3843 3.712 4.472 380.46 54.078 • 0.3840 3.709 4.469 380.16 54.034 • 0.3839 3.707 4.467 380.02 54.014 • 0.3839 3.708 4.467 380.04 54.017 • 0.3839 3.708 4.468 380.06 54.020 • 0.3838 3.707 4.467 379.97 54.007 • 0.3842 3.710 4.471 380.34 54.060 • 0.3841 3.710 4.470 380.28 54.052 • 0.3839 3.708 4.468 380.09 54.024 • 0.3839 3.708 4.468 380.06 54.021 • 0.3841 3.709 4.469 380.22 54.044 • 0.3843 3.711 4.472 380.42 54.072 • 0.3844 3.713 4.474 380.61 54.098 • 0.3845 3.714 4.475 380.67 54.107 • 0.3846 3.715 4.476 380.78 54.122 • 0.3848 3.716 4.478 380.93 54.143 • 0.3851 3.720 4.482 381.26 54.191 • 0.3853 3.721 4.484 381.43 54.215 • 0.3852 3.720 4.483 381.36 54.205 • 0.3852 3.720 4.482 381.31 54.198 • 0.3854 3.722 4.485 381.54 54.231 • 0.3846 3.715 4.476 380.78 54.122 • 0.3851 3.719 4.482 381.26 54.190 • 0.3852 3.720 4.482 381.31 54.198 • 178

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