Banks in Safest Euro Nation See Credit Drought as Finns Save

Jussi Laitinen, the chief executive officer of Finnish mortgage lender Aktia Bank Oyj, says people in the euro area’s highest-rated economy are too scared to take on more debt as Finland’s economy falters.

“At the moment, people are avoiding taking large loans and buying bigger apartments,” Laitinen said in a Dec. 2 interview at his office in Helsinki. “Consumer wariness is quite understandable, given the message they hear is that the economy is in trouble.” Lending will hardly grow in 2014 as record-low interest rates fail to entice households, he said.

Finland -- the only euro member still to carry a stable outlook on its AAA grade at Moody’s Investors Service, Standard & Poor’s and Fitch Ratings -- pays less to borrow relative to Germany than any other nation in the single currency bloc. Credit-default swaps suggest Finland is a safer investment than the U.S. and Germany. Prime Minister Jyrki Katainen has repeatedly argued budget cuts designed to keep borrowing costs low will ultimately restore demand and fuel a recovery.

Yet the experience of Aktia, a mid-sized Finnish lender which has 4.2 percent of the nation’s mortgages and 3.7 percent of deposits, suggests the government’s efforts to jumpstart growth through fiscal restraint may be failing.

Merkel Austerity

Other banks operating in Finland are suffering a drop in credit growth. Lending volumes fell in the first half from the same period a year ago driven by a decline in mortgages, Danske Bank Oyj, the Finnish unit of Danske Bank A/S, said June 30. Nordea Bank AB’s unit in Finland also saw lending contract in the first six months of the year because of “weak domestic demand,” it said July 17.

Finland, which has championed the austerity policies promoted by German Chancellor Angela Merkel, has suffered two recessions in four years and the economy is now smaller than it was in 2007. Though unemployment eased to 7.4 percent of the workforce in October, that’s still well above the 6.2 percent it was at in October of 2007.

Adding to Finland’s headaches is its growing number of retirees. The country is home to the European Union’s fastest-aging population, putting pressure on the government to find savings to cover ballooning health-care bills.

Aging Finns

Katainen’s six-party coalition unveiled a package of measures on Nov. 29 to be implemented by 2017 to help Finland pay for its pensioners. It’s cutting the tasks of municipalities, encouraging longer careers and seeking to reduce structural unemployment.

“The problem is if the economy doesn’t grow,” Laitinen said. “A record number of people will retire and that will continue over a longer time period. The cost pressures in the public sector are huge and that means we’ll each end up with less money. That contributes to making consumers more careful.”

The government’s efforts to improve its budget have so far failed to result in a surplus as economic contraction depletes public income and bloats welfare bills. Finland will this year post its fifth consecutive budget deficit, the government estimates.

The Finance Ministry has identified a 4.7 percent gap relative to gross domestic product between the amount Finland needs to pay for social services and the funds it has available.

While low interest rates are failing to restore borrowing and growth, the Financial Supervisory Authority said today they’re also hurting bank profits and raising the need for other sources of revenue. A continued weak economic situation poses a threat to the financial industry, it said.

House Prices

New mortgages dropped an annual 18 percent in October, according to the Bank of Finland. House prices fell 0.4 percent in the month in October. Outstanding residential mortgages amounted to 88.2 billion euros at the end of October, an increase of 2.8 percent in the year, the central bank said.

Aktia said in January it will terminate services as a central credit institution for savings banks and other local lenders by 2015. That role included procuring international funding for smaller lenders and providing advisory services.

“We have been quite careful for the past year, as part of our transformation from the central credit-institution role to a more independent Aktia,” Laitinen said. “We still have a significant amount of refinancing to do for our savings bank partners and we need to unravel that before we can start to seek more significant growth.”

“We haven’t grown for the past year and it will take another year to 15 months, he said. ‘‘That doesn’t mean we’re not giving out loans, but it means we haven’t tried to increase market share.”

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