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SEPTEMBER 30, 2013 SOVEREIGN & SUPRANATIONAL Denmark, Finland, Norway and Sweden: Peer Comparison CREDIT FOCUS Summary RATINGS Denmark FC Government Bond Rating LC Government Bond Rating FC Bond Ceiling LC Country Ceiling The Aaa ratings and stable outlook of the four main Nordic countries 1 – Denmark, Finland, Norway and Sweden – are driven by a number of shared credit strengths and challenges. Their strengths include robust government balance sheets, strong institutional frameworks and – despite diverging economic performances since the global financial crisis – a sustained economic resilience relative to most other Aaa-rated peers. However, this economic resilience masks highly indebted private sectors and high house prices, which could inhibit private consumption going forward. Aaa/STA Aaa/STA Aaa Aaa Finland FC Government Bond Rating LC Government Bond Rating FC Bond Ceiling LC Country Ceiling Aaa/STA Aaa/STA Aaa Aaa The shared credit strengths and challenges of the four countries’ Aaa ratings are as follows: Norway FC Government Bond Rating LC Government Bond Rating FC Bond Ceiling LC Country Ceiling Aaa/STA Aaa/STA Aaa Aaa » Low budget deficits or surpluses and low general government debt-to-GDP ratios: The four Nordic countries entered the global financial crisis having pursued prudent fiscal policies resulting in several years of budget surpluses and public-debt-to-GDP ratios below 50%. This provided them with a fiscal buffer when their economies weakened. » Very high institutional strength: The Nordic banking crises in the 1990s motivated the governments to strengthen the region’s institutions, which was an important reason for their relative resilience in the crisis. The crises also led to a further tightening of financial sector regulation and evidenced the advantages of the broad consensus that prevails in these countries regarding prudent policy making, especially with regard to sustainable fiscal policies. » Economic resilience relative to Aaa peers: The four countries have diversified economies and a high GDP per capita. They all benefited from the rapid expansion in global trade growth ahead of the global financial crisis, but while Sweden and Norway have recorded relatively rapid growth since 2010, Denmark and Finland face some structural issues. » Household indebtedness is high: Household indebtedness in Denmark, Norway and Sweden has risen sharply since the mid-1990s in line with house-price increases. Finnish households have avoided a build up of debt to the same magnitude. High household asset levels partly mitigate the risks associated with these debt burdens. Sweden FC Government Bond Rating LC Government Bond Rating FC Bond Ceiling LC Country Ceiling Aaa/STA Aaa/STA Aaa Aaa KEY INDICATORS, 2013F Real GDP (% Y/Y) CPI (% Y/Y) Fiscal Balance (% GDP) Current Account (% GDP) Denmark Finland Norway Sweden 0.7 -0.1 1.5 1.4 1.3 2.5 1.7 0.9 -1.7 -2.2 13.7 -1.5 4.9 -1.7 13.8 7.5 Source: Moody’s Investors Service, Central Banks, Eurostat, IMF 1 This peer comparison does not cover Iceland (rated Baa3/stable) given the different factors that underpin its creditworthiness. SOVEREIGN & SUPRANATIONAL 1. Strong government balance sheets All four Nordic countries entered the global financial crisis with a track record of budget surpluses and low general government debt-to-GDP ratios. A long-term track record of sustained fiscal surpluses or low deficits The Nordics have built up a prudent fiscal track record since the banking and economic crises experienced by Finland, Norway and Sweden in the 1990s (Denmark avoided a banking crisis during the same period). This track record reflects the fact that, in order to limit future crises, Nordic governments implemented a number of widespread policy reforms that included a strengthening of their fiscal frameworks. The consensus-driven policy-making environment has helped governments in each country to sustain high revenue-to-GDP ratios without voter demands for lower taxation rates – in fact, in 2012 all four countries had revenue ratios above 50% compared to a median for Aaa-rated peers of 43% in the same year. This income has supported high public spending while at the same time allowing budget surpluses to be maintained; only Norway