Finland Needs Flexible Policy to Tackle Crisis Slump, IMF Says

Finland’s key challenge is to protect its economy as Europe’s debt crisis saps momentum in the northernmost euro member, the International Monetary Fund said.

“Spill over to Finland could be significant given its highly open economy and trade and financial linkages with Europe,” the Washington-based group said in an Article IV concluding statement. “The key immediate policy concern is to cushion the downturn, including through a nimble fiscal policy, while mitigating any lingering vulnerabilities.”

Europe’s debt crisis has caused economic growth to slow on falling demand for exports, which account for about 40 percent of the only Nordic euro member’s economy. A third of Finland sales abroad are in the single-currency area, and risks for the country are now “tilted to the downside,” the IMF said, reiterating a growth forecast of about 0.5 percent for 2012.

Prime Minister Jyrki Katainen’s six-party cabinet has kept the budget deficit in line with the European Union’s rules. Next year, spending will decline and taxes will increase by a total 2.7 billion euros ($3.4 billion). The government is seeking to halt debt growth by 2015 to ensure its AAA credit rating.

The IMF “concurs that a broadly neutral 2012 fiscal policy is appropriate, avoiding pro-cyclical withdrawal of support to the economy while preventing damage to long-term sustainability prospects,” according to today’s report.

Government Debt

Finland’s 2012 government debt at an estimated 50.5 percent of gross domestic product has risen from 33.9 percent in 2008, according to the European Commission. The 17-member euro area had average government debt of 91.8 percent of GDP last year the Brussels-based organization said.

The yield on Finland’s 10-year benchmark notes rose 3 basis points to 1.68 percent today and spread to similar-maturity German bunds widened to 31 basis points from a low of 27 basis points on June 1.

Private consumption is underpinning the Finnish economy as flexible layoff plans have slowed unemployment growth, allowing households to keep spending.

The country’s financial sector, where Nordea Bank AB, Danske Bank A/S and the OP-Pohjola Group operate, “has remained generally sound,” the IMF said. “Bank capital ratios are comfortably above minimum requirements and non-performing loans are manageable,” the group said.

Inside the euro area, Finland shares its top credit rating with Germany, Luxembourg and the Netherlands. The other countries in the monetary union are Austria, Belgium, Cyprus, Estonia, France, Greece, Ireland, Italy, Malta, Portugal, Slovakia, Slovenia and Spain.

To contact the reporters on this story: Kati Pohjanpalo in Helsinki at kpohjanpalo@bloomberg.net; Kasper Viita in Helsinki at kviita1@bloomberg.net

To contact the editors responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net; Christian Wienberg at cwienberg@bloomberg.net

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