Report of the Board of Governors 2008

INTERNATIONAL background to the danish economy

Growth in the global economy declined significantly in 2008. The decline was particularly strong towards the end of the year following a substantial deterioration of the financial crisis that resulted in negative growth in the major industrialised countries. International economic organisations expect that output in the industrialised countries will decline overall in 2009, and that a gradual reversal will not occur until the end of 2009 at the earliest. As a result, many countries have eased both monetary and fiscal policy considerably.

The financial crisis that began in the summer of 2007 was initially a liquidity crisis that caused participants in the financial markets to show restraint in lending to each other. During 2008, in an attempt to loosen up the tight money markets, the central banks of several countries expanded their lending facilities, increased the number of counterparties, accepted a wider range of eligible collateral, and increased the maturity of loans. Efforts were made to remedy dollar liquidity shortfalls outside the USA through bilateral agreements between the Federal Reserve and a number of central banks, including the European Central Bank, ECB. In the course of the year it became clear that the losses of several of the world's major financial enterprises were so severe that both their solvency and the overall financial stability were at risk. In September, the investment bank Lehman Brothers filed for Chapter 11 bankruptcy and global confidence in the financial system plummeted as a result. In many countries the authorities had to rapidly implement massive rescue packages guaranteeing loans and deposits and injecting government capital into financial enterprises to mitigate the drop in confidence and ensure capacity for new lending in the financial system.

Energy and food prices rose in the 1st half of the year but fell back substantially as the global economy slowed down. At year-end, the price of oil had fallen to 36 dollars per barrel from 94 dollars at the beginning of the year and more than 140 dollars in July. In the USA and the euro area annual consumer price inflation peaked during the summer, reaching 5.6 per cent and 4.0 per cent, respectively, followed by a significant decline.

In July the ECB raised its policy rate by 0.5 percentage points to 4.25 per cent based on elevated inflation expectations, but then lowered the rate on three occasions in the autumn, by a total of 1.75 percentage points to 2.5 per cent at the close of the year.

The Federal Reserve eased its monetary policy considerably in 2008. The fed funds target rate was cut seven times during the year to 0.25 per cent, down 4 percentage points in total. Interest-rate reductions totalling 2.25 percentage points in the 1st half of the year reflected a downturn in the US economy due, among other reasons, to a very weak housing market.

As a result of the international financial crisis, policy rates were lowered by 0.5 percentage points in the first coordinated action ever between the central banks of Canada, the euro area, Switzerland, Sweden and the USA.

However, tighter lending conditions generally meant that the rate cuts were not fully passed through to consumers and business enterprises.

The yield on the benchmark 10-year US government bond fell from 3.9 per cent at the beginning of 2008 to 2.2 per cent at the end of 2008. In Germany, the yield decreased from 4.2 per cent at the beginning of the year to 3.0 per cent at the end of the year. In both Germany and the US these yields increased during the spring as a result of growing fears of persistently higher inflation. In the 2nd half of the year yields declined following relaxation of monetary policies, poorer growth prospects and the financial crisis.

The foreign-exchange markets were characterised by substantial exchange-rate fluctuations in 2008. In the spring, the dollar fell considerably to just under 1.60 dollars per euro, which is the lowest level in recent times. Subsequently the dollar strengthened again to 1.40 dollars per euro at the end of the year, corresponding to a decline of 4 per cent against the euro compared to the beginning of the year. The pound sterling reached an all-time low against the euro, standing at 0.96 pound sterling per euro at the turn of the year. The financial crisis put several smaller currencies under pressure in the autumn. The Swedish krona and the Norwegian krone depreciated to historically low levels against the euro from September onwards.

The danish economy

After a number of years with a sustained upswing, the Danish economy also shifted to a lower gear in 2008. Total output fell by 1.3 per cent compared to 2007, cf. Table 1, making 2008 the first year with negative growth since 1993. The slowdown was originally caused by a lack of spare capacity but was exacerbated by the financial crisis and the weaker international economy. The economic downturn worsened in the 4th quarter as the financial turmoil intensified.

Despite the decline in GDP, the considerable pressure on the labour market continued, especially in the 1st half of the year. In August, unemployment had declined to 47,200 persons or 1.7 per cent of the labour force, which is the lowest unemployment rate since the early 1970s. Extensive pressure on the labour market meant that many industries, as well as the public sector, had difficulties in recruiting the required labour. The pressure on the labour market began to ease towards the end of the year. At the close of the year, unemployment had risen to 2.1 per cent.