had an expenditure-to-GDP ratio below 50% in 2012. Much of this spending relates to a relatively high percentage of the labour force in each country being employed in the public sector, government’s responsibility for healthcare and education, as well as a generous social security system. Public confidence in the authorities’ policies combined with general voter support for spending in these areas has enabled successive governments to plan around a longterm fiscal framework. Finland and Norway recorded continuous fiscal surpluses averaging 4.2% and 14%, respectively, during 2000-08 (see Exhibit 1). Denmark experienced a modest fiscal deficit in 2003 and Sweden small deficits in 2002-03, but both countries also entered the global financial crisis with strong government balance sheets: Denmark’s surpluses averaged 2.6% during 2000-08, while in Sweden they averaged 1.4% (better than Sweden’s fiscal rule).2 This robust performance compares with median fiscal surpluses for Aaa-rated credits of 1.2% of GDP during 2000-08. All four countries experienced recessions in 2009 owing to the global financial crisis and the highly open nature of their economies. A combination of a fall in nominal GDP and stimulus spending contributed to budget deficits being recorded in Denmark (2.8%), Finland (2.7%) and Sweden (1%) in 2009. Elevated international oil prices allowed the Norwegian government to maintain a substantial budget surplus (of 10.5% of GDP) in 2009, although the non-oil deficit stood at 4.4% of GDP in the same year. Since the crisis, Norway has maintained budget surpluses of greater than 10% of GDP (the non-oil deficit averaged 4.1% of GDP during 2009-2012) owing to revenues accruing to the Government Pension Fund-Global (GPF-G) and this trend is expected to be sustained in 2013-14. We forecast public-deficit-to-GDP ratios in Denmark, Finland and Sweden of 1.7%, 2.2% and 1.5%, respectively, this year, similar to the 1.8% of GDP fiscal deficit expected for the median of Aaa-rated countries. A resumption in global economic growth from the latter part of 2013 (and thus a recovery in external demand) will contain deficits in the three weaker Nordic countries in 2014. 2 2 See “The Nordics exhibit very high institutional strength” below for more information. SEPTEMBER 30, 2013 CREDIT FOCUS: DENMARK, FINLAND, NORWAY AND SWEDEN: PEER COMPARISON SOVEREIGN & SUPRANATIONAL EXHIBIT 1 All four countries recorded budget surpluses in the run-up to the global financial crisis Gen. Gov. Financial Balance (% of GDP) Sweden Norway Denmark Finland Aaa-Median* 20 15 10 5 0 -5 -10 2004 2005 2006 2007 2008 2009 2011 2010 2012 2013F 2014F * Excludes Denmark, Finland, Norway and Sweden Source: Haver - Eurostat, National Statistics, Moody's Low government debt-to-GDP ratios Budgetary discipline in the run-up to the crisis meant that, at end-2008, each country had low government debt-to-GDP ratios: Denmark at 33.4%, Finland at 34%, Norway at 48.2% and Sweden at 38.8% (see Exhibit 2). This compares with 44.5% of GDP for the median in the Aaa-rated group. Their healthy positions enabled fiscal stimulus measures to be introduced without fiscal sustainability coming under pressure in 2009. EXHIBIT 2 Balance sheets have consistently outperformed the median for Aaa-rated countries Gen. Gov. Debt (% of GDP) Norway Sweden Denmark Finland 2009 2010 2011 Aaa-Median* 70 60 50 40 30 20 10 0 Average 2004-08 2012 2013F 2014F * Excludes Denmark, Finland, Norway and Sweden Source: Haver - Eurostat, Moody's Since the global financial crisis, the fiscal performance of each country has been mixed, though all four experienced economic contractions in 2009. Norway did not see a rise in its public-debt-to-GDP ratio in 2009 as oil and gas revenues offset fiscal stimulus measures and ensured fiscal surpluses. Indeed, its debt-to-GDP ratio dropped from 43% in 2010 to 28.7% in 2011, although this fall was driven by an accounting adjustment owing to a drop in liabilities relating to repurchase agreements used by the GPF-G. We expect the ratio to stand at 27% of GDP in 2014. 