Central bank governor Erkki Liikanen said that Finnish authorities should consider granting housing loans for only part of the value of a property.

He pointed out that Spain should provide a warning as to what can happen when borrowers become over indebted. “A rapid increase in housing prices is a recipe for a crisis, which always follows when prices fall sharply. Ordinary people, the economy and the banks suffer,” Liikanen said in an MTV3 interview on Friday.

Liikanen said that the crisis has taught that banks should be supervised as an entire sector, so that risks faced by the sector could be detected.

In spite of the protracted euro zone crisis, in which Spain now appears to be in danger of asking for a government bailout, Liikanen said that the Finnish economy had managed well, but he warned of “external threats”.

ECB bond purchases show ECB 'can act'

Liikanen -- who is also a member of the European Central Bank’s governing council -- defended an announcement by the European Central Bank yesterday, indicating that it would intervene in European financial markets to buy government bonds on the secondary market.

It is believed that purchasing the bonds would help lower the high interest rates facing cash-strapped euro area governments such as Italy and Spain.

Finland has opposed such a measure, saying that it only delivers temporary results, and that it consumes too much of the capital in the European Union’s temporary and permanent bailout funds.

Governor Liikanen said the proposed bond purchases show the ECB can act and is prepared to act to defuse the eurozone crisis.