The rate of wage increase rose in the 1st half of the year and then started to fall back as the economic outlook deteriorated. For the private sector as a whole, the annual rate of wage increase was 4.2 per cent in the 4th quarter of 2008, down from 4.5 per cent in the same quarter of 2007. The rate of wage increase was higher than in other countries throughout 2007.

Inflation was 2.4 per cent year-on-year in December measured by the increase in the Harmonised Index of Consumer Prices, HICP. Inflation increased in the 1st half of the year and then began to decline. Price developments over the year were driven mainly by the strong fluctuations in energy and food prices. Domestic market-determined inflation rose over the year and was 2.4 per cent in December.

Growth in domestic demand decreased in 2008. Private consumption growth slowed significantly, which should be viewed in the light of factors such as weakening consumer confidence and the dampening of the housing market. Retail and car sales declined over the year. The housing market weakened considerably with reduced prices and fewer transactions. In addition, there was a significant increase in the time on market. Business investment fell in 2008, reflecting weaker sales opportunities. In addition, the financial enterprises tightened their credit standards. The tightening primarily comprised interest-rate increases and more rigorous collateral requirements.

The current-account surplus increased to kr. 31.2 billion in 2008 against kr. 12.0 billion in 2007. The improvement reflects that the surplus on trade in services has remained high, while the last few years' pronounced deterioration of the surplus on trade in goods has ceased. In addition, the surplus on investment income increased substantially. At end-2008 the nominal effective krone rate was significantly higher than at the beginning of the year. In combination with the relatively high rate of wage increase, this had an adverse impact on competitiveness.

The government surplus fell to 3.0 per cent of GDP in 2008 against 4.5 per cent of GDP in 2007. The fall was primarily due to lower income taxes and falling proceeds from the taxation of pension yields. Public consumption and investment went up by 0.6 per cent. In overall terms fiscal policy was moderately expansionary.

monetary and foreign-exchange policy

Danish monetary and foreign-exchange policy is aimed at keeping the krone stable vis-à-vis the euro. Due to the euro area's low-inflation policy, this creates a framework for low and stable inflation in Denmark. The formal framework for Denmark's fixed-exchange-rate policy is the Exchange Rate Mechanism, ERM II. Denmark participates with a central rate of kr. 7.46038 per euro and a fluctuation band of +/- 2.25 per cent in relation to the central rate, cf. Chart 1. The fixed-exchange-rate policy means that the monetary-policy interest rates are used solely to keep the krone close to its central rate.

At the beginning of 2008 Danmarks Nationalbank purchased foreign exchange for kr. 8 billion. The krone weakened a little in the following months and was slightly weaker than the central rate against the euro at the end of April and the beginning of May. This could be attributed to the narrowing of the short-term yield spread to the euro area in the light of the turbulence in the money markets that drove up the ECB's marginal rate. To stabilise the krone, Danmarks Nationalbank intervened in the foreign-exchange market for around kr. 20 billion in April and May, and the lending rate and the rate of interest on certificates of deposit were raised from 4.25 per cent to 4.35 per cent on 16 May. The discount and current-account rates remained unchanged at 4 per cent.

Krone vis-à-vis euro	Chart 1
Note: Reverse scale.

The Danish krone was stable in June, July and August, and Danmarks Nationalbank did not intervene in the foreign-exchange market. On 3 July, Danmarks Nationalbank followed the ECB by raising the monetary-policy interest rates by 0.25 percentage points effective from 4 July. The ECB motivated the interest decision by increasing risk of higher inflation.

The international financial crisis escalated in September and October and the Danish krone came under pressure. The pressure on the krone followed a period in which the spread between Danmarks Nationalbank's lending rate and the ECB's marginal rate had been negative. To mitigate the pressure, Danmarks Nationalbank intervened in the foreign-exchange market, purchasing kroner against foreign exchange for a considerable amount from late September to early October. However, this proved insufficient to withstand the pressure on the krone, and Danmarks Nationalbank raised its monetary-policy interest rates, effective from 8 October. The lending rate and the rate of interest on certificates of deposit were raised by 0.4 percentage points to 5 per cent, and the discount rate and the current-account rate were raised by 0.25 percentage points to 4.5 per cent. Danmarks Nationalbank subsequently continued to intervene in the foreign-exchange market to stabilise the krone. On 8 October, the ECB announced a reduction of the minimum bid rate by 0.5 percentage points to 3.75 per cent. On the same day, the ECB also announced that, until further notice, the weekly main refinancing operations would be carried out at a fixed rate, corresponding to the minimum bid rate, whereas they had previously been carried out at a variable marginal rate that could be at least the minimum bid rate. This meant a widening of the monetary-policy interest-rate spread between Denmark and the euro area to 1.25 percentage points.

