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Bank of Finland: Household debt accumulation poses mounting risk

As the economy improves and household savings rates stand at an historic low, more and more Finns are choosing to fund their consumer spending with borrowed money. Finland's central bank warns that interest rates will rise before long, so consumers should be careful with ever-expanding opportunities for easy credit.

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The Finnish economy is once again heating up and consumer spending is growing faster than incomes. Bank of Finland reports that household debt grew five percent in May on the previous year, with so-called unsecured consumer credit, via international online credit providers and peer-to-peer lending services, up by 13 percent in the same period.

As the selection of loan alternatives grows, increasing numbers of Finnish consumers are now moving beyond traditional new home and housing cooperative loans to secure expensive consumer credit from sources that Finland's central bank says are difficult to monitor.

"A significant proportion of households’ bad credit records is generally due to non-performing consumer loans," it said in a late June release. 

Low interest rates make the prospect of debt more appealing, but the Bank warns that interest rates will eventually rise, straining household finances with added debt-servicing expenditure.

Last autumn, the European Systemic Relief Board warned Finland about its "high and increasing household indebtedness, especially among some groups of households." The warning from the EU's financial supervisor to Finance Minister Petteri Orpo apparently fell on deaf ears, however, as the rate of consumer debt in Finland has only grown since.

Can savings make a comeback?

But what can be done to remedy the situation?

One option experts offer to combat excess indebtedness is a credit register, which would make it possible for creditors to see the credit history of loan applicants. Sweden has a register that lists the total debt, income, real estate holdings and payment histories of the people listed.

Another option is to encourage more Finns to save. The central bank says the 2016 savings ratio, defined as the percentage of household income left over after consumption, was –1.9 percent. That means that households in Finland are currently consuming more than they earn in income.

The country last witnessed a negative savings ratio in 2006-2008, when it fluctuated between –0.25 and –0.5 percent. 

The Bank of Finland's forecast doesn't expect the savings ratio to improve any time soon, for at least as long as low interest rates and consumer confidence prevail.

Debt culture has changed

Figures show that every fourth Finnish resident now holds some kind of consumer debt. Cars, trips abroad, boats and appliances are the most common purchases behind the loans.

Think tank PTT's economist Eeva Alho says the Finnish debt culture has changed in recent years, and steps must be taken quickly to correct it.

"There is a growing group with significant housing debt and lots of consumer credit and payment defaults," she says. 

Others however point out that the influence of household spending on the Finnish economy has waned now that exports have started to pick up speed again.

"This is very good news, because consumption that relies on debt is unsustainable… Customers with consumer credit from several sources have increased," says Aktia Bank's chief economist Heidi Schauman. 

The only long-term solution

The good news in this scenario is that regulators and credit ratings agencies agree that Finnish banks are very stable. Household indebtedness in neighbouring countries like Denmark and Sweden is also much higher.

This too presents a problem, however, because the Nordics are now tied to a common banking system, so the effect of defaults and bank credit losses elsewhere will be felt in Finland, too. Schauman says the public needs to re-educated about prudent spending habits.

"It'd be important to talk about money and how to use it with young people. A better understanding of financial matters isn't a quick fix, but it is the best long-term solution."

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