March 31 (Bloomberg) -- Finland’s government bonds, the worst performers in the euro area this year, face more headwinds as turmoil in neighboring Russia risks compounding the Nordic nation’s economic woes.
The securities have delivered the smallest gains this year among 14 euro nations tracked in Bloomberg World Bond Indexes, earning 2.6 percent. That’s 1.4 percentage point less than the region’s average and compares with Greece, whose 23 percent ranked first.
The northernmost euro member’s economy has contracted in three of the past five years as its main growth engines, papermaking and technology, have struggled with competition and falling demand. The economy, home to former mobile-phone maker Nokia Oyj, now faces the added hurdle of sanctions against Russia, the destination of 10 percent of Finnish exports, after President Vladimir Putin’s annexation of Crimea in Ukraine.
“The Finnish economy has been losing competitiveness in the past few years,” said Martti Forsberg, who oversees about $3.44 billion of European debt at Nordea Investment Management in Helsinki. “That’s one thing that has caused investors to be cautious. Now, because of the Russian crisis, you may see some additional selling of the bonds.”
The yield on Finland’s 10-year bond rose two basis points to 1.87 percent as of 5:48 p.m. local time. The yield has increased from a 2013 low of 1.72 percent on Feb. 5. The yield spread to German debt with a similar maturity was at 30 basis points, compared with a one-year average of about 23 basis points.
The economic difficulties are now feeding through into political turmoil as policy makers struggle to get state finances under control without choking off an expansion. The Left Alliance, a member of the six-party government, quit last week in protest over growing austerity measures to halt debt growth, which is estimated to breach the European Union rules that limit debt to 60 percent of gross domestic product this year.
The 6.6 billion-euro austerity program by 2017, equal to about 3 percent of GDP, is necessary to keep debt from getting out of hand, Prime Minister Jyrki Katainen said.
“Finland’s economic situation is so challenging that someone must work to fix it,” the premier said last week. “This is an extremely bad time to be promoting our political self-interest. None of us can afford to just focus on our own campaign pledges.”
Finland will grow 0.7 percent this year, ETLA research institute forecast last week, cutting a 1.6 percent estimate from September. The country is “particularly vulnerable” to Russia’s crisis and economic sanctions, it said.
The U.S. and EU have imposed sanctions against Russia after President Vladimir Putin annexed Crimea this month and ordered a troop buildup along the country’s border.
The added concerns over Russia came as reports showed unemployment surged to a nine-month high of 9.1 percent in February and retail sales slid an annual 1.1 percent. Bank of Finland Governor Erkki Liikanen said last week that the Russian crisis was already weighing on the economy.
Finland has managed to keep its AAA debt rating throughout the European debt crisis. Fitch Ratings on March 28 affirmed its AAA grade, saying that the economy will recover this year and that sanctions against Russia won’t “substantially affect Finland’s economic performance.”
Nordea Investment Management, a unit of Nordea Bank AB, the Nordic region’s largest bank, has an underweight position in Finnish bonds with maturities as long as 10 years, meaning it owns a smaller percentage of the debt than benchmark indexes suggest, and prefers Dutch securities, Forsberg said.
Finnish bonds also underperformed as the euro region emerged from its recession, giving investors the confidence to seek higher yields in lower-rated bond markets, helping Portugal post a 12 percent return in 2014. Dutch bonds gained 2.8 percent.
“Finland is lagging both in unit labor costs and growth terms,” Forsberg said. Should the Russian crisis “really start to hurt trade with Europe, there could be some widening in Finnish spreads.”
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