Finland’s Outlook Cut to Negative at S&P on Sub-Par Growth

Finland faces a one-in-three chance its AAA credit rating will be cut over the next two years, Standard & Poor’s said, citing lackluster demand that’s thwarting government efforts to halt debt growth.

Finland’s long-term AAA rating was affirmed while the outlook was cut to negative from stable, the credit-rating company said in a statement today. The economy will grow on average 1 percent in 2014 to 2016, S&P said, lowering its previous projection of 1.4 percent.

“Finland’s persistent sub-par growth rate reflects deep structural demographic and economic imbalances that hamper the government’s efforts to achieve fiscal consolidation,” Maria J. Redondo and other analysts at S&P said. “We consider that there are downside risks to growth and policy implementation.”

Finland’s manufacturing engine is faltering as erstwhile top exporters in forestry and the Nokia Oyj-led technology industry struggle with falling demand and increasing competition. The government last week lowered its economic growth forecast for 2014 to 0.5 percent from 0.8 percent, in part as sanctions against Russia now threaten its nascent recovery. About 10 percent of Finnish exports go to Russia.

“The economy remains vulnerable to any slowdown of economic activity in the euro area or among other major trading partners, such as Russia,” S&P said.

Government Response

“Finland’s problems are the result of a failure to undertake structural reforms over the past 15 years,” Prime Minister Jyrki Katainen said on his way to parliament today. Nokia’s strength in the early 2000s may have masked Finnish weaknesses, he said. “The debt crisis has exposed all these weaknesses and we’ve now taken action to rectify them.”

The spread between 10-year Finnish bond yields and similar-maturity German debt widened 1 basis point to 31 basis points at 9:57 a.m. in Helsinki.

The outlook cut “puts more pressure on the already shaky government and will deliver a hit to Finnish bonds, very dependent on the highest ratings,” Jan von Gerich, Helsinki-based analyst at Nordea Bank AB, wrote in a note to clients. “Recent decisions taken by the government on further austerity and structural measures have clearly not convinced S&P.”

The government has responded with a 9 billion-euro ($12.5 billion) package of long-term measures designed to help it pay for its aging population. It’s also pushed through 6.8 billion euros of spending cuts and tax increases since 2011 to protect its credit rating during Europe’s debt crisis.

Government Exit

The ruling coalition shrank to five parties last month after the Left Alliance exited in protest against further austerity. Katainen said last week he will step down in June to pursue top positions outside Finland and Finance Minister Jutta Urpilainen faces a leadership challenge next month within her party. S&P said it doesn’t expect Katainen’s resignation to lead to “any substantial deviation” from current policies.

Finland’s general government debt will breach the European Union’s 60 percent of gross domestic product rule next year, after reaching 59.8 percent in 2014, the Helsinki-based Finance Ministry estimates.

S&P has rated Finland’s debt AAA since Feb. 1, 2002, even as it placed the rating on watch for a downgrade for about a month in December 2011 amid the European debt crisis. Since then, Finland’s rating had a negative outlook until January 2013.

Investor Response

In the euro area, Germany, Luxembourg and Finland have AAA ratings at S&P after Netherlands lost its AAA grade in November. Some investors shrug off ratings actions, as evidenced by the short-lived market impact of Standard & Poor’s downgrade of the U.S. in 2011.

Finland remains one of the best sovereigns and any notable move on Finnish bonds following the outlook cut is an opportunity to buy, Michael Michaelides, a fixed-income strategist at Royal Bank of Scotland Group Plc, wrote in a note to clients. Finland ranks only marginally lower than Germany in RBS’s rating index, he said.

Fitch Ratings affirmed Finland’s rating on March 28, citing the nation’s “prudent” track record in fiscal and macroeconomic policy. Geopolitical tensions in Russia and a failure to address the impact of an aging population and lower growth on public finances pose potential future risks, it said. Moody’s last affirmed Finland’s Aaa on May 29, 2013. Fitch and Moody’s have a stable outlook on Finnish sovereign debt.

S&P said the negative outlook reflects at least a one-in-three chance of a one-level rating downgrade in the next 24 months “should no clear signs emerge that Finland’s negative economic and fiscal debt trends are being reversed.”

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