Finance & Business World

Latvia’s Cabinet will seek to persuade European Union Monetary Affairs Commissioner Joaquin Almunia it can adhere to the fiscal terms of its bailout after lenders criticized the government for dragging its feet.

Almunia met with Prime Minister Valdis Dombrovskis at 9:30 a.m. in the capital Riga, a day after the ruling coalition said it will try to find 320 million lati ($668 million) in spending cuts and 180 million lati in tax increases in a bid to meet the demands the International Monetary Fund, the EU and Sweden attached to a 7.5 billion-euro ($11.1 billion) loan.

Yesterday’s Cabinet talks followed criticism from lenders that the Baltic state hasn’t shown enough commitment to its loan terms, which call for budget cuts of 500 million lati a year until 2012. Latvia tried to persuade donors to sign off on 325 million lati in budget cuts, prompting Swedish Premier Fredrik Reinfeldt to tell Latvia it “must correct” its deficit. The EU has called for better coordination in the country’s talks.

“Since the start of the crisis last year, communication about Latvia has often unsettled the markets,” said Kenneth Orchard, a senior analyst at Moody’s Investors Service in London. “There has been a constant effort by the European Commission and the IMF to coordinate communication. It’s going to be an ongoing saga at least until after” general elections a year from now.

Euro Peg

Latvia, which like neighboring Lithuania and Estonia pegs its currency to the euro as part of the exchange-rate mechanism 2, is suffering the EU’s second-deepest recession behind Lithuania after a lending boom spurred a property bubble that burst when the credit crisis descended on the region.

“As long as the economy remains weak, I can’t see this getting any easier,” Orchard said.

Gross domestic product contracted 18.7 percent in the second quarter, compared with a 20.2 percent slump in Lithuania and a 16.1 percent decline in Estonia.

Riga’s OMX Index was little changed at 313.09 today at 2:18 p.m. Riga time. The yield on Latvia’s 5.5 percent government bond due March 2018 rose 6 basis points today to 7.299 percent. The lats was little changed at 0.7095 per euro.

Almunia said that now is a “critical moment” in Latvia’s program since there are some signs of economic stabilization, according to a press release from the Latvian Commercial Bank Association which met with him today. Almunia said it is necessary for Latvia to be timely in adopting its 2010 budget, according to the press release. Almunia will hold a press conference today at 3:30 p.m. Riga time.

Drag On

Coalition talks may drag on even after Almunia’s visit quick pay day loan. The country’s biggest coalition party, the People’s Party, has said it may not support the Finance Ministry’s proposed cuts.

“Almunia is not the god, the lord,” Vents Krauklis, the party’s deputy faction leader said, according to the Leta newswire. The party last night said its chairman, Mareks Seglins will step down on Nov. 21, and may be replaced by Andris Skele, a three-time former premier. Skele said the party should support Dombrovskis’ government as long as it has the confidence of the president and the Parliament, according to the statement.

Danske Bank A/S said Skele’s previous support for a lats devaluation “could unnerve markets yet again,” in a client note today. Skele in August suggested widening the trading corridor of the lats band. He also called for a budget deficit of 3 percent of gross domestic product in 2010, and to quickly sell Parex Banka, the lender the state took over in November.

Hurting Sweden

Dombrovskis and Finance Minister Einars Repse are members of the New Era Party. Repse is due to present the proposed budget to Parliament on Oct. 23. Lawmakers will vote on the budget a month later.

The region’s economic decline is hurting Swedish lenders with Stockholm-based Swedbank AB and SEB AB the biggest banks in the Baltics. Dombrovskis has tried to contain the domestic fallout of the stipulated austerity measures, also needed to maintain the euro peg, and last week proposed capping mortgage holders’ liability.

That led to speculation, which the government has sought to quell, that the country may be preparing the ground for a lats devaluation by limiting the domestic losses such a move would incur.

Sweden’s krona slipped as much as 0.6 percent against the euro today to trade at 10.3633 at 1:20 p.m. in Stockholm. Swedbank lost 2.3 percent to 64.75 kronor and was down 0.2 percent at 46 kronor.

