“Is Your Portfolio Safe? Shocking Truth About Northern European Debt Exposure!”

The Nordic countries are known for their solid balance sheets due to their healthy public finances, a perception that has been challenged by a recent report from the IMF. The report found that the private sector in the Nordic countries (including households and non-financial corporations) has taken on significant levels of debt since 2011, to the point where their total aggregate debt levels (public and private) are on par with the so-called southern states of the European Union. This debt has largely been taken on due to the low interest rate environment post GFC and the Euro crisis, which created an incentive to borrow more. The report argues that while the Nordics are running current account surpluses and have strong public balance sheets, these factors may not be enough to prevent a financial crisis if economic agents decide to move their money outside the country instead of refinancing the local economy.

Additional piece: The Nordic Dissonance – Are We Overrating the Nordics?

For many years, the Nordic countries have been hailed as paragons of economic stability and sound financial management. Their reputation has been built on a foundation of healthy public finances, low levels of government debt, and strong institutional frameworks. In recent years, however, cracks have started to appear in this rosy picture, with rising levels of private sector debt raising concerns about the long-term sustainability of their economic model. This article will delve deeper into these issues and explore whether the Nordics are really as economically robust as we have been led to believe.

The Nordic model of economic governance is often held up as a shining example of how to balance social welfare and economic growth. The model is characterized by high levels of taxation, a robust welfare state, and a highly skilled and educated labor force. These factors have enabled the Nordic countries to achieve some of the highest rankings in the world for human development, life expectancy, and social equality. However, while the model has certainly delivered impressive results in these areas, there are growing concerns that its long-term economic viability may be in question.

One of the main factors behind these concerns is the rising level of household debt in the Nordics. According to the IMF report cited in the summary, total private sector debt in the Nordic countries (excluding the financial sector) has risen significantly since 2011 to the point where it is now on par with the southern European countries that have been struggling with debt crises for years. This debt has been largely driven by the low interest rate environment created by the GFC and the Euro crisis, which has incentivized households and corporations to take on more debt. While the current account surpluses and robust public balance sheets of the Nordics may provide some cushion against the deleterious effects of this debt, they may not be enough to prevent a financial crisis if the economic agents that generate the excess savings in the economy decide to move their money outside the country.

Another concern with the Nordic economic model is the high level of income inequality relative to the rest of Europe. While the Nordics are often held up as examples of social equality, the reality is that they also have some of the highest levels of income inequality in Europe. This is largely due to their reliance on a highly skilled and educated labor force, which has created a two-tiered labor market where highly skilled workers earn significantly more than those with lower levels of education. While this has helped to drive economic growth, it has also created a more unequal society, raising concerns about the sustainability of the Nordic model over the long-term.

So, are the Nordics the new GIPS? While it is clear that the Nordics face some significant challenges to their economic model in the coming years, it is also clear that they are still in a much stronger position than many other countries in Europe. Their healthy public finances, current account surpluses, and highly educated workforces provide a strong foundation for continued economic growth and development. However, it would be wise to keep a close eye on the rising levels of private sector debt and income inequality in the region, as these could pose serious risks to the Nordic economic miracle in the years to come.

—————————————————-

Rui Soares is an investment professional for FAM Frankfurt Asset Management, an independent investment firm

As the FT reported earlier this month:

Hedge funds have increased their bets against Sweden’s property sector as investors predict that rising interest rates will weigh on domestic property prices and expose its vulnerability to tighter bank lending. [ . . . ]

“The closer we look at Sweden, the worse things look,” said James McMorrow, European commercial property economist at Capital Economics.

Does it follow that the Swedish economy is in trouble? And even if it did, doesn’t it have a very solid balance sheet that allows it to easily overcome and smooth out any short-term economic weakness?

At first glance, Sweden and the Nordic countries in general seem solid. As far as healthy balance sheets are concerned, they are in completely different leagues from Greece, Italy, Portugal and Spain, the so-called southern states of the European Union – and over the Over the past 10 years, the difference between the two groups of countries has only increased:

This rather traditional approach to the quality of a country’s balance sheet, however, overlooks that the private sector also has a balance sheet. Starting with households. . .

. . . and if we add the private non-financial corporate sector, we get a rather interesting picture of total private sector debt by country:

. . . meaning total aggregate debt levels (public and private) put the Nordic countries on a par with the southern third:

Surprising? It shouldn’t be. The low interest rate environment post-GFC and the Euro crisis has created an incentive to take on more debt. However, only countries with unused debt capacity could benefit from it. The private sector in the Nordic countries — households and non-financial corporations — had debt capacity in 2011 and made the most of the low interest rate environment, which led to a significant increase in their level of debt since 2011. And yes, part of it has gone to financing real estate bubble boom.

One could now argue that the Nordic countries are running current account surpluses – that is. they are not dependent on external financing – and that strong public balance sheets will allow governments to step in and stabilize the economy, if necessary. These are fair points. Again, the firms that generate export revenue and that drive current account surpluses are not necessarily those with the highest levels of debt.

This potential mismatch means that the economic agents that generate the excess savings in the economy could decide to move their money outside the country instead of refinancing the local economy. Without capital controls, even current account surpluses are not absolutely effective in preventing financial crises.

As for healthy public balance sheets, they can easily get dirty once automatic stabilizers and bailouts of all kinds start to kick in in the midst of a rapid and severe economic downturn.

In 2007, according to IMF data, Spanish public debt represented 36% of GDP and total private sector debt (excluding the financial sector) 276%. In 2021, Sweden’s public debt was 37% of GDP and total private sector debt (excluding the financial sector) was 285%.

Are the Nordics the new GIPS?

https://www.ft.com/content/c1bda8ce-ddcc-4645-acb7-fbbe1915a67f
—————————————————-