How Finland keeps its head above eurozone crisis

25.07.2012 11:51

TheGuardian: Finland's economy is dominated by services but it is competitive in manufacturing – and its revenues are bigger than its debt

Finland – home of reindeer, pickled fish and Nokia – is now the only eurozone country with a stable triple-A credit rating, according to Moody's.

On Monday night, the credit rating agency hit Germany, Luxembourg and the Netherlands with a stinging blow, cutting the outlook on their triple-A ratings from stable to negative. That pushes them into the same bracket, on Moody's measures, as France and Austria – leaving Finland the only European country with a triple-A rating and stable outlook.

What is it about Finland? It is a big country, almost as large as Germany, but with a population of just 5.3 million – or just 16 people for every square kilometre. Two thirds of the country is covered in forest, and the far north forms part of the Arctic circle. The economy is not all mobile phones and forestry. Finland is also known for its metals, engineering and electronics industries, and exports account for a third of GDP. Income per capita is among the highest in western Europe and the country is celebrated for its generous welfare state.

Moody's said that while Finland would not be immune to the eurozone crisis, it had "strong buffers which differentiate it from the other AAAs". Among these were the fact it has no debt on a net basis. The IMF estimates Helsinki will collect taxes and other revenues of €105bn (£82bn) this year, compared with €101bn of government debt.

Finland has a small banking system focused on domestic customers, as well as "limited exposure to, and therefore relative insulation from, theeuro area in terms of trade", notes Moody's.

Finland has also insisted on receiving collateral in exchange for its participation in eurozone bailouts – which has impressed Moody's. Last week, for example, Helsinki agreed to contribute to the Spanish banking bailout package, but only on the basis that Spain provides it with cash collateral worth €770m – around 40% of its share of the bailout. Every time Spain receives a payout from the bailout fund, it will hand over collateral to Finland. The deal was similar to a collateral agreement it struck with Greece in 2011, and could start a trend.

Michael Hewson, of CMC Markets, said: "The reason Finland appears to have escaped [the cut to negative outlook] is due to its insistence on collateral in exchange for aid. This could well see other countries start to demand collateral as well, which could well complicate the swift disbursement of future bailout funds."

Finland has taken a consistently tough line throughout the eurozone crisis. This month, it threatened to block an agreement to use Europe's bailout fund to start buying Italian and Spanish bonds in the secondary markets.

That stance has led some to believe that Finland, rather than Greece, might be the first country to quit the single currency.

The US economist Nouriel Roubini wrote on his EconoMonitor website: "If Greece moves closer to exit and Italy and Spain end up on the verge of losing market access and requiring even more risky financial support from the eurozone core, Finland may decide that the additional credit risk is not worth the benefit."



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