Austerity Measures

Even as austerity measures exacerbate the nation’s recession, Latvia has no choice but to push through the IMF and EU-ordered budget cuts or risk spiraling debt levels that would undermine its chances of adopting the euro, Orchard said.

“If they start slipping, then the debt-to-GDP ratio could go to 80 percent or 90 percent and that may not be sustainable,” Orchard said.

The country targets euro adoption, which requires member states to have budget deficits no wider than 3 percent of GDP and debt levels within 60 percent of GDP, in 2014. The government estimates that the country’s budget shortfall next year will be equivalent to 8.5 percent of GDP.

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If you think flying is a miserable experience now, just wait until 2010.

Air travel has been declining since 2008 as a result of the recession. But it is expected to pick up next year, resulting in more headaches for travelers, according to a study released Thursday.

The study from the Brookings Institution, a nonprofit public policy organization based in Washington, said the downturn in travel has a "silver lining of freeing up airport capacity and improved on-time arrival rates. But these silver linings will disappear…in 2010."

The result: More delays.

This adds to the current hardship of traveling, considering that in every year since 2000, at least 15% of flights have been delayed at least 15 minutes, the study said.

Part of the problem is the "antiquated" air traffic control system, and the difficulties in establishing the more advanced Next Generation Air Transportation System, or NextGen, which is still three to nine years away from implementation, according to Brookings.

"Once reason that policymakers can feel confident that such performance will continue to suffer is the reality that the same antiquated air traffic control system will be in place to manage our every-busier skies," the study said.

High-speed rail could free the skies

Air passenger travel in 2008 and 2009 has suffered its most significant declines since the terrorist attacks of Sept. 11, 2001, and the recession is to blame, reported Brookings.

Air travel in the United States experienced its first annualized drop in September 2008 since the World Trade Center and Pentagon attacks of 2001, and these declines continued through March 2009, according to the most recent data from Brookings.

This is in stark contrast to the gains that occurred between 1990 and 2008, when U saving account payday loan.S. airports increased passenger and flight levels by 60%, the institute said.

Brookings offered several solutions to alleviate air travel congestion when it picks up again, including increased investment in rail corridors. This would help free up the skies, the study said, noting that half of all flights are between cities that are less than 500 miles apart.

The challenge for high-speed rail travel is that it must be able to compete with air travel. The study noted that "at distances of less than 400 miles high-speed rail can meet or beat air travel times, while the capability wanes up to and past 500 miles."

As part of his stimulus plan, President Obama is pledging $13 billion into an ambitious high-speed rail project.

David Castelveter, spokesman for the Air Transport Association, the airline industry group, said that cutting capacity is not the problem, because it occurs on the "least popular routes." Also, he said the airline industry is reluctant to end short-range flights.

"We can continue to serve the small communities we serve today, and not eliminate it, as these studies suggest," he said.

Castelveter said the air traffic control system must be modernized. A change from radar to digital satellite technology would reduce the spacing between flights and relieve congestion, he said.

"Whether it’s next year, or [the next] two years, the economy will ultimately recover and the industry will attempt to grow," Castelveter said. "Our great concern is the fact that this government has yet to move forward aggressively with modernization of the air traffic control system."  

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French and Italian industrial output surged in August, fueled by government incentives to buy new cars, adding to signs that stimulus spending is helping the euro-region economy emerge from its worst recession in 60 years.

French output rose 1.8 percent, from July, dwarfing the 0.3 percent median forecast by 22 economists surveyed by Bloomberg. Italian production jumped 7 percent in August, the biggest monthly increase in at least 20 years.

The gains in manufacturing in France and Italy, which account for more than a third of the euro-region economy, provide further evidence that the euro region will expand in the three months through September, after five quarters of contraction. European manufacturing also grew more than initially estimated in September, a report showed this week.

“Manufacturing activity will finally stop being a drag on growth in third quarter,” said Annalisa Piazza, an economist at Newedge Group in London. “Today’s data, coupled with the upswing in German industrial production in August, will lead to an upswing in euro-zone output figures in August of around 3 percent month on month, much stronger than previously anticipated.”