3 SEPTEMBER 30, 2013 CREDIT FOCUS: DENMARK, FINLAND, NORWAY AND SWEDEN: PEER COMPARISON SOVEREIGN & SUPRANATIONAL Automatic fiscal stabilisers and discretionary spending saw the debt-to-GDP ratio in Sweden peak at 42.6% in 2009, but it has since fallen back amid healthy nominal GDP growth and low budget deficits. The ratio is forecast to fall to 39.5% in 2014 in line with accelerating economic growth. Both Denmark and Finland have experienced weak economic recoveries since the crisis, which has reduced their ability to contain public spending. Their higher budget deficits have undermined efforts to contain the debt stock as a result. Denmark’s debt-to-GDP ratio will fall back to 42.4% in 2014 (from a peak of 46.4% in 2011) as its economy begins to recover (thus reducing upward spending pressures and improving the outlook for revenue growth). In the case of Finland, the weak economic outlook will be the main driver behind the continued rise in the public debt-to-GDP ratio, which will stand at close to 60% in 2014. Despite this mixed outlook, these three countries will outperform many of their Aaa-rated peers, with the median debt stock for this group forecast to stand at 42.4% in 2014. The debt figures for both Denmark and Finland mask their strengths on the asset side of the government balance sheet. Finland, for example, benefits from surpluses on it social security holdings that regularly amount to around 2% of GDP, but that are not used to fund the central government’s annual budgetary requirements. Moreover, the net international investment position-to-GDP ratio for each country is positive; at the end of 2012, it stood at 5.1%, 12.3% and around 100% for Denmark, Finland and Norway, respectively. Sweden has a negative net international investment position-to-GDP ratio owing largely to its sizeable net external debt position. Nevertheless, its ratio improved from -37% in 1998 to -7% in 2011. This improvement occurred largely between 1998 and 2007 and in part reflected the country’s ability to generate substantial current account surpluses during the same period. The still-strong government balance sheets of the four Nordics have enabled them to maintain a safe haven status – Finland is the only Aaa-rated sovereign in the euro area that still maintains a stable outlook, in part reflecting a strong track record of fiscal reform and a consistent macroeconomic policy framework – since the global financial crisis, and debt-servicing costs have remained low as a result; yields on 10year government bonds have fallen sharply since 2008 (see Exhibit 3). EXHIBIT 3 Safe-haven status has helped to contain government bond yields 10y Government Bond Yields Denmark % Norway Finland Sweden 6 5 4 3 2 1 0 2007 2008 2009 2010 2011 2012 2013 Source: Haver-Financial Times 4 SEPTEMBER 30, 2013 CREDIT FOCUS: DENMARK, FINLAND, NORWAY AND SWEDEN: PEER COMPARISON SOVEREIGN & SUPRANATIONAL 2. The Nordics exhibit very high institutional strength The Nordic banking crises experienced in the 1990s helped to improve the broader regulatory and policy-making environment in all four countries. It also helped to drive a political consensus for pursuing sustainable fiscal frameworks. The Nordic banking crisis provided an incentive to improve institutional frameworks… The Nordic banking crisis in 1990s effected Finland, Norway and Sweden. Only Denmark’s banking system did not face similar systemic risks. The roots of the crisis were different in each country, but they did share similar traits. Overall, the regulatory framework faced by banks was weak in terms of capital requirements and general supervisory over-sight. When financial systems started to undergo financial liberalisation in the 1980s domestic banks were therefore able to take on risky loans (for example, excessive loan concentration and loans provided for potentially unviable projects) owing to poor internal controls and inexperienced staff. The result was rapid private-sector debt accumulation and asset price bubbles. Debt levels had reached unsustainable levels in the early 1990s. When interest rates started to increase, economic growth slowed and asset bubbles burst, the result was an increase non-performing loans and the need for bank recapitalisations. Norway also suffered an external shock through a drop in oil prices in 1986 and Finland a similar shock following a break-up of the Soviet Union, a major trading partner. The strength of the Nordic institutions was highlighted by the ability of the sovereigns to borrow from the