The outflow of foreign exchange continued after a pause, however, as the mounting financial crisis caused investors to withdraw from smaller currencies. At the end of October, Danmarks Nationalbank intervened again to stabilise the krone, bringing the total intervention purchases of kroner in September and October to kr. 65 billion. On 24 October, Danmarks Nationalbank raised the lending rate and the rate of interest on certificates of deposit by a further 0.5 percentage points, thus widening the spread between Danmarks Nationalbank's lending rate and the ECB's interest rate to 1,75 percentage points.

From the end of October, the krone strengthened and Danmarks Nationalbank was able to repurchase foreign exchange. On 6 November, Danmarks Nationalbank, mirroring the ECB, cut its monetary-policy interest rates by 0.5 percentage points effective from 7 November. On 4 December, the ECB announced a reduction of the interest rate by 0.75 percentage points. Danmarks Nationalbank cut its lending rate and the rate of interest on certificates of deposit by 0.75 percentage points to 4.25 per cent and lowered the discount and current-account rates by 0.5 percentage points to 3.5 per cent, effective from 5 December.

On 19 December, Danmarks Nationalbank unilaterally cut the lending rate and the rate of interest on certificates of deposit by 0.5 percentage points to 3.75 per cent in light of the development in the foreign-exchange market, where it had been purchasing foreign exchange for a period of time. The discount and current-account rates remained unchanged at 3.5 per cent. The spread between Danmarks Nationalbank's lending rate and the ECB's interest rate was subsequently 1.25 percentage points. In November and December, Danmarks Nationalbank purchased foreign exchange in the market for kr. 56 billion.

In 2008, Danmarks Nationalbank sold foreign exchange net for approximately kr. 20 billion in connection with intervention, cf. Table 2. In the same period, the foreign-exchange reserve increased by kr. 44 billion to kr. 212 billion at the close of 2008. On Danmarks Nationalbank's initiative, the central government raised foreign loans of kr. 64 billion in order to strengthen the foreign-exchange reserve against the backdrop of the substantial outflow of foreign exchange in the autumn. The central government's foreign debt is raised in the interest of the foreign-exchange reserve, and the equivalent amount in kroner is credited to the central government's account at Danmarks Nationalbank and is not available for other purposes.

The central government's domestic debt exceeded the domestic financing requirement by just over kr. 100 billion, mainly as a result of the issuance of 30-year government bonds for around kr. 90 billion. The central government plans to use the overfinancing in 2008, which is deposited in its account at Danmarks Nationalbank, to finance the credit package of up to kr. 100 billion for Danish banks and mortgage-credit institutes in 2009, cf. page 17.

The money market
Due to increasing concerns about own losses and declining confidence in counterparties, the global money markets more or less froze in the autumn in step with the escalating financial crisis. The spread between uncollateralised and collateralised money-market interest rates widened considerably. To boost liquidity, Danmarks Nationalbank, in line with other central banks, launched a series of temporary facilities in 2008, extending the collateral basis for borrowing by banks, cf. page 17. However, the spread between uncollateralised and collateralised money-market interest rates remained high in both the euro area and Denmark. In the autumn of 2008 there was also a lack of short-term dollar and euro liquidity among banks and mortgage-credit institutes in Denmark. Danmarks Nationalbank established swap lines with the Federal Reserve and the ECB with a view to offering dollar and euro loans to Danmarks Nationalbank's monetary-policy counterparties.

To restore confidence in the financial markets, western governments began to announce bank rescue packages towards the end of September. The Danish Act on Financial Stability, which ensures that all claims of depositors and other unsecured creditors are fully covered was adopted in early October, cf. page 17.

Due to the difficult financing conditions in 2008, there was a tendency for a larger group of financial institutions to raise loans from Danmarks Nationalbank. Viewed over the full year 2008, banks and mortgage-credit institutes increased their borrowing from Danmarks Nationalbank.

