Finland
2010 Article IV Consultation: Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Finland

Owing to the high dependence of its exports on countries and commodities, Finland experienced the worst recession in the euro area. Executive Directors encouraged authorities to focus on improving bank cost efficiency, preventing excessive risk taking, and limiting liquidity and funding risks. Directors welcomed the establishment of the Nordic-Baltic Stability Group, and stressed the need to strengthen the effectiveness of cross-border supervision and crisis management arrangements. Directors welcomed structural reforms and also emphasized the need of a strong fiscal consolidation to secure fiscal sustainability.

Abstract

Owing to the high dependence of its exports on countries and commodities, Finland experienced the worst recession in the euro area. Executive Directors encouraged authorities to focus on improving bank cost efficiency, preventing excessive risk taking, and limiting liquidity and funding risks. Directors welcomed the establishment of the Nordic-Baltic Stability Group, and stressed the need to strengthen the effectiveness of cross-border supervision and crisis management arrangements. Directors welcomed structural reforms and also emphasized the need of a strong fiscal consolidation to secure fiscal sustainability.

I. Economic Situation and Outlook

1. Finland entered the crisis with robust fundamentals, a legacy of strong policies. Growth was well above the euro area average and the external current account exhibited sizable surpluses. Banks were generally sound, with no major bubbles in financial or real estate markets, while the government consistently ran fiscal surpluses over the last decade and public debt was low (negative in net terms, given large pension funds assets).

2. Nevertheless, Finland has been hit hard by the global crisis because of international spillovers and signs of recovery are still hazy. Exports fell dramatically in 2009 owing to their concentration in telecommunications (TLC) and capital goods, both heavily hurt by the worldwide slump, as well as sharper-than-average output declines in major trading partners. Domestic demand contracted much less, as still substantial wage rises cushioned private consumption, although dropping capacity usage led to severe investment cutbacks and massive destocking. Thus, having expanded by 1¼ percent in 2008, GDP collapsed nearly 8 percent in 2009, the largest plunge in the euro area, turning the output gap from 4¼ percent above potential in 2008 to 4¼ percent below capacity last year (Figure 1). Though private consumption and exports rebounded in the second half of 2009, growth was mildly negative in both 2009Q4 and 2010Q1, technically putting Finland in a double dip recession.

Figure 1.
Figure 1.

Finland: Growth and Inflation, 2000-11

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Sources: Statistics Finland Eurostat; and IMF staff estimates.1/ Overall excluding energy and unprocessed food.

GDP and Demand

(Percent change)

article image
Sources: Statistics Finland; and IMF staff projections.

Contribution to growth.

3. The impact on employment and inflation was dampened. The unemployment rate rose notably from 6½ to 8¼ percent during 2008–09, but well below Okun’s law predictions (Figure 2). Inflation turned down markedly in 2009 (Table 1). However, it has outpaced the EU average since late 2008, in part the result of generous multi-year collective wage agreements in 2007 that were generally in excess of productivity gains.

Figure 2.
Figure 2.

Finland: Labor Market Developments, 1990-2009 1/

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Sources: Statistics Finland; OECD.1/ Data for 2009 refer to the first three quarters.
Table 1.

Finland: Main Economic Indicators, 2007–15

article image
Sources: Ministry of Finance, Bank of Finland; and staff projections.

A negative value indicates a level of potential output that is larger than actual GDP.

For 2010, annual change is for April.

For 2009, data are for first ten months.

Based on relative normalized unit labor costs.

Inflation, Labor Market, and Output Gap Indicators

(Percent change)

article image
Sources: Statistics Finland and IMF staff projections.

Percent of labor force.

Economy-wide.

A01ufig01

Finland: Unemployment Developments

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Source: IMF staff calculations.1/ The financial stress indexis not available for Ireland.2/ Detailed data on short-time workschemes that allowed for the computation of full-time equivalent employees were only obtainable for Germany and Italy.
A01ufig02

Employment Growth and Unemployment Rates, 2000-2009

(In percent)

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Source: WEO.
A01ufig03

Beveridge Curve, 1975-2009

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Source: Finnish authorities.

