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Katainen Monitoring Finnish Debt as ECB Policy Spurs Divide

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Finnish Prime Minister Jyrki Katainen
Finnish Prime Minister Jyrki Katainen said record-low ECB rates are also helping Finland’s economy, which sank into a recession at the end of last year as business investment faltered. Photographer: Simon Dawson/Bloomberg

July 2 (Bloomberg) -- Finnish Prime Minister Jyrki Katainen said his government is monitoring the nation’s housing market to ensure record-low euro-zone rates don’t fuel risks that would warrant regulatory intervention.

“It’s certainly a very sensitive issue for Finland as it is for other euro countries,” Katainen said yesterday in an interview in Helsinki. “It must be monitored constantly.”

Finnish house prices have surged about 35 percent since 2000 as mortgage borrowing sends household debt burdens to a record 119 percent of disposable incomes. Homeowners in the euro area’s only stable AAA rated member have used the bloc’s lowest mortgage rates to build up debt as monetary policy designed to help nations further south shows signs of spurring bubbles in the north.

Finland is looking into the option of regulatory curbs to ensure households don’t build up unsustainable debt burdens, Katainen said. An automatic cap on mortgages is one such model, he said.

“The idea would be to establish the instrument even if there’s no need to use it immediately,” he said. “So far the issue is not on the table, we’ll keep monitoring the situation.”

Finnish Debt

Five-year credit-default swaps on Finnish debt traded at about 27 basis points today, compared with a low of 22 basis points at the end of last week. That’s even lower than the cost of insuring against a German default, with equivalent contracts on bonds sold by the largest European economy trading at 31 basis points today.

Finland pays less relative to Germany to borrow over 10 years than any other euro member. Its 10-year yield eased to 1.97 percent as of 1:12 p.m. in Helsinki, compared with a high of 2.14 percent on June 24.

Finland, which together with Sweden, Norway and Denmark became a haven from Europe’s fiscal crisis last year, has a public debt load that’s just over half the currency bloc’s average. The government in Helsinki has kept its budget within the European Union’s 3 percent deficit rule every year since the global financial crisis erupted in 2008.

Escaping Turmoil

Like elsewhere in the Nordic region, healthy public finances have attracted capital from investors eager to escape the debt turmoil further south. Demand for haven assets drove government bond yields in the region down to record lows last year, widening the divide between Europe’s north and south.

Policy makers in Scandinavia have struggled to address the imbalances crisis policies have injected into their markets. In Sweden, the regulator has required banks to meet stricter capital standards than those set elsewhere. Sweden and Norway are also telling lenders to raise the risk weights they apply to mortgage assets to prevent credit bubbles.

Finnish authorities are considering handing the financial watchdog powers to enforce a binding loan-to-value cap at 80 percent, compared with its current 90 percent non-binding recommendation. More than a third of home loans exceeded the guideline last year, according to the Financial Supervisory Authority.

“Households put themselves in a risky position in the future, along with the whole economy,” Lauri Kajanoja, a principal adviser on domestic economic policy at the Bank of Finland, said in an interview last month. “There should be tools to interfere with this.”

Monitoring Imbalances

Finland is among eight euro-zone countries to face “in depth” monitoring of macro-economic imbalances from the European Commission, the European Union’s Brussels-based executive arm said in April. Though the commission didn’t open a disciplinary procedure on Finland that could lead to fines, it did urge the government in Helsinki to take action as part of its annual reform program.

Still, Katainen said record-low ECB rates are also helping Finland’s economy, which sank into a recession at the end of last year as business investment faltered.

“Naturally we must identify domestic risks,” he said. “On the other hand, loose monetary policy is a prerequisite for the investments that are made here.”

To contact the reporter on this story: Kasper Viita in Helsinki at kviita1@bloomberg.net

To contact the editor responsible for this story: Christian Wienberg at cwienberg@bloomberg.net

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