The euro-area economy barely contracted in the second quarter as Germany and France, the region’s largest economies, returned to growth. The euro area will expand 0.3 percent in 2010, the International Monetary Fund said on Oct. 1, when it trimmed its estimate for this year’s contraction to 4.2 percent.

Car Incentives

Manufacturing in both France and Italy has been propped up by government stimulus measures, including a payment of 1,000 euros ($1,473) for buyers who trade in older cars for less- polluting models. President Nicolas Sarkozy’s government intends to extend the program into next year, though it will be scaled back and Italy is also considering an extension overnight pay day loans.

French car production surged 19 percent in August from the previous month, while in Italy output of motor vehicles, including cars and trucks, gained 12.9 percent, today’s reports said.

Manufacturing “is mainly benefiting from the car-incentive schemes, although output of other manufactured products is also rising,” said Joost Beaumont, an economist at Fortis Bank Nederland. This suggests “that the pickup in world trade and the turn in the inventory cycle are also leaving their mark.”

Even with the gains in production and demand, joblessness is still rising across the EU. With some government-stimulus measures starting to expire and the euro’s 18-percent gain against the dollar since February weighing on exports, policy makers including European Central Bank President Jean-Claude Trichet have warned the economic pickup may be uneven.

Exit Strategies

Trichet has also called on governments to figure out how to withdraw the billions of euros of stimulus measures used to combat the worst recession in 60 years to avoid fueling inflation as growth begins to accelerate. Trichet yesterday demanded that lawmakers execute “ambitious” plans to reverse the region’s largest budget deficit since the euro began trading in 1999 “as soon as possible and at the latest when the recovery takes hold.”

Failure by politicians to devise a plan and then carry it out may fuel debt and inflation, forcing the Frankfurt-based ECB to raise interest rates faster in the recovery, according to economists at Goldman Sachs Group Inc. and Barclays Capital.

The ECB left its benchmark rate unchanged yesterday at a record low 1 percent.

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Confidence among Japanese merchants rose in September, a boost economists say may not last as near- record unemployment and falling wages deter people from spending.

The Economy Watchers index, a survey of barbers, taxi drivers and others who deal with consumers, climbed to 43.1, the Cabinet Office said today in Tokyo. The index dropped for the first time in eight months in August.

The improvement in sentiment doesn’t indicate the economy’s recovery from its worst postwar recession is gaining traction, economists said. The unemployment rate is close to a record high and wages have dropped for 15 months, which may compel households to tighten their purse strings.

“We need to see a clear improvement in the labor market and wages before sentiment gains momentum,” said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo. “Consumer spending will weaken as support from government measures fades.”

Japan’s economy expanded in the second quarter for the first time in more than a year, helped by exports and 25 trillion yen ($282 billion) in government stimulus packages. Economists expect growth to slow in coming months.

“We can’t be optimistic about the current state of the economy,” Deputy Prime Minister Naoto Kan said this week, adding that the government may need to compile an extra budget to support the nation’s weakening job market online pay day loans.

The jobless rate dropped to 5.5 percent in August from a record 5.7 percent in July. Winter bonuses for Japan’s large companies will fall 13.1 percent to about 660,000 yen ($7,472), the biggest drop since the survey began in 1970, the Institute of Labor Administration reported this week.

Imports Fall

In another sign of weak demand, imports fell by a record amount in August, causing the current-account surplus to widen, the Finance Ministry said in a report today.

Households are shifting to cheaper stores including Uniqlo Co. and turning their back on luxury brands. Gianni Versace SpA will close its three Japanese stores and review its entire business strategy, Federico Steiner, spokesman for Versace in Milan, said on Oct. 6.

The starting salary for graduates fresh out of college this year rose 0.09 percent to 208,306 yen, according to the business lobby Keidanren, the smallest gain since the survey started in 1966.

“The drop in starting salary is a direct reflection of how severe this recession is,” said Hideshi Nitta, manager of the labor policy bureau at the Keidanren in Tokyo. “Growth will probably remain tepid next year.”

