Economists: Finland better prepared for economic problems than in early 1990s
EK expert likens Iceland with Finland of recession years
The storm in the world financial sector and erratic behaviour of stock markets remind many of the recession of the early 1990s. Experts say, nevertheless, that the situation in Finland is different, and not just over the fact that Finland no longer has the Soviet Union as a neighbour.
“Russia is not going anywhere. Its existence boosts Finland’s possibilities for exports. Asia also remains in good shape”, says Pasi Sorjonen, head of the forecasting group of the Research Institute of the Finnish Economy (ETLA).
The present situation differs from the recession of the 1990s in that the balance sheets of Finnish companies are now strong, banks are not suffering from credit losses, the public economy is in surplus, debt servicing costs of households are significantly lower, and interests are lower. As part of the euro zone, there is no exchange rate risk, and no housing bubble has developed.
In the recession, housing loans sometimes had payback times of five years, and the interest rate was in two digits. The high interest rate was a severe burden on households. Now, with 20-year housing loans, a rise in interest rates that extends the payback time by a year would not ruin the finances of home owners.
“We are not Iceland. Iceland is like Finland once was”, says Jussi Mustonen, head of economic policy at ETLA.
Pasi Holm, director of the Pellervo Institute of Economic Research says that financial turbulence blowing from Iceland has extended to Finland. In Iceland, investors used borrowed money to leverage the stock market.
“In Iceland, people borrowed money to invest aggressively on the stock market, buying companies at huge risks. Now the lever is operating in the opposite direction, when they cannot get credit, or if they do, the cost is higher than the return on shares, which have gone down”, Holm says.
The financial crisis in Europe started with the mortgage crisis in the United States, but housing bubbles have emerged in other countries as well: Spain, Britain, Denmark, and Ireland. From the housing market, the upheaval has increasingly spread to the real economy, as values of shares have declined.
Financial institutions are linked in many ways across national borders, and the difficulties spread with cross-border creditor and debtor relationships.
“Although Finnish banks do not have loans on their books which might be considered the worst possible toxic waste, the values of many ordinary targets of investment have tumbled down so far that it can be felt in the whole economy”, says Timo Viherkenttä, deputy CEO of the Local Government Pensions Institution.
Overall pessimism can also affect the value of companies that are not actually a part of the financial sector. For the past year companies have had to pay an extra risk supplement for loans, which is added to the interest rate. This is an additional expenditure for households and companies, which reduces investments, increases the costs of financing, or reduces profitability.
“This mechanism cannot be averted, as the Finnish financial system is tied to the global system. We have known all the time that it will inevitably come to Finland. The only questions are, to what an extent and how severely, and what the direct impacts on interest rates are”, Jussi Mustonen says.
If the US economy weakens, it will cause a weakening of prospects in Finland as well. Exports will decline, industrial production, and eventually employment will also go down. On the other hand, the weakening of the euro against the dollar will support the competitiveness of export companies.
Although stock market prices are considered to be the cool thermometers of the market economy, Mustonen says that stock markets have also made “completely unfounded, collective lemming movements”.
Mustonen notes that fluctuations were even greater at the beginning of this decade, when the IT bubble burst.
ETLA’s Sorjonen notes that cyclical trends were going downwards regardless of problems on the finance market. “This financial disturbance is just icing on the cake.”
Previously in HS International Edition:
Major Finnish investors seek to calm worries about financial crisis (30.9.2008)
Helsingin Sanomat
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| 8.10.2008 - TODAY |
Economists: Finland better prepared for economic problems than in early 1990s
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