global bond markets in order to obtain the funds needed to support banking rescues and restore confidence. Moreover, although there were no bank-resolution frameworks in place in the three countries, the existing legal and bureaucratic systems were effective and transparent. At the same time the governments took swift action to provide the political resolve needed for quick action. Together, these factors enabled the authorities to rapidly adopt policies aimed at shoring up confidence in the banking system, including lending guarantees and government take-overs of problem banks. The direct economic and fiscal costs of the Nordic crisis in the early 1990s are difficult to quantify owing to the parallel external shocks faced by Norway and Finland and methodological issues, but a 2012 IMF paper 3 suggests that Finland faced a cumulative loss in gross output of 59.1% of GDP and Sweden 30.6%. The gross fiscal cost for Finland was 12.8% of GDP and for Sweden 3.6%. Norway was affected to a lesser extent, with no loss in gross output estimated and a fiscal cost of 2.7% of GDP, possibly because in Norway the crisis was preceded by problems in smaller banks in the 1980s and therefore the authorities had already started to act to restrain credit growth earlier in the credit cycle. The negative impact that the banking crises had on the sovereign balance sheets and economy was the main driver of an improvement in their financial supervisory regimes. Domestic banks thus entered the global financial crisis having operated under conservative regulations that limited the degree of risk they were able to take on (including limited investments in credit derivatives that have undermined the balance sheets of many major banks in other Aaa-rated peers). Indeed, only Denmark – the Nordic country not to suffer a banking crisis in the 1990s – was required to create a bank recapitalisation scheme in response to the global financial crisis. Although the banking systems in all four countries were not immune to the crisis and they suffered liquidity constraints owing to their extensive use of external wholesale funding markets, their respective central banks were largely able to ensure that domestic financial systems continued to play their credit-allocation role. Part of this ability stemmed from market confidence in the authorities. 3 5 Systemic Banking Crises by Luc Laeven and Fabián Valencia SEPTEMBER 30, 2013 CREDIT FOCUS: DENMARK, FINLAND, NORWAY AND SWEDEN: PEER COMPARISON SOVEREIGN & SUPRANATIONAL ...and created a consensus for fiscal sustainability The Nordic crisis also helped to build political consensus for sustainable fiscal frameworks. Since 2001, Norway has specified a fiscal rule that over time only the real return on the GPF-G (estimated at 4%) should be included in the annual government budget. The guiding principle is that revenues from oil resources remain available over the long term, although the policy does allow flexibility during periods of economic weakness. For example, during the global financial crisis, the government pursued counter-cyclical fiscal policies that were short term in nature (such as bringing forward infrastructure investment). Sweden has a fiscal rule requiring that general government net lending to be an average of ±1% of GDP over the business cycle. The government must also propose a ceiling for central government and pension system expenditure for the next three years. By determining the ceiling, the government sets the framework for revenues and expenditure in order to comply with the surplus target. Denmark has adhered to the Maastricht Criteria 4 (with the exception of 2012, when its fiscal deficit stood at 4.1% of GDP owing to exceptional repayments of pension contributions) and has signed up to the Fiscal Compact 5 that has been agreed by euro area members (despite not being a member of the currency union). As part of a reform package announced in the 1980s, governments in Denmark have followed medium- and long-term targets for a range of fiscal and macroeconomic indicators. Finland is also a member of both the EU and the euro area and has adhered to the Maastricht criteria and is a signatory to the Fiscal Compact. Moreover, for nearly 20 years, successive Finnish governments have followed a guideline that sets