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Peru’s central bank will probably keep its benchmark lending rate at a record low as policy makers evaluate signs that an economic recovery has taken hold.

The seven-member board, led by bank President Julio Velarde, will keep its reference rate at 1.25 percent, according to 11 of 12 economists surveyed by Bloomberg. The bank is scheduled to announce its decision after 7 p.m. New York time.

Velarde will pause for a second month, after seven straight cuts earlier this year, to measure the effect of lower borrowing costs on the country’s economy, said Pablo Secada, an economist at the Peruvian Economy Institute. Growth is showing signs of rebounding after the economy stalled in the first half of the year on falling export demand and weaker domestic spending.

“The central bank is aware that the economic recovery has begun, even if it’s moderate,” Secada said in an interview from Lima. “We’re seeing growth in consumer demand, so they have cause not to be pessimistic.”

Brazil, Mexico and Chile have all held their benchmark rates unchanged since August, citing improving economic growth. Peru cut the overnight rate by 5.25 points this year to spur consumer spending after six increases in 2008 pushed borrowing costs up to the highest since 2001.

Peru’s metals output, agriculture and cement sales all increased in August, and unemployment was 8.3 percent that month, down from an almost two-year high of 9.3 percent in March. The improved numbers came after the economy shrank for the first time in eight years in the second quarter.

Metals Pricing

Prices of copper, zinc, lead, tin and silver, which account for 60 percent of Peru’s export revenue, have all gained at least 35 percent this year as increases in U.S. and Chinese manufacturing signal rising demand for industrial materials.

“The market is very promising for business in general,” said Norberto Lassner, president of Neogas Peru, a compressed natural gas distributor that inaugurated a $5 million filling station outside Lima last week. “There’s a great deal of repressed demand.”

Bank loans grew 15 percent this year through September from a year earlier spurred by mortgages and car loans, according to Peru’s banking regulator. Corporate debt offerings totaled 400 million soles ($140 million) in September, the highest monthly figure in two years, securities regulator Conasev said.

Peru’s foreign debt rating was put on review for an increase to investment grade by Moody’s Investors Service last week, citing the country’s “stable” economic policies.

Slowing inflation

The bank may cut the rate by 0.25 point as inflation hovers at a two-year low and Peru’s currency strengthens, said Kathryn Rooney, an emerging-market analyst at Bulltick Securities Corp. The Peruvian sol has advanced 9.5 percent this year, the seventh-best performance against the dollar among 26 emerging- market currencies tracked by Bloomberg.

The country’s annual inflation rate fell in September to 1.2 percent from 1.87 percent through August as food and transport costs declined.

The inflation rate will be lower than policy makers’ target of 1 percent to 3 percent this year on declining consumer demand, Velarde said last month.

Still, after expanding 9.8 percent in 2008, the fastest pace in 14 years, Peru’s economic growth may slow to 1.8 percent in 2009, the slowest pace since 2001, Velarde told reporters in Lima on Sept. 18.

“Domestic demand is taking longer to pick up than expected,” Rooney said in a telephone interview from Miami. “Data shows growth woefully below potential.”

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Australia’s central bank may leave interest rates unchanged today for a sixth month and signal plans to increase borrowing costs as early as next month amid signs the economy is strengthening.

Reserve Bank Governor Glenn Stevens will keep the overnight cash rate target at 3 percent at 2:30 p.m. in Sydney, according to 19 of 20 economists surveyed by Bloomberg News. One expects a quarter percentage point increase.

The benchmark rate will have to be raised from its current “unusually low level at some point” as private demand increases, Stevens said last week. The local currency’s surge to a 13-month high and forecasts by analysts for an increase in unemployment may prompt Stevens to delay an increase this month.

“Board members are still uncertain about the sustainability of the global recovery,” said Stephen Roberts, an economist at Nomura Australia Ltd. in Sydney. Low inflation also “provides the Reserve Bank with the luxury to normalize interest rates slowly, even as the economy exhibits modest growth.”

Speculation that Stevens will move faster than policy makers in the U.S., Europe and Japan to raise borrowing costs has helped stoke a 25 percent gain in the nation’s currency this year, curbing earnings by exporters including BHP Billiton Ltd.