The net position of the banks and mortgage-credit institutes vis-à-vis Danmarks Nationalbank was reduced by kr. 106 billion in 2008, cf. Table 2. The lower net position was reflected in a reduction of the holdings of certificates of deposit by kr. 82 billion and an increase in monetary-policy loans in kroner by kr. 24 billion.

Furthermore, the banks and mortgage-credit institutes raised loans in foreign currency from Danmarks Nationalbank under the swap lines established. At the end of December, the financial institutions had raised loans in foreign currency for kr. 108 billion.

Bank interest rates and bond yields
From the end of 2007 until December 2008, the banks' average interest rates on lending to households and the corporate sector rose by 0.9 and 0.8 percentage points, respectively, while the corresponding deposit rates rose by 0.3 and 0.6 percentage points, respectively. The banks raised their lending rates several times during 2008, citing higher financing costs in the money and capital markets in connection with the international financial turmoil.

The Danish bond markets were also affected by the financial turmoil in 2008. Yields on mortgage-credit bonds rose significantly in September and October, and the spread to government bond yields widened considerably. The mortgage-credit bond yields subsequently fell again, e.g. as a consequence of the announcement on 31 October 2008 of the agreement on financial stability in the pension area in Denmark, cf. page 17.

The yield on 10-year government bonds decreased from approximately 4.5 per cent at the beginning of 2008 to approximately 3.3 per cent at year-end. The yield spread to equivalent German government bonds was fairly stable at around 0.25 percentage points from March to September and then widened to around 0.4 percentage points at the end of the year. Other European countries experienced an even further widening of the yield spread to Germany.

The domestic financial system

Financial stability
During the summer of 2008, the Danish financial system proved to be seriously affected by the financial crisis. Danmarks Nationalbank's temporary measures, which are described below, were aimed at increasing liquidity in the markets. In addition, Danmarks Nationalbank several times had to provide support for Danish banks that experienced liquidity problems. The Danish banks' large deposit deficits made them vulnerable to restrictions on access to foreign funding. Danmarks Nationalbank assessed that financial stability was at risk as the liquidity problems of individual banks could affect other banks' access to foreign funding. Initially, Danmarks Nationalbank made a specific assessment of each bank, but during the autumn it became clear that a general solution was required.

Roskilde Bank
On 10 July, Danmarks Nationalbank concluded an agreement with Roskilde Bank concerning an unlimited credit facility. The agreement was made following an approach from the board of Roskilde Bank, who assessed that an announcement that substantially greater write-downs were expected might lead to a run on the bank by customers wanting to withdraw their deposits. The agreement was subject to a number of conditions, including that Roskilde Bank should work towards a full or partial sale of the bank. After an extensive sales process it became clear that no-one wished to acquire Roskilde Bank. In addition, thorough audits of the bank's commitments had disclosed considerable losses and the bank was unable to meet the statutory solvency requirement. To avoid insolvent liquidation, Danmarks Nationalbank and the Danish Contingency Association on 24 August, by agreement with the Danish government, concluded an agreement to acquire Roskilde Bank. The aim was to mitigate the negative impact on the financial system in Denmark. In September, 21 branches of Roskilde Bank were sold. The rest of the bank is still being wound up.

On 27 November, the Finance Committee of the Folketing (Danish parliament) approved a government guarantee protecting Danmarks Nationalbank against any losses in connection with the acquisition and winding up of Roskilde Bank.

EBH Bank
Danmarks Nationalbank provided liquidity support to EBH Bank in September and October. On 13 November, EBH Bank announced that it had fallen below the statutory solvency requirement, and subsequently it was taken over by the Winding-Up Company, cf. below.

Amagerbanken
On 3 October, Amagerbanken obtained a short-term credit facility from Danmarks Nationalbank.

Political agreement on financial stability
On 10 October, the Folketing adopted the Financial Stability Act, under which all depositors and other unsecured creditors are fully covered in respect of claims on banks in the Kingdom of Denmark. A winding-up company was established. In the event that a bank no longer meets the statutory solvency requirement and no private-sector solution can be found, this company will inject capital into a new subsidiary that will acquire and wind up the bank.

Political agreement on financial stability in the pension sector
On 31 October, the Ministry of Economic and Business Affairs, the Danish Financial Supervisory Authority and the Danish Insurance Association decided to launch a number of initiatives to prevent pension and insurance companies from being compelled to divest Danish mortgage-credit bonds.

