DURING the euro crisis struggling Mediterranean economies were discovered to have been living far beyond their means. Northern Europeans sniffed at the southerners’ spendthrift ways. But not all northerners are the epitome of parsimony: Danish households have the highest debt as a share of disposable income among the 34 members of the OECD, a club of mostly rich countries. Their spending binge is beginning to look no more sustainable than that of the feckless southerners.

The culprit, as in so many other places, is the housing market. In 2004 only 10% of Danish mortgages had long interest-only periods, during which borrowers repaid none of the principal. By 2013 that number had climbed to 57%. Over the intervening decade, property prices soared as Danes rushed into the market. Banks financed themselves through mortgage-backed securities, promising investors fat yet seemingly riskless returns: mortgage bonds have a 200-year history in Denmark, and none has ever defaulted.

Gregory Perdon of Arbuthnot Latham, a British private bank, believes that Danish households are living on borrowed time. Thanks to the prevalence of interest-only loans, Danes are paying down their mortgages at a rate of only 2% a year on average. When the interest-only periods end (typically ten years into the loan), their monthly payments will rise sharply. Some will not be able to afford them: the recovery has been weak, and employment has fallen in recent years. Refinancing is an option for many, but not for the most precarious borrowers, due to legal restrictions on loans of more than 80% of a property’s value.

Danes are not short of money, but much of it is tied up in illiquid houses and untouchable pension pots. That leaves them short of liquid assets, in the IMF’s view. If Danes are obliged to pay down their debts by dumping their houses as their mortgage payments go up, the downward pressure on prices could set off an ugly chain reaction. As it is, prices are stagnating, having fallen briefly during the crisis, and loan-to-value ratios are high.

Mortgages are long-term, whereas most of Denmark’s mortgage bonds have maturities of less than five years. The mismatch means that some bonds must be rolled over each year. The Danish government, while insisting that the market is sound, is not taking chances. On April 1st a new law went into effect that would automatically extend by 12 months the maturities of existing bonds in the “very unlikely” event that new auctions failed, or if interest rates went up by more than five percentage points. This will keep the banks from failing. But Fitch, a ratings agency, is still worried: “Some of the consequences of the Danish funding structure are addressed in the bill,” it says, “but the causes are not.”

The European Banking Authority (EBA) has recommended that Danish mortgage bonds, which it currently categorises as very liquid, be given a less favourable classification. Since new regulations require banks to hold a certain level of liquid assets, such a change would make the “very unlikely” scenario of a failed bond auction a good bit likelier. So Denmark is furiously lobbying against the proposed change with its European partners and the European Commission, which will make a decision in June.

Denmark has low government debt and the central bank has ample reserves. But the Danish krone is pegged to the euro. Mr Perdon says that if a housing slump comes, the central bank will find it hard to defend the peg and succour the mortgage market at the same time.

The central bank pooh-poohs a “horror scenario” involving “the downfall of mortgage banks, banks or homeowners”. Ane Arnth Jensen of the Association of Danish Mortgage Banks says that Denmark enjoys some of the cheapest mortgages in the world, thanks to a transparent and competitive market. But if the EBA does lower the status of Danish mortgage bonds, banks would presumably have to offer higher interest to attract enough buyers. The increase would then be passed on to borrowers, further stretching their finances.