4. The banking system has weathered the global turbulence well thanks to healthy capital buffers and prudent management. Finnish banks, in majority foreign-owned and highly concentrated, follow a conservative business model and have limited exposure to opaque structured products or risky regions (exposure to vulnerable European countries in particular is minimal). Their capital ratios compare favorably with those of their peers (Table 2 and Figure 3). The country’s stern regulatory and supervisory environment has helped shield the financial sector from the worst of the crisis. The turbulence was nevertheless felt in Finland too, mainly due to the real and financial international linkages of its economy (Boxes 1 and 2, Analytical Notes (AN) 1 and 2).

Table 2.

Finland: Indicators of Financial Vulnerability, 2005–10

article image
Sources: Bank of Finland; The Finnish Bankers’ Association; Financial Supervision Authority; Statistics Finland; and Fund staff estimates.

As of April 2010

As of March 2010.

Loans are defined as the sum of claims on credit institutions, the public, and public sector entities.

Average lending rate minus average deposit rate.

Liquid assets are defined as the sum of bills discounted by the central bank, debt securities, and the balance sheet item “liquid assets.”

As of May 31, 2010, change since end 2009.

Figure 3.
Figure 3.

Finland: Banking Sector, 2003-09

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Source: ECB, GFSR, BankScope, staff calculations.1/ Excludes Nordea’s derivatives.
A01ufig04

The financial system has showed its resilience during the crisis and there is no evidence that it is currently suffering any distress. An index measuring the stress in the system has decreased rapidly after the crisis, reflecting an important and accelerated improvement in financial conditions.

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Sources: Bank of Finland ; and IMF staff calculations.

5. Profitability and asset quality have deteriorated in the turmoil, while capital coverage has dropped but remained well above regulatory minima.

  • Bank profits, though remaining positive, plunged in 2008–09, reflecting mainly rising loan losses and declining net interest income, amid rapidly falling loan rates. The nonperforming loan rate increased in 2009 to 0.7 percent from a comparatively low 0.5 percent in 2008 (Figure 3).

  • After declining slightly in 2008, the Tier 1 capital adequacy ratio (CAR) improved in 2009, thanks to a partial portfolio reallocation toward less risky assets and expiration of some transitional additional capital requirements, with equity and near-equity funds accounting for 92 percent of regulatory capital.

  • Wholesale liquidity tightened somewhat, but interbank markets were not frozen at the crisis’ peak, and banks benefited from a shift from mutual funds into bank deposits. Nonetheless, liquidity buffers1 are relatively low.

A01ufig05

Capital Adequacy Ratios

(In percent)

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Source: Bank of Finland.
A01ufig06

Asset Composition of the 4 Largest Banks

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Source: Bankscope; and IMF staff estimates.

6. The financial condition of insurance companies and pension funds recovered in 2009 after sharply weakening in 2008. Steep drops in equity prices and interest rates (together with a stark slowdown in new insurance origination) led to sharply lower solvency ratios in 2008 and early 2009 (Figure 4). Since then, ratios have improved considerably, because equity prices have recuperated and the slide in interest rates has halted, although recent renewed turbulence in financial markets is likely to have taken a toll. The authorities amended the solvency regulations for employee pension institutions, boosting their long-term investments until end-2010, thereby avoiding the forced sale of shareholdings. Under pre-existing rules, risky assets, such as equity, would have had to be sold when the equity market collapsed.

Figure 4.
Figure 4.

Finland: Financial Sector, 2005-10

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Source: Bank of Finland and staff estimates.1/ As of March 2010.2/ As of May 2010.
A01ufig07

Households’ Net Worth and Leverage

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Source: Bank of Finland.

Finland: Cross-Border Spillovers1

Extensive trade linkages have deepened the severity of the global crisis in Finland. During 2009, Finnish merchandise trade decreased approximately by one third in relation to the previous year (Table 6). Direction and composition of exports have been sources of special vulnerability to the recession, with trade heavily concentrated in a few European partners. At least two-thirds of its exports are highly sensitive to the world investment collapse (like TLC and other machinery) or in trend decline (paper).

A01bx1ufig01

Goods Exports

(In billions of Euros)

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Source: Nationa Board of Customs.

International financial exposures are also important, but pose manageable risks for Finland. The Finnish banking system has a relatively high share of foreign claims, especially in Western Europe, which makes it susceptible to deteriorating conditions abroad. However, considerable diversification diminishes risks stemming from a localized financial shock. Simulating the direct and indirect impact of a default in one (or more) of the partner countries and the associated domino effects suggests that gross losses for Finnish banks would be generally contained. A more pessimistic scenario of 10 percent default rate across Europe, US, or Japan could reduce credit availability by approximately one third and produce considerable losses for banks, up to 5 percent of GDP.