Act on State-Funded Capital Injections (Credit Package)
The Act, which was adopted by the Folketing on 3 February 2009, enables credit institutions domiciled in Denmark to apply to the government for injections of hybrid Tier 1 capital. All banks, savings and cooperative banks, mortgage-credit institutes and Danish Ship Finance are comprised by the arrangement.

Danmarks Nationalbank's temporary measures
On several occasions in 2008, Danmarks Nationalbank temporarily expanded the credit facilities available to banks and mortgage-credit institutes, currently until 30 September 2010. In May, Danmarks Nationalbank approved a new type of bonds as eligible collateral for loans. These loan bills can be issued by banks in Denmark. The purpose was to boost the somewhat sluggish exchange of liquidity in the money market. When acquired by other banks and mortgage-credit institutes, these bills can be pledged as collateral to Danmarks Nationalbank. In the subsequent months the situation gradually worsened, which made further measures necessary. In September, Danmarks Nationalbank gave banks and mortgage-credit institutes access to credit on the basis of excess capital adequacy. Depending on the capital buffer, the maximum credit line is usually kr. 800 million. At the same time, the collateral base for ordinary borrowing by banks and mortgage-credit institutes from Danmarks Nationalbank was expanded to include equities and investment fund shares. In addition, it became possible to pledge senior debt, i.e. bonds issued by banks and mortgage-credit institutes in connection with covered bonds, as collateral.

Banks
The earnings of Danish banks fell considerably in 2008 and the downward trend is expected to continue in 2009. The fall is primarily attributable to value adjustments and increased write-downs on loans and guarantees, particularly towards the end of the year. The banks' lending to residents, excluding monetary financial institutions (MFIs), was kr. 1,546 billion at end-2008 compared with kr. 1,334 billion at end-2007.

During 2008, nine Danish banks were wound up, merged with or were taken over by other banks.

Mortgage-credit institutes
In 2008, the mortgage-credit institutes experienced a rise in write-downs, although they remained at a very low level. Total lending by mortgage-credit institutes to domestic households and business enterprises etc. constituted kr. 2,165 billion at end-2008, up from kr. 2,016 billion at end-2007. At the end of 2008, deferred-amortisation loans made up 48 per cent of total lending compared with 43 per cent at the end of 2007.

Basel II
In 2008, the credit institutions calculated their capital requirements under the Basel II rules. In terms of credit risk, Basel II entails that the uniform rules are replaced by more institution-specific rules, whereby the risk-weighting of assets – and thus the capital requirement – to a larger extent reflects the risks incurred by each individual institution. For most Danish banks, the transition to Basel II meant reduced capital requirements due to lower capital requirements for exposures with retail customers and small and medium-sized enterprises. The greatest reduction was seen for institutions applying the IRB (Internal Ratings Based) approach to calculation of credit risk. To prevent large one-off decreases in the credit institutions' capital requirements, a transitional arrangement has been introduced for institutions applying the IRB approach. Up to and including 2009, these institutions must hold capital in excess of the statutory minimum requirement of 8 per cent.

Under Basel II, the credit institutions must calculate individual capital needs on the basis of their aggregate risks. The capital needs are not published, but are reported to the Danish Financial Supervisory Authority, which may order individual institutions to increase their capital needs.

Recommendations of the Financial Stability Forum
The Financial Stability Forum (FSF) comprises representatives of national and international financial authorities and aims to promote financial stability and well-functioning financial markets. In April 2008, the FSF presented a report with a number of recommendations in the context of the financial crisis. Danmarks Nationalbank and the Danish Financial Supervisory Authority held a seminar on this issue, and in that connection a group was set up with representatives of the Association of Danish Mortgage Banks, the Danish Mortgage Banks' Federation, the Danish Bankers Association, the Danish Financial Supervisory Authority and Danmarks Nationalbank. This group is to discuss and follow up the FSF recommendations and the process of implementing specific recommendations in Denmark. Its work is expected to be completed by the summer of 2009.

Payment systems
So far, payment and securities settlement in Denmark has not been particularly affected by the financial turmoil. One of the reasons is that the banks and mortgage-credit institutes have considerable holdings of securities and certificates of deposit that can be pledged as collateral in the settlement process.

Settlement of payments via accounts at Danmarks Nationalbank continued to grow in 2008 in terms of both the number of payments and their value. In 2008 there were 793,859 payments totalling kr. 78,799 billion in value.

