The troubles in the Nordic paradise

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By:
Euromoney Skew, Nathan Collins
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While the Nordic economies are, in the main, astonishingly stable, there are some underlying risks.


Euromoney Country Risk
has put out a comprehensive report on the Nordic countries. Naturally, in general, macro-economic life is irritatingly positive across the region.

Norway continues to top ECR’s global rankings, boasting the highest political and economic assessment scores in the world. The country’s access to oil and gas allows it to run a fiscal surplus, which last year came in at a hefty 13.6% of GDP; coupled with a government gross debt burden of just 29% of GDP.

But there is trouble in paradise. A notable threat to Norwegian stability – outside of a very severe oil price shock – is the high level of indebtedness in the populace, particularly in terms of mortgages.

“Home loan surveys undertaken by Finanstilsynet (Norway’s Financial Supervisory Authority) indicate that a substantial chunk of new mortgage lending – around 95% of which is secured on variable rates – is at high loan-to-value ratios. Plus, more homeowners are taking out interest-only mortgages, and on longer repayment terms. No wonder that household debt (which is predominantly mortgage borrowing) is fluctuating at close to 200% of disposable income.”


The safest country in the region outside of Norway, Sweden, benefits from a stable banking sector, and a healthy distance from the tumult in the eurozone. However, it’s not all good news for Sweden:


"But confidence in monetary policy/currency stability has been undermined recently, illustrating the downside for exporters of strong investor sentiment toward Sweden – a stronger krona. Credit bubbles, including inflated housing prices, are also taxing the Swedish authorities. The country’s National Housing Credit Guarantee Board has indicated that residential house prices are on average 20% over-valued, which is a risk because lower mortgage rates swell household debts."


Finland is a strong performer – sixth in the world – in spite of its membership of the eurozone, and the woes that are associated with the common currency. The country displays the positive characteristics common to the other Nordic states and has a stronger fiscal situation than most other eurozone members. This fiscal stability is structurally entrenched, with ECR contributor and chief economist at Handelsbanken Capital Markets Finland Tiina Helenius writing that:


“We expect [the] public finances to show a minor surplus this year and to strengthen further in 2013/14. We now forecast the public-debt-to-GDP ratio peaking below 50% this year and decreasing moderately thereafter. The government has made a commitment to get the debt-to-GDP ratio down by the end of this term (2015): in other words it is committed to keeping Finland’s triple-A credit rating, whatever it takes.”


Denmark is the lowest-ranked of the Nordics, though that still places the economy as the eighth in the world in ECR's rankings. Perhaps the biggest problem facing the country is a troublesome banking sector:



“A series of bank resolution packages have sought to restore stability to the Danish financial system since the 2008 credit crunch, but a preponderance of small, regional-based lenders with low capitalizations and vulnerable loan portfolios has culminated in several bank failures. The sector’s weaknesses are reflected in a low bank stability score from ECR's 10 Denmark experts of just 6.9, some 1.4 points below next-best Sweden.

The bank stability score has fallen from 8.0 over the past 12 months and now ranks below several eurozone countries: Malta, Austria, Germany, the Netherlands, Slovakia, Luxembourg and Finland for that particular sub-factor. But in a sector ripe for consolidation the lower score also reflects concerns about the exposures of larger banks, including the pan-Nordic operator Danske Bank (the country’s largest), which owns Northern Bank in Northern Ireland and National Irish Bank in the south, both of which have incurred loan-losses.”


Denmark is also dealing with the reverse of the problem being seen in Norway and Sweden, with house prices falling – one of the facets of a fairly stagnant economy. Growth for the year is targeted at a little over 1%. The country also has to deal with the problems stemming from pegging its currency to the euro. Denmark has the reserves to defend the peg, but fears over the situation in the eurozone have boosted capital inflows there, thanks to its safe haven status, leading to one negative familiar to savers in Germany and the UK: negative interest rates for holding Danish government debt.

In relative terms, the Nordic region is an ocean of calm.