Finnish Banks’ Foreign Claims

(September 2009)

article image
Note: International claims includes “cross border claims in all currencies and local claims in non-local currencies”Source: BIS.

Finnish Banks’ Claims Abroad

(June 2009)

article image
Source: BIS.

Spillovers to Finland from International Banking Exposures

article image
Source: Staff calculations based on BIS and IFS data.

Magnitude denotes the percent of claims that default.

Deleveraging need is the amount that needs to be raised through assets sales in response to the shock in order to meet the minimum capital requirement, expressed in percent of total assets.

Europe includes Austria, Belgium, Denmark, France, Germany, Greece, Italy, Netherlands, Portugal, Spain, Sweden, Switzerland, Turkey, and United Kingdom.

Foreign claims on Finnish banks are equally significant, but risks are more concentrated. Foreign banks’ share of the Finnish banking system accounts for about two-thirds of its assets and they originate in just a few European countries. To illustrate the intensity of the linkage, given a 5 percent default in Finnish private claims, Sweden suffers the worst (1 percent of GDP), followed by Denmark.

A01bx1ufig02

Lenders’ Losses due to Finnish Default, in percent of GDP

5 percent default scenario

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Spillover estimates include all indirect and multiple-round effects of the shock through the banking systems of “third-part” countries.
1 See Analytical Note 2 (AN2)

7. Household balance sheets are rallying, but risks have increased, in particular related to the current low interest rate environment. Financial assets of households have almost returned to pre-crisis level. However, debt, especially mortgages, has grown stimulated by low rates, the proportion of loans with floating interest rates is very high, and repricing maturities have shortened—all factors that have shifted significant interest rate risk from banks to households. Household loan servicing capacity has declined, leading to increasing problem loans.

8. The real estate market appears generally steady, albeit with some concerns. Real home prices remained stagnant in 2008–09, having appreciated by over 30 percent in 2000–07, but started to ascend fast again at the end of last year. Analyses by staff and others show that they are broadly in line with fundamentals, but the sudden acceleration in the last six months points to increasing hazards if the trend were to continue. As for commercial real estate (CRE), with office rents falling by more than 10 percent in 2009, Finland’s vulnerability is high compared to Nordic peers.

A01ufig08

Residential Real Estate Markets

(In real terms, percentage change)

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Sources: OECD, Global Property Guide, and national sources.

9. Firms entered the crisis with solid balance sheets, but vulnerabilities have risen. During the capital market turmoil of 2008, short-term loans to nonfinancial companies have increased significantly as firms turned to banks for funding. With improving global financial conditions in 2009, corporations were able to tap the international bond and syndicated loan markets, and the stock of bank loans slightly decreased (Figures 5 and 6). Medium and large firms, facing higher loan margins and shorter maturity terms, have stepped up borrowing from employee pension funds, at relatively high cost. Small enterprises suffered most from tighter collateral requirements, increasingly tapping public funding sources like Finnvera. The sharp activity slowdown resulted in a steep rise of payment defaults and bankruptcies. However, these are now decelerating and expected default frequency indicators have also been improving lately.

Figure 5.
Figure 5.

Finland: International Bond Market Developments, 1999–2010Q1

(In millions of US dollars)

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Source: Dealogic.
Figure 6.
Figure 6.

Finland: Bonds Outstanding by Sector of Issuance and Growth in Loans to Households and Nonfinancial Corporations

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Source: Statistics Finland, and Bank of Finland.
A01ufig09

Commercial Real Estate Markets

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Source: Knight Frank LLP.Note: Data are available at a bi-annual basis with an average lag of four months.

Finland: Macro-Financial Linkages

Financial conditions have tightened substantially, reducing significantly economic growth. Banks reported tougher lending standards for corporations, residential mortgages, and consumer lending in 2008–09. Using a Financial Conditions Index (FCI) approach, staff estimates the cumulative negative direct contribution to 2008–09 growth of prevailing financial conditions at 1½–2 percentage points (AN1).

However, lower interest rates are increasingly compensating for the adverse impact of other financial variables. The substantial lowering of short-term interbank and corporate loan interest rates since late 2008, albeit with only small declines in longer-term rates, is gradually offsetting the negative contribution to growth of real exchange rate appreciation, slumping equity prices earlier in the crisis, and banking sector conditions (distance-to-default indicator—AN1). Notably, the influence of the latter, while relatively small, is approaching levels comparable to the crisis of the early 90’s.

