Norway Ignores IMF by Subsidizing Asset Bubble: Nordic Credit

Norway revealed it’s tapping cash to subsidize its overheated housing market after proposing a 50 percent increase in mortgage lending to government employees.

The plans to spend more on a market already showing signs of imbalance, revealed in this month’s revised budget, come as the International Monetary Fund urges the government to rein in spending.

The government will use money that “is inside the parameters of the deviations we expected when we drew up our financing plan,” Sigurd Klakeg, deputy director general at the Finance Ministry, said in a telephone interview from Oslo. “We have ample liquidity and there are cash reserves with the central bank.”

The comments put an end to speculation that Norway would need to sell bonds to finance the lending, which it said this month will reach 33.5 billion ($5.7 billion) in 2013. The step increases Norway’s total funding need by 19 percent, or 16 billion kroner, to 98 billion kroner, Nordea Bank AB estimates.

Norway, which relies on the world’s largest sovereign wealth fund to keep it debt free, has in the past sold bonds to fund government lending programs while tapping the $740 billion wealth fund to plug budget deficits. The government this month unveiled its most expansionary budget since the height of the financial crisis in 2009, as it boosted spending by 19 percent ahead of an election in September.

IMF Warning

On a visit to Norway last week, the IMF warned that excessive spending is imperiling the economy as record oil investments push up labor costs and harm competitiveness. Western Europe’s largest crude producer has struggled to stop property prices and credit growth accelerating from all-time highs as record-low global interest rates drag down borrowing costs in Europe’s second-richest nation per capita.

“Ratcheting down a bit more would make sense,” Thomas Dorsey, part of an IMF mission to Norway, said in an interview in Oslo. Lower spending would help ease “competitive pressures on the non-oil parts of the mainland economy.”

Investors have treated Norway as a haven from the debt crisis in Europe, driving down borrowing costs. Norway’s benchmark 10-year bond yield has fallen about 40 basis points since mid-February. The difference in yield relative to similar-maturity German bunds has narrowed to about 74 basis points from 101 basis points in the same period, according to data compiled by Bloomberg.

Election Effect

Spending is rising as Prime Minister Jens Stoltenberg trails the opposition in the polls ahead of elections in four months, suggesting his Labor Party-led coalition will be ousted after eight years in power. He faces an opposition led by the Conservative Party, which has promised tax cuts and even more spending.

The central bank has also lowered rates twice since 2010 to help keep krone gains in check. Home prices jumped 7.7 percent last year, prompting the financial regulator and the government to tighten capital and mortgage lending rules to cool the market.

While the government won’t boost bond sales this year, its willingness to increase public lending may indicate more issuance next year, according to Nordea and Danske Bank A/S.

“The revised budget is clear evidence that the strong growth in the various government lending schemes continues,” said Gaute Marius Langeland, chief strategist at Nordea in Oslo. “This is a signal that issuance in 2014 is likely to increase further from an already very high level.”

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