Debt Anxiety Is Inflaming Finland’s Close-Run Election Battle

Leo Laikola
·5 min read

(Bloomberg) -- Some of Europe’s foremost worriers about debt will determine the setup of the next Finnish government this weekend in a close-run election focused on public finances.

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Finland boasts one of the world’s highest credit ratings, and an overall burden comparable to Germany’s, but the extent of the Nordic country’s borrowing in recent years has become a key battleground for voters who fret more about fiscal matters than their European peers.

Three main parties are neck-and-neck in polls heading into Sunday’s election. Petteri Orpo’s opposition National Coalition Party, which wants a strict limit on borrowing, is narrowly in the lead, with the anti-immigrant Finns Party just behind them. Close behind in third place are Prime Minister Sanna Marin’s Social Democrats, who favor investing to spur growth as a debt-reduction strategy.

An election fight where the public finances are a prism to judge the governing coalition’s record showcases one reason why the only Nordic country in the euro region has been a frequent stickler in European Union talks on loosening debt rules. It’s the latest manifestation of an enduring tradition of fiscal prudence.

“The government bond market has a long memory and the only proper way to be in this market is to aim for a long-term commitment,” Teppo Koivisto, director of finance at Treasury Finland, said in an interview. “And this is exactly what we try to do in Finland.”

Koivisto, who is in charge of marketing the country’s bonds, says its past record in honoring debts still features from time to time in discussions with international investors.

A key moment in that history was in 1931, when US President Herbert Hoover granted European debtor countries a moratorium with the option to postpone repayment by one year. After it ended, the only country to have paid back its borrowings in full was Finland.

That determination to service debts established its reputation for reliability in the eyes of international finance, a legacy that persists — along with credit ratings only one notch down from the highest available with all agencies.

It’s the juxtaposition of that tradition and the record of Marin’s five-party coalition that is so controversial. Under her government, Finland’s public debt jumped by about €40 billion ($43.4 billion) to about €195 billion last year, fueled by borrowings to tackle fallout from the pandemic, Russia’s war in Ukraine and the energy crisis. Still, about a quarter of the total debt growth isn’t explained by those crises.

Public debt as a percentage of gross domestic product peaked above 75% in 2021, after which it declined to about 71% by the third quarter of 2022, according to Eurostat data. That’s less than half of Italy’s, in the ballpark of Germany’s, and well below the EU average in that list, at 85%.

That’s still not low enough to satisfy national pride, not least when Finland’s neighbors, Sweden and Denmark, are nursing debt ratios of less than half of its total.

Finns care about this stuff. Questioned for the 2021 Eurobarometer survey on the most important issue facing them, the country was the only one in the EU to specify public finances. In a recent poll for national broadcaster YLE, 35% of respondents said the government debt is their biggest worry, on a par with climate change.

One reason for that is the experience of Finland’s 1990s depression, one of its worst-ever economic crises.

The country endured multiple simultaneous shocks, including the collapse of trade with the Soviet Union, currency devaluation and banking crisis, which fueled a record level of unemployment and bankruptcies. In response, the Finnish government deployed austerity to cut spending and raise taxes, but had to also rely on an unprecedented amount of borrowing. Its debt-to-GDP ratio jumped to 51% by 1993, from around 10% previously, reaching 67% three years later, according to the Bank of Finland.

Pia Kindstedt remembers the ordeal. The 63-year-old’s lunch restaurant business went bankrupt as people stopped eating out and foreign currency loans soured. Those who suffered such “total loss” were often seen as “pariahs,” she recalled in an interview.

That recent history meant that, when the finance ministry warned this month that reforms to generate growth and balance the public finances are a “matter of fate,” it resonated. Finland’s generous Nordic-style welfare system faces years of chronic budget deficits, threatening a debt ratio exceeding 80%, officials warned.

According to political custom in Finland, the party with the most seats in parliament gets the first attempt to form a ruling coalition. That means the 37-year-old Marin is unlikely to continue leading the country’s next cabinet, while National Coalition leader Orpo — a former finance minister — has the best chance to win premiership.

The next government will also inherit an economy in recession, with a poor growth outlook and increasing public-spending needs exacerbated by worsening demographics. Growth of just over 1% expected from next year onward will help, but only marginally.

“We may be close to the point where investors start to pay more attention to Finnish debt metrics,” Jan von Gerich, chief strategist at Nordea Bank Abp, said in an interview. “If the next government does not take the debt issue seriously, the risk of bond investors starting to demand higher yields in return increases.”

Such concerns are lingering as Finns go to the polls. And vying for power against the Social Democrats and National Coalition Party is the opposition anti-immigration Finns Party, led by Riikka Purra, whose policies also seek savings — in immigration, foreign aid, climate policies and EU support funds.

Koivisto at the Treasury insists the recent worsening of Finland’s public finances has caused “no significant changes” in investor behavior. But their sustainability and medium-term growth prospects are “key issues in the future,” he warns.

“When we see the formation of the new government, I think we come back to these discussions with the investors — and also with the rating agencies,” he said.

--With assistance from Kevin Whitelaw and Thomas Hall.

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