Investors have a 100 percent expectation Stevens will raise the overnight cash rate target by a quarter percentage point in November, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange. They also tipped a 40 percent chance of an increase today, the index showed at 10:36 a.m.

‘Good Episode’

Governor Stevens, who cut the benchmark lending rate by a record 4.25 percentage points between September 2008 and April to cushion the economy against fallout from the global credit squeeze, said on Sept. 28 that compared with past recessions, “this has been a good episode for Australia.”

“In due course, both fiscal and monetary support will need to be unwound as private demand increases,” Stevens told a Senate committee in Sydney.

Reports published last week showed retail sales, approvals to build private homes, bank mortgage lending and property prices all jumped in August, adding to signs the economy will strengthen this quarter.

Advertisements for job vacancies rose in September for a second straight month, gaining 4.4 percent from August, according to an Australia & New Zealand Banking Group Ltd. report released in Melbourne yesterday.

Unemployment Rising

Still, a report due Oct. 8 will show the unemployment rate rose to 6 percent last month from 5.8 percent as employers cut 10,000 jobs, according to the median estimate of 20 economists surveyed by Bloomberg.

Consumer spending, stoked by A$20 billion ($17.6 billion) in government cash handouts to households, helped fuel a 1 percent expansion in Australia’s gross domestic product in the first half of this year.

The government is also boosting domestic demand by spending an extra A$22 billion on roads, railways, ports and schools.

There are increasing signs the stimulus is starting to drive up asset prices. The nation’s benchmark S&P/ASX 200 index of stocks has surged more than 20 percent this year, and a report published Sept. 30 by property monitoring company RP Data-Rismark showed house prices climbed 7.9 percent in the first eight months of this year.

Economic Growth

“We are in a situation where we would not want to see very strong growth in housing prices — that would be unhelpful from a social perspective,” Anthony Richards, the head of the central bank’s economics department, said on Sept. 29, adding that it’s “not reasonable to expect that interest rates will stay at the current low levels indefinitely.”

The Reserve Bank scrapped its forecast in August for the economy to contract this year, instead predicting GDP will rise 0.5 percent. The bank expects growth will accelerate to 2.25 percent in 2010 and 3.75 percent in 2011.

While an increase in the benchmark rate today is possible, a “hike in November is a better bet,” said Spiros Papadopoulos, a senior economist at National Australia Bank Ltd. in Melbourne.

“By then, we will have the September-quarter consumer price index, and another full round of key monthly indicators to shore up the central bank board’s view that the economy is on a sustained recovery path,” he said.

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The global financial crisis is probably not completely over and banks are likely to experience further setbacks, European Central Bank Governing Council member Axel Weber said in a newspaper interview released on Sunday.

“We will probably not be spared small aftershocks on the financial markets,” Weber told Germany’s Handelsblatt business daily.

He added, however, that the magnitude of such aftershocks would be far smaller than the hit the global economy took after the collapse of U pay day loan.S. investment bank Lehman Brothers in September 2008.

“Economic activity and financial markets are currently in a stabilization phase globally. Nonetheless, the economic crisis will bring further costs for banks,” said Weber, who is also president of Germany’s Bundesbank.

(Writing by Paul Carrel; editing by John Stonestreet)

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Turkish Prime Minister Recep Tayyip Erdogan, who hosts the International Monetary Fund’s main annual meeting next week, wants to show that his $600 billion economy can survive the global crisis without new money from the lender.

Turkey has been the fund’s biggest borrower this decade, drawing about $43 billion to help recapitalize more than 20 failed banks. Erdogan, who heads an Islamist-rooted government that has been entrenching its power since a 2007 re-election, has resisted taking on new loans in more than a year of talks with the fund, even as the EU membership candidate sank into its deepest recession.

“Erdogan consistently said ‘no’ to the IMF, despite pressures from both the domestic and the overseas business community,” said Ahmet Akarli, an economist for Goldman Sachs Group Inc. in London. He likely saw dependency on IMF loans as incompatible with his “strategy of transforming Turkey into a leading global player and a heavyweight in its immediate region,” Akarli said.