A01bx2ufig01

Interest Rate Developments

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Sources: Bank of Finland; and Thomson Reuters.
A01bx2ufig02

Finland: Financial Conditions Indices and Credit Market Imbalances

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Sources: Bank of Finland ;and IMF staff calculations.

10. With fiscal policy turning to support growth, the budget position worsened sharply in 2009, reversing years of impressive performance (Table 3 and Figure 7). The general government (GG) headline balance went abruptly from a surplus of 4 percent of GDP in 2008 to a deficit of 2½ percent of GDP in 2009. The deterioration was due to substantial structural loosening as well as the free operation of automatic stabilizers. Spending surged as a share of GDP, mainly because the nominal expenditure ceilings were maintained despite the output collapse (¶2). Overall, the structural primary surplus declined by 1¾ percent, to 1½ percent of GDP in 2009. Population aging remains a millstone on long-term fiscal sustainability (¶31).

Table 3.

Finland: General Government Accounts, 2007–11

(In percent of GDP)

article image
Sources: Eurostat; Ministry of Finance; and Fund staff calculations and estimates.
Table 4.

Finland: Balance of Payments, 2005-11

(In billions of euros)

article image
Sources: Bank of Finland; and staff projections.
Table 5.

Finland: Net International Investment Position, 2001-09

(In percent of GDP)

article image
Sources: Bank of Finland; Statistics Finland; and staff calculations.
Table 6.

Finland: Trade by Regions and Countries, 2009

article image

Imports by countries of origin, exports by countries of destination

Source: National Board of Customs, Finland.
Figure 7.
Figure 7.

Finland: Fiscal Developments and International Comparison

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Sources: Thomson Financial/DataStream and WEO.
A01ufig10

General Government Developments

(Percent of GDP)

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Sources: IMF, WEO and staff estimates.

11. Discretionary stimulus extends beyond the impact on the fiscal balance. The 2009 budget made available substantial funds (about ½ percent of GDP) to inject loans and capital into distressed nonfinancial companies, and these operations have been classified as below-the-line transactions, on the assumption that the disbursements will be recouped once the economy recovers.

A01ufig11

Discretionary Measures, 2008-09 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Sources: IMF REO, 2009 ; and IMF staff estimates.1/ Excluding one-off and temporary measures.

12. Sustained current account (CA) surpluses and other indicators suggest adequate but reduced competitiveness (Box 3 and Figure 8). The surplus, having hovered around 4 percent of GDP during 2000–08, plunged to 1¼ percent of GDP last year amid collapsing exports. It is projected to recover to the 2 percent of GDP range during 2010–11, as accelerating exports more than offset recovering imports. In the medium term, the CA is expected to stabilize around this level, with old-age pre-funding boosting the savings rate and despite continuing terms-of-trade erosion.

Figure 8.
Figure 8.

Finland: Current Account and Net International Investment Position, 1999–2009

(In percent of GDP)

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Sources: Bank of Finland; Statistics Finland.

Macro Outlook

13. Economic activity is projected to rebound in 2010, but growth is likely to be subdued, before consolidating in 2011. The external sector is to provide a positive, yet restrained, contribution to growth in both years.

  • In 2010, growth is expected to attain 1¼ percent. Domestic demand should expand moderately with private consumption and investment remaining frail in the near term, as households face rising unemployment and tight credit, while firms suffer large excess capacity, stern lending conditions, and a CRE overhang. Continuing fiscal stimulus measures and large automatic stabilizers will reduce the downside for consumption and investment. Inflation is likely to decline as a sizable output gap strengthens resistance to price and salary increases. The labor market is anticipated to lag the pick-up in activity, with unemployment hitting 8¾ percent.

  • In 2011, amid improving global conditions, firming consumer and investor confidence, and deepening normalization of financial markets, growth is projected to speed up to 2 percent, despite sizable fiscal tightening. The authorities’ projections are more optimistic with real GDP expanding by 2½ percent, implying a stronger growth momentum fueled by private demand.

