Finland CEO of the largest housing financier, OP Group Timo Ritakallio is worried about rising interest rates.
Contrary to what one might think, the interest expenses of Finnish home debtors are not monitored at night, nor are the debt situation of companies too much.
Instead, Finland’s debt burden gathers dark clouds on the horizon.
“I am concerned that the Finnish government is getting into debt at such a high rate. We have to react to this now, because ten years from now it may already be too late,” says Ritakallio.
It is not the debt level itself that is particularly serious, but the price of the debt. The market interest rate on Finland’s ten-year government debt already crossed the three percent mark last week. Even if the debt is never repaid, interest expenses must be taken care of.
“The cost of debt is on the rise, something we haven’t gotten used to in ten years.”
Finland’s debt level in relation to the gross domestic product is below the average compared to the OECD countries, the European Union and the euro area countries. In Ritakallio’s opinion, this comparison is clinging too much.
“Our core problem is that interest expenses will grow quickly, because we have built the coming years so that we will take on a lot of debt.”
Problem is completely new to the young generation.
The interest costs of the national debt began to decline from their peak levels in the late 1990s. The decline has continued in recent years, even though the amount of debt has been growing all the time. In recent years, interest expenses have been at the level of 1990, even though borrowing has been record high.
“These deficits of 7-8 billion euros are such large numbers that they cannot be corrected in a four-year period.”
Interest rates have been pushed down by the stimulus measures of the European Central Bank (ECB). Now the ECB is trying to curb inflation by tightening monetary policy, i.e. raising interest rates. Market interest rates have risen faster than expected this year.
HS Vision calculated Finland’s national debt this week growth rate of interest expenses. In the 2023 budget, 1.5 billion euros have been reserved for interest expenses, i.e. almost three times compared to this year’s interest expenses. The default interest rate was 1.8 percent for ten-year loans. A one percentage point increase in interest rates increases government spending by around 600 million euros.
Read more: Finland’s indebtedness turned to a completely new position. How worried do you have to be now?
At a three percent interest rate, the 1.5 billion interest expenses recorded in the budget have already grown to around 2.2 billion euros. According to Ritakallio, the rise in interest rates can increase interest expenses to up to three billion euros annually.
“If interest rates rise, measures should be taken somewhere to balance the state economy,” says Ritakallio.
In Ritakallio’s opinion, the direction should be that the government’s income is as large as its expenditure.
Prime minister Sanna Marini (sd) according to the government’s public finance plan, the deficit of the state budget will be around 7.2 billion euros annually in the years 2023–2026.
“These deficits of 7-8 billion euros are such large numbers that they cannot be corrected in a four-year period. We should strive for long-term thinking and find a parliamentary consensus that this really is a problem.”
Corona pandemic during that time, western countries revived the economy like it was the last day. Finland also took on a lot of new debt. The pandemic was such a big shock that, according to Ritakallio, revitalization was wise, but now the debt has “been left on”.
“Now let’s talk about the rise in energy prices. The first thing that has been thought about is how to compensate for it. If it is compensated, it will only accelerate inflation.”
Accelerating inflation would also lead to central banks being forced to tighten monetary policy, i.e. raise interest rates further. It punishes all debtors and slows down economic growth.
In Ritakallio’s opinion, instead of new supports, Finns could put on wool socks and accept that the sauna is not heated as often as before.
“I think it is important to discuss how to save electricity. When we spend less, we get it for the same money. And that wouldn’t be a bad thing at all in terms of the green transition.”
There have been enough crises. In a few years, the pandemic has moved to wartime and an energy crisis. We cannot know what new crisis is around the corner. Therefore, in Ritakallio’s opinion, indebtedness should be slowed down now that the situation is not yet too alarming.
“The more difficult the debt situation becomes, the more likely it is that the state will be forced to either cut services or continue to raise various fees. Those in the active population suffer in that.”
All moreover, this “active population” is decreasing. Ritakallio is also concerned about Finland’s sustainability deficit, which makes it difficult to manage the national debt. Finland is aging and the birth rate is not increasing. There will be fewer taxpayers and more people collecting subsidies.
So we need more young, able-bodied people – and quickly.