Istanbul, a city of 12 million that straddles the two continents, will welcome about 15,000 delegates including finance ministers of the G-7 countries. They’re here to attend the annual meetings of the IMF and World Bank, the institutions set up after World War II to ensure financial stability and reduce poverty.

Turkish financial markets backed Erdogan’s go-it-alone strategy, posting gains even as Turkey refused IMF requests to reduce spending on local government and improve the country’s tax collection system.

Growing Power

Turkey’s benchmark ISE-100 stock index has added about 80 percent this year, exceeding the 57 percent gain on the benchmark MSCI Emerging Markets index. Yields on the country’s benchmark bonds have fallen by almost half, to a record low of 8.6 percent.

Erdogan, 55, is seeking to promote Turkey as a growing economic power and also a regional dealmaker. He’s mediated indirect peace talks between Syria and Israel, acted as a go- between in international talks with Iran over its nuclear program, and offered his country as a conduit to bring central Asian oil and gas to Europe.

The IMF and World Bank meetings are only held outside Washington once every three years and Turkey, venue for the 1955 summit, becomes the first country to host them twice — a publicity coup for Erdogan and his Justice and Development Party.

The IMF meetings “will take Turkey’s visibility to new levels,” Deputy Prime Minister Ali Babacan said on Sept 30.

No Walking Stick

Erdogan inherited an IMF program of spending cuts and state asset sales when he came to power in 2003, and stuck with it for five years. Now he’s balking at the fund’s demands for tighter budgets, and says Turkey no longer needs IMF cash.

“We’ve shown we can overcome crisis without the IMF,” he said on Sept. 17 in Istanbul, the city he ran as mayor between 1994 and 1998. “We’re trying to stand on our own two feet and move forward without a walking stick.”

Talks will resume once the annual meetings end, “and we’ll see what is needed,” fund Managing Director Dominique Strauss- Kahn said yesterday in Istanbul. “There’s no rush and no tension between Turkey and the IMF.”

The country’s banking system has weathered the global crisis without the need for government bailouts, after a decade of IMF-ordered changes to tighten regulation and risk management. Akbank TAS, the lender part-owned by Citigroup Inc., stayed profitable throughout the crisis and posted second-quarter net of $494 million, up 44 percent from a year earlier.

Limping Economy

Turkey’s manufacturing economy, though, is limping its way through the global slowdown, as European demand for Turkish-made cars, fridges and washing machines slumps. Net income at Ford Otomotiv Sanayi AS, the local unit of Ford Motor Co., fell 35 percent in the second quarter as exports slumped.

Gross domestic product dropped an annual 14.3 percent in the first quarter, the deepest contraction since quarterly records began in 1987. Unemployment among people under 24 jumped to 29 percent in February from 22 percent a year earlier.

The economy would have performed better if Erdogan had agreed IMF loans, Mustafa Koc, chairman of the country’s biggest industrial group Koc Holding AS, which is Ford’s local partner, said in Istanbul yesterday.

Ballooning Deficit

Higher spending to support the jobless, combined with lower tax revenue, is forcing the government to borrow more to fund a budget deficit forecast at 63 billion liras ($43 billion) this year, six times the target drawn up before the crisis struck.

That means Erdogan can’t cut off talks with the fund altogether. The country still owes about $8 billion to the IMF from earlier programs.

“They’ll keep the IMF talks in limbo for a while longer because that’s worked so far,” said Tevfik Aksoy, an economist at Morgan Stanley in London. “If global conditions worsen and it looks like there may be a need for money after all, then they’ll be able to announce it.”

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Danish Central Bank Governor Nils Bernstein said Denmark would have been hurt less by the financial crisis had it adopted the euro, calling the common European currency an “insurance policy” for the economy.

“The crisis has shown us this is not just a political problem,” Bernstein, 66, said in an interview in Copenhagen on Sept. 28. “The crisis has shown that we can manage economically outside the euro, but it has also demonstrated that there are big advantages during a crisis to be inside and much more protected against turmoil and to have access to the euro system’s facilities.”

