Government debt The government was playing the debt card again, and this time there may be cause for horror – HS Vision raises four nasty remarks about accelerating indebtedness.

Finland the government survived a framework dispute on Tuesday in a way familiar from recent years: Challenges will be met by taking on more debt.

Indebtedness has been a successful cure for Western economic problems in recent years. Debt-financed stimulus measures have had a smaller-than-expected impact on the European and US economies. The debt will now be used to finance Ukraine’s war-related expenditure – and a little more.

However, the debt market environment is changing. Money has been cheap so far, but it may soon be different.

Inflation acceleration has led central banks to change their outlook on the monetary policy outlook. Zero interest rates are no longer a matter of course.

In the framework dispute, rising interest rates were found to cause a billion-dollar increase in government spending. However, the interest rate situation did not come to the fore in the discussions, because the needs caused by the war and taking care of Finland’s preparations were considered so important.

Interest The rise is the biggest threat to over-indebted countries in southern Europe, such as Italy and Greece, but Finland cannot downplay the dangers of indebtedness either.

HS Vision gathered four observations on why indebtedness is a more unpleasant phenomenon for Finland than for many other countries.

1. The rise in interest rates swims quickly in Finnish loans

An increase in interest rates would not immediately hit the financing costs of any government in full, as government bonds use fixed coupon rates. However, rising interest rates on Finnish government bonds would fade relatively quickly.

The revaluation period for Finnish government bonds is exceptionally short compared to the European average. The length of Finland’s government bonds is relatively short in comparison, and Finland has not particularly excelled in the use of derivatives that hedge against rising interest rates.

New interest rates on Finnish loans average 4.5 years, compared to 5–10 years in the euro area.

2. Rising interest rates are also swimming in mortgages

Interest rates would also hit Finnish mortgage debtors faster than in the rest of Europe. In Finland, the majority of mortgage debtors have a floating rate loan, while in the rest of Europe fixed rate loans are the most popular.

About a third of Finnish mortgage debtors have interest rate hedging, which provides some protection against rising interest rates, but even taking this into account, Finns are exceptionally vulnerable to changes in interest rates.

The burden of mortgages does not directly affect the central government finances, but it also indirectly affects the state treasury.

3. Finland’s lunch to cover its debt is weak

Finland’s population structure has its own chapter, which makes the economic outlook weak. General government expenditure is chronically higher than revenue, even in exceptional circumstances. If Finland’s interest expenditure increases, it will be more difficult to replace it by making savings elsewhere.

It is easier for other countries to explain indebtedness on a temporary basis.

4. The traditions of debt discipline are crumbling in the eyes

Finland’s indebtedness also raises the question of whether Finland is permanently withdrawing from the list of countries known for sound public finance management.

The balance of Finland’s public finances has traditionally been nurtured through expenditure frameworks. Frames set frameworks for spending money that have not been found to deviate. Unexpected spending needs have been offset by saving similar money elsewhere.

Now the government has once again decided to deviate from the framework, although technically it is shifting Ukraine’s war-related spending out of the framework.

Repeated exceptions to the frameworks for maintaining expenditure discipline, of course, erode the importance of frameworks.

Director General of the State Audit Office Sami Yläoutinen according to the agency intends to study the government’s decisions carefully. In May, VTV will issue a statement to the Finance Committee setting out its more detailed comments on the fiscal plan.

“We will comment on the decisions made now later, but at the general level it can be said that VTV has considered it important to respect the framework procedure,” says Yläoutinen.

According to Yläoutinen, exceptions to the frames should in principle be avoided. If exceptions are made, they should be carefully justified and strictly limited so that exceptional circumstances are not used to unnecessarily increase expenditure.

For now Interest rates on Finnish government bonds have not worried investors. Interest rates on Finnish bonds have risen sharply, but only slightly more than interest rates on Germany, which is the benchmark.

And Finland’s debt situation as a whole does not look inconsolable.

According to the Ministry of Finance’s outlines, the growth of euro-denominated debt seems sharp, but more important is how the debt develops in relation to the size of the economy. According to the forecasts of the Ministry of Finance, the ratio of public debt to GDP will increase at a much more moderate slope. If Finland is able to maintain the projected economic growth, it will help deal with the growing debt.

Rising inflation may also ease the government debt burden if interest rates remain below inflation despite their increases. High inflation accelerates nominal economic growth, which reduces government debt relative to the size of the economy.

Debt inflation played a key role in offsetting post-World War II debt.

Inflation is more effective the stronger the economic growth. Projected economic growth is always associated with uncertainty that is even higher than usual at the moment.

The European economy is currently undergoing a vicious crossroads as rising inflation is linked to an uncertain economic situation. Inflation usually goes hand in hand with economic warming, but now economic growth is freezing. Several experts have seen the possibility of stagflation in the European situation. It means high inflation coupled with slow economic growth or recession. Such a situation would quickly erode consumers ’purchasing power and living standards.

Forecasting economic growth in the current situation in Europe is largely a lottery, as the forecasters also acknowledge. So much depends on the development of Ukraine’s war and sanctions.

The frame rally was made on the assumption that gas and oil would flow from Russia. Increases in sanctions could significantly accelerate inflation and slow economic growth.

Governor of the Bank of Finland Olli Rehn gave its own assessment of the direction of the economy in the framework debate, and it does not promise easy times for indebted states. Rehn estimates that the European Central Bank will still have to cut larger-than-expected slices out of economic growth forecasts as energy prices rise and production bottlenecks continue.

There is a consensus that the effects of the war will not be short-lived, as Russia’s role in the economy will not be able to recover quickly.

This was also acknowledged by the Minister of Finance Annika Saarikko (mid) Tuesday.

“The effects of the Korona on the economy were relatively temporary, but the effects of the war are likely to be permanent,” Saarikko said at the news conference.