Stable AAA Gives Scant Relief on Imbalances, Katainen Says
Finland has emerged as the safest credit inside the euro area. That assessment does little to ease Prime Minister Jyrki Katainen’s concerns that his economy run by aging Finns risks losing competitiveness.
Finland this week became the only euro-area nation to boast a stable AAA grade at all three major credit rating companies, after Standard & Poor’s on Jan. 14 raised the nation’s outlook. Top-rated Germany and Luxembourg have negative outlooks at Moody’s Investors Service, while the Netherlands risks a downgrade both at S&P and Moody’s.
“The most important signal this credit rating gives to us and the rest of the world is that we have done something right,” Katainen said in an interview in Helsinki yesterday. Yet the regained stable outlook doesn’t ease pressure on the government, he said. “We cannot afford this because we know we’re in the middle of two structural challenges, of which the first one is aging.”
Finland’s economy, saddled with the fastest-aging population in Europe, is mired in a recession with the rest of the single currency bloc. The AAA rating affords Katainen little relief in negotiating new spending cuts and tax increases with his six-party coalition as lawmakers start talks in March to design a budget framework for the next four years.
The Nordic nation, which credit default swaps suggest is a safer bet for bond investors than Germany, has benefited from its haven status during Europe’s fiscal crisis. It costs about 30 basis points to insure against a Finnish default, versus 40 basis points to guard against non-repayment of German debt using five-year contracts, according to data available on Bloomberg.
Investors often ignore rating actions, as evidenced by the rally in Treasuries after the U.S. lost its top grade at S&P in 2011. France and Austria were stripped of their AAA scores a year ago.
Government bond yields in debt-ridden nations in southern Europe have fallen since November and spreads to benchmark German securities have narrowed. The difference in yield between 10-year Finnish bonds and similar-maturity German notes narrowed to 12 basis points today from yesterday’s 19 basis points, compared with as little as 8 basis points in August.
Finland’s public debt will grow to 54.7 percent of gross domestic product this year from 53.1 percent in 2012, the European Commission said on Nov. 7. That compares with an average debt load of 94.5 percent in the euro zone this year, after 92.9 percent in 2012, according to the commission.
S&P said the Finnish government “appears committed to pursuing strong fiscal and structural policies that should enable the economy to grow above 1 percent in the medium term.” The rating company also said “policy making in Finland remains prudent, transparent, and consensus-based.”
Europe’s leaders have won some respite from the debt crisis thanks to European Central Bank President Mario Draghi’s July pledge to do whatever it takes to preserve the euro. Policy makers in Europe should make use of the lull in the turmoil to enact reforms, re-balance budgets and address external imbalances, Moritz Kraemer, managing director at S&P, said in an interview on Bloomberg Television today.
“More important than what the ECB is doing is what the governments are doing,” Kraemer said. Whenever market pressure eases, “the risk of complacency looms large,” he said.
Finland can’t afford to postpone reforms, Katainen said.
Aside from an aging population, Finland is also struggling to keep pace with “an industrial structural change,” he said.
S&P’s ratings on Germany and the Netherlands are unsolicited, meaning the countries don’t pay the company for the review.
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