a limit on the total amount that can be spent during a government’s term. All four countries have also been carrying out reforms of their pension systems years in advance of many other developed economies. In addition to policies aimed at increasing the age at which workers can retire and encouraging private pensions (central planks of pension reforms in many other countries), the Nordic countries have for several years been focusing on adjustments to the way their pension systems are funded. As mentioned above, Norway is using its oil and gas revenues to build up funds in the GPF-G. In the 1990s, Sweden reformed its pension system away from an expensive defined-benefit system to a defined-contribution system in order to contain costs amid concerns that the former system would be unsustainable as the population aged. Finland and Denmark have also accumulated large pension assets; according to the OECD these represented 75% and 49.7% of GDP in 2011, respectively 6. In the case of Denmark the current basic state pension is gradually being reduced in importance relative to a savings-based pension. Finland also has a combination of a basic state pension and a more dominant statutory earnings-related pension, and will be pursuing additional pension reforms in the next two years. These systems compare with the largely pay-as-you-go systems – viewed as unsustainable amid ageing populations – still in place in most other advanced economies. 4 http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Glossary:Maastricht_criteria 5 http://www.eurozone.europa.eu/media/304649/st00tscg26_en12.pdf 6 This compares with an accumulated pension assets-to-GDP ratio of just 4.2% in Belgium and 4.9% in Austria in the same year. A number of countries have also accumulated substantial pension assets; in 2011 the ratio stood at 95.8% in the UK, 110.7% in Switzerland and 135.8% in the Netherlands. 6 SEPTEMBER 30, 2013 CREDIT FOCUS: DENMARK, FINLAND, NORWAY AND SWEDEN: PEER COMPARISON SOVEREIGN & SUPRANATIONAL 3. The Nordics have a track record of economic resilience Despite high labour costs, all four Nordic countries exhibited a track record of respectable growth rates ahead of the global financial crisis, although Denmark and Finland face challenges. Robust growth rates were recorded ahead of the global financial crisis The broad characteristics of Nordic economies have substantial similarities to other advanced economies. They are well-diversified and enjoy a high average GDP per capita. The Nordics also have small, open economies where foreign trade plays a significant role amid different exchange-rate regimes. Denmark is the most open economy, with its openness indicator7 standing at 104%, followed by Sweden (91%), Finland (81%) and Norway (69%). The four economies grew in an annual average range of 2%-4% during 2000-07, having benefited from the rapid growth in the global economy during the same period. They also recorded high current account surpluses, although terms of trade were higher in Norway and Sweden than in Denmark and Sweden (see Exhibit 4). However, this openness left the Nordic region exposed during the global financial crisis, led by Finland whose real GDP contracted by 8.5% in 2009. In the same year, Denmark and Sweden contracted by 5.7% and 5%, respectively, compared to an average contraction of 2.9% in the Aaa-rated peer group in the same year. They also remain vulnerable to adverse developments in the euro area (see Exhibit 5). EXHIBIT 4 Current account surpluses in Norway and Sweden have exceeded those in other Aaa-rated countries Current Account Balance (% of GDP) Sweden Norway Denmark Finland Aaa-Median* 20 15 10 5 0 -5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F * Excludes Denmark, Finland, Norway and Sweden Source: Haver-Eurostat, National Statistics, Moody's 7 7 Openness of the economy is defined as (exports of goods and services + imports of goods and services)/GDP. SEPTEMBER 30, 2013 CREDIT FOCUS: DENMARK, FINLAND, NORWAY AND SWEDEN: PEER COMPARISON SOVEREIGN & SUPRANATIONAL EXHIBIT 5 Around a third of exports were destined for the euro area in 2012 (% of total) EA* Other EU** Nordics Other 100 90 80 29% 19% 43% 70 60 22% 50 40 16% 15% 30 20 10 29% 30% Denmark Finland 24% 13% 11% 33% 30% 12% 41% 33% 0 Norway Sweden * Excludes