On some days, the financial turmoil led to record numbers of foreign-exchange transactions for settlement via the international currency settlement system CLS. It has been possible to settle payments related to credit derivatives via CLS since November 2007, but the volume is still low. However, the collapse of Lehman Brothers and the problems experienced by the US mortgage institutes Fannie Mae and Freddie Mac led to an increase in payment settlement via CLS. These transactions were settled via the normal procedure without causing any capacity problems.

Oversight
Danmarks Nationalbank oversees the financial infrastructure in Denmark in order to promote safe and efficient settlement of payments and securities transactions.

The Sumclearing
The Sumclearing is the Danish system for clearing and settlement of retail payments in Denmark. Danmarks Nationalbank has monitored settlement discipline among Sumclearing participants for quite a while. During this period, it has been observed that a number of participants have been postponed because they had not reserved sufficient liquidity. With reference to Danmarks Nationalbank's survey of settlement discipline, the Danish Bankers Association has raised the fee for postponement.

Danmarks Nationalbank follows the sector's discussions on how to modernise the retail payments infrastructure.

Securities settlement
In October, NASDAQ OMX Nordic Exchange announced plans to introduce a central counterparty for equity trading in the Nordic market. This will reduce settlement risk. The central counterparty will enter into all transactions concluded as buyer and seller vis-à-vis the respective counterparties. At the same time, the Nordic settlement procedure will be aligned with those seen elsewhere in Europe.

VP Securities A/S (VP) has set up a central securities depository in Luxembourg, VP Lux S.à r.l., with a view to giving Danish banks and mortgage-credit institutes access to issue euro-denominated bonds from a euro area member state. This means that the bonds can be pledged as collateral to central banks in the euro area. On 18 December 2008, the Governing Council of the ECB approved VP Lux under the euro area standards for central securities depositories.

The Payment Services Directive and SEPA
The EU Payment Services Directive, which was adopted in 2007, must be transposed into national legislation by 1 November 2009.

The Directive is the legal foundation for the efforts by European banks to establish a Single Euro Payments Area, SEPA. Denmark will be part of SEPA, and since January 2008 Danish banks have offered their customers the option to conduct cross-border transfers using the new SEPA Credit Transfers product.

Target2 and Target2-Securities
In May 2008, Denmark migrated to the new single shared platform for settlement of payments in euro, Target2. Target2 is one of the largest payment systems in the world. In 2008, the Danish participants settled 179,182 payments in Target2 with a value of 5,545 billion euro.

Due to an increase in cross-border securities trading, the Eurosystem is in the process of setting up a single European platform for securities settlement, Target2-Securities. VP has indicated that it wants to use Target2-Securities for the settlement of securities transactions in both kroner and euro. Target2-Securities is expected to be operational from 2013.

Fixing of swap reference rates
On 1 October 2008, Danmarks Nationalbank began to calculate and publish swap reference rates on a daily basis for maturities between 2 and 10 years in order to extend the range of Danish reference rates. The reference rates are published on the basis of daily reporting by Danish and foreign banks.

International monetary cooperation

Enlargement of the euro area
On 1 January 2009, Slovakia joined the euro area and introduced the euro as its currency. The euro area now consists of 16 member states. On introduction of the euro as its currency, Slovakia left the Exchange Rate Mechanism, ERM II. The current ERM II participants are Denmark, Estonia, Latvia and Lithuania. The change in the group of participants does not entail any adjustment of the terms for the Danish krone in ERM II.

The International Monetary Fund
In the last few years the work of the International Monetary Fund, IMF, has been characterised by the adjustment of the voice and representation of its 185 member countries in the organisation to better reflect their relative weight in the global economy, and by the introduction of a new financing model for the IMF's activities. The coming reforms were adopted by the IMF's Board of Governors in the spring of 2008. The required amendments to the IMF's Articles of Agreement are now awaiting approval by the member countries before the reforms can be implemented. Denmark sent its approval to the IMF on 2 October 2008.

Towards the end of 2008, the global financial crisis brought the IMF back into focus in international economic-policy cooperation. The EU and G20 discussions of reforming the international financial system showed broad international support for the IMF as a central institution in the efforts to design a more efficient global financial architecture. The IMF introduced a new type of credit facility in October, the Short-Term Liquidity Facility, which provides large short-term financing without the normal binding economic-policy requirements. The facility is aimed primarily at emerging market economies with track records of sound policies. In the 4th quarter of 2008, following several years with a very low level of lending activity, the IMF granted very large loans to Ukraine, Hungary, Iceland, Pakistan and Latvia, among others, in support of economic adjustment programmes.