Denmark pegged the krone to the euro in 1999, obliging the central bank to use policy to steer the currency. Nationalbanken raised the benchmark rate to 5.5 percent in October as policy makers defended the krone from a sell-off while the European Central Bank cut its main rate. That led to higher mortgage payments for Danish holders of adjustable-rate loans and increased the euro’s appeal among voters.

“The big interest rate differential we had last year wouldn’t have been necessary had we been inside the euro zone,” Bernstein said. “We were under pressure.”

Denmark would have had earlier access to dollars had it been a member of the common European currency, he said. In September last year, Nationalbanken was one of several central banks outside the euro zone to receive swap lines with the U.S. Federal Reserve.

‘Safe Harbor’

“We had to make an agreement with the Fed and a euro agreement with the ECB to help us through our problems, which demonstrates that in a storm it’s better to be in a safe harbor than alone at sea,” Bernstein said.

Momentum in favor of switching to the common currency has ebbed as the crisis abated and the Danish central bank cut its lending rate to a record low of 1.25 percent on Sept. 24. After rising to a three-year high of 53.4 percent in November, Danish voter support for the euro fell to 48.9 percent of respondents, a poll commissioned by Danske Bank A/S showed this month.

The government will probably break its pledge to hold a referendum on joining the euro this electoral term, which ends in 2011, as polls show dwindling support, government officials, who spoke on condition of anonymity because an official announcement has yet to be made, said this month.

Economists have said if Danes rejected the euro for a third time, after votes in 1992 and 2000, the issue could be sidelined for at least 15 years.

‘Not Very Convincing’

“My expectations are that there won’t be a referendum until we are sure to get a ‘yes’,” Bernstein said. “But the polls fluctuate a lot and are not very convincing. We’ve lost before, and you can’t try too often. It’s the government’s job to convince the voters.”

Former Prime Minister Anders Fogh Rasmussen, who has said not having the euro “damages” Danish interests, handed the premiership to Lars Loekke Rasmussen in April. The former promised a vote by 2011; his successor has gone on the record to say setting a deadline is “impossible,” though he’s stopped short of officially canceling Fogh Rasmussen’s pledge.

Danish support for the euro may recede further as the central bank continues to cut rates. Bernstein signaled the bank may take more steps to ensure market interest rates better reflect the fixed exchange-rate policy, adding the difference between market spreads and benchmark interest rate spreads was something the bank is “tracking continuously, attentively.”

‘No Target’

In an effort to reduce the difference between European and Danish interbank offered rates, the central bank has widened the spread between its own lending and deposit rates, reducing the return banks can get if they use central bank facilities.

“While there is no target for the spread between the lending and deposit rates, we can see signs that the difference between the two is starting to work according to plan,” Bernstein said. “The result is that financial institutions are making less use of the central bank’s facilities.”

The bank on Sept. 28 lowered the rate it pays on certificates of deposit to 1 percent from 1.15 percent, widening the spread between its lending and deposit rates to 25 basis points.

The difference between the three-month European interbank offered rate and the equivalent Danish rate dropped to 0.874 points today. That compares with 1.0943 points on June 30 and 2.036 points on Jan. 2.

More Cuts

“It’s quite likely that we’ll see more rate cuts, both with the lending rate and also the deposit rate,” Jacob Graven, chief economist at Sydbank A/S, Denmark’s third-biggest bank, said today. The bank probably hasn’t finished cutting rates, he said. He expects the spread to the ECB key rate to end at around 0.10 to 0.15 point. “There’s still a pretty hefty spread in market rates and that’s making the krone very attractive.”

The difference between the bank’s lending and deposit rates may widen to as much as 50 basis points, Graven said. “But this is untested terrain, so it’s hard to estimate.”

Lower rates may support the property market, after house prices dropped for the last six quarters, to slump a record 11.4 percent in the three months through June. According to Bernstein, prices probably won’t rise next year.

“Maybe in the third or fourth quarter the housing market will trough,” Bernstein said in an interview in Copenhagen on Sept. 28. “It will be flat in 2010, we don’t have big expectations that it will suddenly start to rise.”

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