Debt in Finland

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    "Pekka Sutela"
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Other

Debt in Finland

Unless a major crisis erupts in Europe, Finland’s fiscal prudency and solid banks might well satisfy the markets.

By Pekka Sutela

Published on Dec 7, 2011

Is Finland worried that the crisis will affect its own debt ranking?

Pekka Sutela

Traditionally, Finland has been very conservative when it comes to debt. After both World War I and the Great Depression, the country took great pride in being the only debtor that repaid its debts to the United States—even with a heavy domestic cost. The wisdom of the policy can be questioned but it remains a basis of self-identification.

Today, Finland remains one of the few AAA rated countries in Europe. Most Finns find the recent increase in debt-to-GDP ratio to over 50 percent both shameful and dangerous. For several years, the difference between ten-year bond interest rates between Finland and Germany was negligible, sometimes even negative. And Finland was able to borrow at slightly better rates than Germany.

This fall, the interest rate margin between the countries has risen from about 0.2 to almost 0.6 percentage points. Over the long term, Finland is thus now seen as slightly more risky than Germany. The rise is not a major one and the risk premium still remains very small relative to what many European countries have. In the short run, it is not regarded as a particularly worrisome fact, rather as a symptom of what might happen. Also, due to cash in the treasury, as matters now stand, Finland has no need to enter bond markets for several months.

Two problems stand out. The current rainbow government, with six parties from right to left, is strong in the parliament but may lack internal cohesion when difficult decisions need to be made. Expenditure cuts are needed to send a signal to markets, and a convincing policy plan on the fiscal pressures of an aging population is still missing. But still, unless a major crisis erupts in Europe, Finland’s fiscal prudency and solid banks might well satisfy the markets.

Economy Western Europe

Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.

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