14. The supply potential of the economy has probably been severely curtailed by the crisis. Potential growth may run considerably lower than before the downturn in the near to medium term, owing to the large contraction in investment, likely decline in the participation rate, and a deceleration in total factor productivity (if financing constraints and increased risk aversion curb research and development). Potential growth is expected to stay at around 1½ percent over the medium term, somewhat below its pre-crisis trend, leaving a permanent decline in the level of potential output—7 percent by 2015 (AN3), when the output gap is anticipated to close.

Medium-Term Macroeconomic Framework

article image
Sources: Finnish authorities; and IMF staff estiimates.

Finland: External Competitiveness

Standard REER measures of external competitiveness—using different cost or price indices—are mixed, but generally point to some modest recent deterioration. From the early 2000s, on average indicators have moved broadly sideways. Compared to 2007, though, when Finland had a large CA surplus, economy-wide REER indicators suggest some decline in competitiveness.

Exporter profitability has also worsened. The ratio of ULC-based to price-based-REERs estimates changes in labor shares compared to trading partners as a profitability proxy. Both economy-wide and tradable relative labor shares have increased over the last five years.

Merchandise export market shares in both total world trade and in the EU have been trending downward over the last twenty years. This reflects a secular decline in export prices, especially for communications equipment and forestry/paper products, as well as outsourcing of production.

A01bx3ufig02

Finland Export Trade Shares

(In percent)

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Sources: IFS.

The multilaterally-consistent CGER methodology1 shows sizable and rising competitiveness margins, but specificities of the Finnish economy point to over-estimation. The margin is estimated to lie in the range of 16 to 4 percent depending on the CGER method used. In particular, the CA norm based on the macroeconomic balance approach is estimated at -1 percent of GDP and is mainly influenced by the dependency ratios, relative incomes, and past values of the current account.

  • However, the large real undervaluation implied by the equilibrium real exchange approach is mainly driven by a relative increase in Finland’s government consumption/GDP ratio, itself largely determined by the massive nominal GDP decline in 2009. This factor causes the CGER equilibrium REER to appreciate markedly, while the measured REER only appreciates marginally as noted above, thereby boosting “artificially” the competitiveness margin.

  • Moreover, two adjustments which reflect specific features of the Finnish economy reduce the “real undervaluation” significantly. First, including the expected evolution of the Finnish population in the CGER panel data approach increases the CA norm to a positive ¼ percent of GDP, limiting the undervaluation to 7½ percent. Second, estimating the macroeconomic balance approach using only time series data for Finland increases further the CA norm to ½ percent of GDP and lowers the undervaluation even more, to about 6 percent.

Estimates of Competitiveness Margin Using CGER Methodologies 1/

(Level relative to equilibrium in percent; minus indicates undervaluation)

article image
Source: IMF staff estimates.

CGER (Consultative Group on Exchange Rate Issues). Values between -10 and +10 mean the real exchange rate (RER) is close to balance. International Monetary Fund, 2008, “Exchange Rate Assessments: CGER Methodologies” (available at www.imf.org). CGER estimates based on data available in April 2010.

Macroeconomic balance approach.

1 See also AN4

15. In the longer run, a rapidly aging population could lower potential growth further. Imminent population aging will squeeze working-age cohorts, while slowing down trend productivity. Maintaining potential growth will therefore require boosting labor force participation and reforms to enhance productivity (¶35).

A01ufig12

Old-Age Dependency Ratios and Working-Age Population Indices, 2010-2060

(Population in 2010 = 100)

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

Source: Eurostat.

Long-Term Scenario

Prospects for labor force participation/employment and productivity growth imply a significant drop in per capita income growth.

article image
Sources: ECFIN: The 2009 Ageing Report; ECFIN: Sustainability Report 2009; and Staff calculations.

GDP per employed.

Change in the share of population 15-64 years.

Employed as a share of population 15-64 years.

Risks

16. In light of the magnitude of the downturn the outlook is unusually uncertain, but the risks are roughly balanced. The main risks around the central projection include deviations from the baseline in: (i) lending and financial conditions, including asset prices; (ii) domestic and external demand; and (iii) size/effect of monetary and fiscal policy measures. Upside/downside risks stemming from these factors are deemed equally probable, but with uncommonly pronounced dispersion.

A01ufig13

Real GDP Growth: Risks to the Forecast

Citation: IMF Staff Country Reports 2010, 273; 10.5089/9781455207725.002.A001

The chart includes the risks to the projections of growth (1.2 percent in 2010 and 2.0 percent in 2011) based on historical forecast errors increased by a factor of 25 percent to reflect increased uncertainty.Source: IMF staff estimates.