Swap lines with the central banks of Iceland and Latvia
Danmarks Nationalbank, Norges Bank and Sveriges Riksbank concluded bilateral agreements in May with Seðlabanki Íslands, offering to make euro available against Icelandic kronur, for 500 million euro each. In December Danmarks Nationalbank and Sveriges Riksbank concluded similar agreements with Latvijas Banka. For Danmarks Nationalbank, the agreement comprised a total amount of 125 million euro for Latvian lats.

banknotes and coins

In 2008, the value of banknotes and coins in circulation fell from kr. 61.6 billion to kr. 61.3 billion. The circulation of banknotes increased from 161 million banknotes in 2007 to 162 million in 2008, i.e. an increase of 0.6 per cent. The circulation of 1,000-krone banknotes fell by 2 per cent, while the circulation of other banknotes increased by 1.2 per cent.

517 counterfeit banknotes were removed from circulation in 2008. This is a slight increase in the number compared to 2007. In an international context, counterfeiting of Danish banknotes is limited, however.

New banknotes
In 2007, Danmarks Nationalbank announced that the draft proposal from the artist Karin Birgitte Lund will form the basis for a new Danish banknote series. The motifs are Danish bridges and prehistoric finds from the areas surrounding the bridges. In cooperation with Karin Birgitte Lund, Danmarks Nationalbank worked on the original draft proposal in 2008, especially with regard to the depictions of the five bridges. The final proposal was submitted to the Ministry of Economic and Business Affairs for approval in the spring, and the approval was granted by the Royal Bank Commissioner on 29 May 2008. The work on the proposal continues with a view to issuing the first new banknote (the 50-krone banknote) in August 2009. The last banknote (the 1,000-krone banknote) is expected to be issued in 2011.

Faroe islands and Greenland
As the central bank of the Kingdom of Denmark, Danmarks Nationalbank also supplies the Faroe Islands and Greenland with cash. Since 1951 the Faroe Islands have had their own banknotes with Faroese motifs, but with the same denominations as the Danish banknotes. In 2006 a bill was introduced for Greenland to have banknotes with its own motifs, and the Act on Banknotes in Greenland entered into force on 1 June 2007. Miki Jacobsen has been chosen by the Greenland Home Rule Government to illustrate the Greenlandic banknotes. The draft proposals are expected to be presented to the Home Rule Government in early 2009, and all the denominations are scheduled to be issued at the same time in 2011.

Coins
At the beginning of 2008, Danmarks Nationalbank contacted the Ministry of Economic and Business Affairs with a proposal to abolish the 25-øre coin as the coin no longer had self-supporting purchasing power. The Ministry accepted the proposal, and the coin was abolished as legal tender, effective from 1 October. The coin can be encashed at Danmarks Nationalbank for another three years until 1 October 2011.

In connection with the encashment of the 25-øre coin, coins of many other denominations were also returned. As a result the number of coins in circulation did not increase as usual in 2008; in fact there was a decline of 187.9 million coins at a value of kr. 99.8 million.

Danmarks Nationalbank continued to issue thematic coins in 2008. The second coin in the series of coins to mark the International Polar Year was issued at the beginning of the year. The series was completed in February 2009 with the issuance of the third and last coin. In the ship series three coins were issued, the motifs being M/S Selandia, the Viking longship the Sea Stallion and the Royal Yacht Dannebrog, respectively.

Statistics

Danmarks Nationalbank prepared two new sets of statistics during 2008. The lending survey was first published on 13 January 2009 and will be disseminated quarterly in future. Being qualitative, it is based on statements by credit managers of the largest banks and mortgage-credit institutes on lending-policy changes. The survey contains information about factors that have influenced lending policy during the last quarter and provides a picture of the institutions' expectations of credit developments in the coming quarter. The lending survey thus supplements the existing quantitative lending statistics.

The coverage of securities statistics is expanded to include information on ownership concentration in Danish securities with special focus on mortgage-credit bonds. The statistics are published by ISIN codes, showing the degree of concentration in the owner distribution of individual bond series. The statistics were published for the first time on 7 January 2009 and will be issued on a monthly basis.