Moody’s Questions Finland’s Bleak Debt Forecast

(Bloomberg) -- Moody's Investors Service says Finland's debt growth will be contained much sooner than the government expects, raising questions about the reliability of the forecasts.

“We expect debt to stabilize within the next 3 to 4 years,” Steffen Dyck, vice president and senior credit officer at Moody's, said in an interview. The Finnish government says that process will take a decade. Moody's also predicts the economy will grow more than 3% next year, more than twice the government's estimate for the coming years.

“Our assumptions for Finland's growth outlook are a bit more positive” than Finland's own, Dyck said in a phone interview.

Finland emerged as a champion of austerity during Europe's debt crisis, but has since struggled to contain its own borrowing. The only Nordic member of the euro zone subsequently lost its AAA rating, and now has the second-highest credit score at Standard & Poor's, Fitch and Moody's.

With the onset of the Covid-19 crisis, Finland, like most other countries, has abandoned all talk of austerity, and this year embarked on a massive debt-fueled spending plan. It raised its 2020 borrowing estimate four times in recent months, to 18.8 billion euros ($21.3 billion). That compares with just over 2 billion euros at the start of the year.

Dyck at Moody's said that even “delaying the debt stabilizing goal is not clear push-back from Finland's prudent fiscal policy making.” That's because “Finland has done good preparatory work in bringing down its debt burden to below 60% of gross domestic product in 2019,” he said.

With Finnish GDP set to contract 5.5% this year, there's no doubt the extra spending is needed.

“The crucial question is what will the government do with this money over the long-term,” Dyck said. “A positive take” from its most recent iteration to this year's budget “is that it continues to invest in skills in order to maintain a competitive, knowledge-based economy.”

Dyck also points out that the European Central Bank's emergency bond-buying program reins in borrowing costs, and that Finland's “debt affordability would not weaken dramatically even in a worst case scenario.”

Jan von Gerich, chief analyst at Nordea Bank, says Finland's debt growth has already been noted in the bond market. The government now needs to provide a “credible medium-term road map” to reassure investors, he said.

Lasse Corin, chief economist at Aktia Bank, said “this isn't the right time to implement fiscal tightening measures.” But, “it would be healthier to start talking about the need for future tax increases, savings and structural reforms already. The truth is, the government is leaving its successors a lot of work as regards public finances.”