“For ten years there has been talk about the need for measures to obtain work- and skill-based immigration. We should get started very quickly here, we have already lost a lot of time.”
At the same time, he urges to take measures to encourage people to work.
“Let’s do things so that people never have to think about whether they are dependent on social support or social assistance, or whether they should go to work.”
The thinking is reminiscent of, for example, the former prime minister Juha Sipilä (central) government’s active model. Ritakallio does not directly say that she supports the model in question, which lost its reputation very quickly. He says he hopes for a policy that encourages people to be active.
According to Ritakallio, his message reflects the message of Finland’s big companies.
“One thing that big companies are most worried about is the state of public finances. Its weakening will affect business activities here in the form of rising costs and higher taxes, fees and other expenses.”
The increase in taxes and expenses reduces the desire to invest, says Ritakallio. That would mean losing jobs.
“What kind of debt can society handle in the 2030s?”
Worry Finland’s indebtedness arose in Ritakallio’s mind after the 2008 financial crisis.
“Economic growth has been slower since then and indebtedness has crept up.”
Until now, those worried about indebtedness have hardly made their voices heard, because interest expenses have only shrunk. Now the indebtedness is in a new position.
The spring parliamentary elections are already on the minds of all decision-makers. Ritakallio is happy that indebtedness has come up in public discussion in recent days.
“Then we’ll see how this election spring is in the discussions and what kind of policies are made with the next four years in mind.”
Read more: This is what the politicians who did not consider indebtedness to be dangerous now think
Ritakallio does not take a position on which party seems to have the best approach to debt. The best form of government would be one that “is able to carry out activities that balance Finland’s public finances in the long term”.
He emphasizes that Finland’s large companies do not like tax increases, but does not propose cuts either. Tax increases and spending cuts are the two basic pillars of balancing the state economy.
“Making value choices is the task of politicians. Decision-makers should commit to the framework defined by the economy. What kind of debt can society manage in the 2030s? How can the additional cost caused by interest expenses be taken care of without taking on more debt for it?”
Instead of discussing spending cuts, Ritakallio calls for a new attitude towards financial discipline.
“Often we only talk about where to cut. We should really be talking about how to reform the structures.”
As a point of comparison, Ritakallio takes OP’s own collective bargaining negotiations held in 2018–2019, which are now called change negotiations.
“Our idea was not to cut a percentage of the workforce, but we started to think about how to change the structures of the operation. We reduced the hierarchy in the organization, sought self-direction and so on. The same things could very well be done in the state administration.”
“Many Finns have good conditions to survive this financially.”
Economic is now plunging into recession. According to Ritakallio, the financial sector in North America and Europe still seems to be in exceptionally good shape. He got to feel the mood of the world’s biggest banks when he attended the World Bank and International Monetary Fund (IMF) meeting in Washington DC last week.
“In the biggest banks, we can see that households and companies are quite resilient, good at enduring this situation.”
For example, according to Ritakallio, the majority of Finnish home loan borrowers manage their finances if the reference interest rate rises to around three percent. The majority of OP’s mortgage customers pay a fixed monthly installment, meaning their monthly expenses do not change at all.
According to Ritakallio, the euro-denominated deposits of Finnish households have grown faster than loans over the past three years. During the pandemic, money has been saved, which gives a buffer in difficult times. The resuscitation has therefore been beneficial.
“Corona also changed behavior and during that time people did not spend in the same way. Now the credit card data shows that money has started to be used normally again for travel, restaurants and concerts. It’s back to normal life.”
Talks are curtailed, expectations are weakening and prices are rising. Those who have money must continue to spend, Ritakallio urges.
“Many Finns have good conditions to survive this financially. If there is too much gloom, even those who don’t have to, start to behave differently and save. It slows down economic recovery.”
CEO of the OP Group, was born in Vampula in 1962.
Previously served as CEO of the employment pension insurance company Ilmarinen 2015–2018 and as Deputy CEO 2008–2014.
Education: Master of Law (University of Turku, 1985), MBA (Aalto University, 2001) and Doctor of Technology (Aalto University, 2016).
Wife, two children and one grandchild.
Enjoys orienteering, tennis and golf.
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