II. Policy Discussions

17. Against this background, Finland needs to secure the recovery, mitigating lingering risks, and also start addressing long-term sustainability issues.

  • In the near term, actions should focus on consolidating restoration of financial sector health and economic growth. There are signs that banks may be prompted by competition and the difficult operating environment to engage in higher risk activities in a quest for better returns (¶25), while bank profitability and credit quality have declined (¶s19, 20). Liquidity buffers are low, particularly in consideration of relatively high reliance on wholesale funding (¶s20, 23). In the fiscal area, a balance must be struck between support of economic activity and prevention of continuous budget worsening (¶s26–30).

  • Longer term policies should strengthen financial stability, ensure fiscal sustainability, and advance structural reforms to boost potential output. With most of the banking system made of large entities in foreign hands, supervision and crisis management for systemic cross-border institutions as well as mitigation of too-big-to-fail risks and prompt intervention in distressed institutions are critical issues (¶s22–24). The EU and Basel initiatives to reform supervision and regulation may have profound implications for Finnish banks (¶23). The fiscal position having considerably weakened, gradual and credible adjustment is required with the aim to restore sustainability (¶s31–34). Structural reforms would alleviate the adverse impacts of the crisis and population aging on growth, and facilitate fiscal consolidation (¶s33–35).

A. Maintaining Financial stability

18. In line with the FSAP update, staff observed that bank support actions have been broadly appropriate and consistent with those of other industrialized countries (Tables 78). The enlargement of deposit insurance was in accordance with EU-wide measures. ECB liquidity extension on full allocation basis was also supportive of financial stability. Guarantees for bank liabilities and capitalization facilities, although in practice not used, envisaged respectively sunset provisions and consistency with a sound “fix-it-and-exit” approach aimed at avoiding the persistence of distortions to the level playing field. These facilities have now expired.

Table 7.

Finland: Headline Support for Financial and Other Sectors and Upfront Financing Need1/

(As of July 2010; in percent of 2009 GDP)

article image
Sources: FAD-MCM database; Monetary Authorities; International Financial Statistics; and World Economic Outlook, April 2009.

Amounts in columns A, B, C and E indicate announced or pledged amounts, and not actual uptake. Column D shows the actual changes in central bank’s balance sheet from June 2007 to June 2010. While the expansion of central bank balance sheet is mostly related to measures aimed at enhancing market liquidity as well as financial sector support, it may occasionally have other causes. It may also not fully capture some other types of support, including that arising from changes in regulatory policies. For the euro zone countries, see the ECB line.

Column B does not include Treasury funds provided in support of central bank operations. These amount to 0.5 percent of GDP in the U.S., and 12.8 percent in the U.K.

Excludes deposit insurance provided by deposit insurance agencies.

This includes support measures that require upfront government outlays. It does not include recoveries from the sale of assets acquired through interventions.

Support to the country’s strategic companies is recorded under (B); of which €20 bn will be financed by a state-owned bank, Caisse des Depots and Consignations, not requiring upfront Treasury financing.

It does not include the temporary swap of government securities for assets held by Italian banks undertaken by the Bank of Italy.

Excluding asset accumulation in Sovereign Wealth Fund, the balance sheet expansion during the period was only 4.5 percent of GDP.

A maximum amount of €22.8 bn (13.7% of GDP) is allocated to the guarantee scheme, the reinforcement of core capital (with the latter not exceeding €4 bn), as well as Portugal’s contribution to the European Financial Stability Facility.

Cabinet approved guarantees for bank debt up to €100 bn. Another €100 bn can be extended, if needed. Bank Restructuring Fund, for which the current legislative framework provided €9 billion (of which €6.75 bn funded by the state), could potentially be increased to up to €99 billion through debt issuance. A €30-50 bn fund was created to purchase high-quality securities issued by financial institutions (FAAF).

Some capital injection (SEK50 billion) will be undertaken by the Stabilization Fund.

Upfront government financing reflects SNB creation on SPV to purchase of USB’s bad assets.

Estimated upfront financing need is £301 bn (21.6 percent of GDP), consisting of Bank Recapitalization Fund (£68 bn), Special Liquidity Scheme (£185 bn) and financing for the nationalization of Northern Rock and Bradford & Bingley (£48 bn).