Safe-haven flows and negative rates during the euro crisis

When the euro area's sovereign debt crisis intensified between mid-2011 and mid-2012, investors seeking a safe haven outside the currency union, as a hedge against a possible euro breakup, poured money into Danish government securities and mortgage bonds, pushing their yields to historic lows even as yields on peripheral euro-area debt spiked. Danmarks Nationalbank's own analysis found that this safe-haven demand put sustained upward pressure on the krone against its euro peg, so the central bank intervened by selling kroner in large volumes and cut its interest rates repeatedly, both independently and alongside the European Central Bank, to curb the currency's appreciation. In July 2012, with conventional rate cuts no longer sufficient, Danmarks Nationalbank introduced a deposit rate of minus 0.2 percent, among the first negative policy rates adopted by any central bank worldwide, a tool Denmark would return to repeatedly over the following decade. The episode illustrates how, under a fixed exchange-rate regime, external financial-crisis shocks can arrive through the currency's strength rather than its weakness, with Danish monetary policy bending entirely around defending the peg either way.