Finland ** Excludes Denmark, Finland, Sweden Source: Haver-IMF DOT Norway’s GDP contracted by a marginal 1.6% in 2009. While sensitive to Europe’s business cycle, Norway’s economy was less affected by the crisis than its regional peers, in part owing to its oil-related revenues, which provided funding for fiscal stimulus and as the sovereign benefited from oil prices remaining above their long-term trend during the crisis. The local manufacturing sector had also built up capacity in oil-related products, which provided an additional export stream. Since 1971, when the government began to fully utilise the economic potential of Norway’s oil and gas reserves, the hydrocarbons sector has been an important driver of the domestic economy. It now accounts for more than one-half of total merchandise exports and one-third of general government revenue. Norway and Sweden have recovered more quickly than their Nordic neighbours Approximately one-third of total merchandise exports from Denmark, Finland and Sweden go to the euro area, while around one-half are sent to the EU. Despite this similarity in external trade, Sweden has, along with Norway, proved more resilient in the aftermath of the global financial crisis than Denmark and Finland (see Exhibit 6). By 2012, both Norway and Sweden’s economies had recovered from the output losses experienced in 2009, with real GDP growth in Sweden averaging 3.7% during 2010-12 and in Norway 1.6%. Norway continued to benefit from an expansion in the oil sector while Sweden’s diverse manufacturing base allowed it to take advantage of continued economic growth in emerging markets (particularly in Asia). This compares with Denmark’s average real GDP expansion of 0.8% during 2010-12 and Finland’s 1.8% (although this growth rate is higher than that recorded in Norway, the rate masks the relatively large output gap that appeared in Finland in 2009). We expect a similar pattern of divergent growth in 2013-14; growth will likely average 1.2% in Denmark, 0.8% in Finland (including a mild contraction in 2013), compared to 2.2% in Norway and 1.9% in Sweden. The economies of Denmark and Finland are therefore expected to grow by less than the median for Aaa-rated countries (an average of 1.7%). This relatively weak outlook for Denmark and Finland reflects country-specific issues that started ahead of the global financial crisis. Finland’s manufacturing sector remains heavily concentrated on pulp & paper, and information technology products. In the case of the former, domestic companies are migrating their production facilities abroad, in part owing to the high costs of operating in Finland. In the case of the latter, the technology sector was dominated by telecoms products that have lost world market share to overseas competitors. Denmark’s domestic economy has 8 SEPTEMBER 30, 2013 CREDIT FOCUS: DENMARK, FINLAND, NORWAY AND SWEDEN: PEER COMPARISON SOVEREIGN & SUPRANATIONAL problems owing to weak credit growth amid deleveraging in the banking system and the related issue of a weak property market, which is undermining private sector demand (see Section 4). EXHIBIT 6 Norway and Sweden's economic performance is ahead of its neighbours Real growth rate (%) Average 2000-07 Average 2012-14F 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Denmark Finland Norway Sweden Aaa-Median* * Excludes Denmark, Finland, Norway and Sweden Source: Haver-Eurostat, National Statistics, Moody's 4. High household indebtedness has been driven by rising house prices Household indebtedness in all four Nordic countries has increased sharply since the 1990s, in part owing to rising house prices. Risks in relation to this indebtedness are somewhat contained by the high level of financial assets held by households. However, current debt levels could pose challenges to the economic growth outlook, particularly in Denmark. Households in all four Nordic countries have become increasingly indebted since the 1990s… All four Nordic countries have high levels of household indebtedness. At end-2012 the ratio of outstanding household debt to disposable income in Denmark, Norway and Sweden stood at 209.9%, 196.1% and 164.5%, respectively (see Exhibit 7). Although the ratio in Finland was a significantly lower 113% last year, this compares with just 70.2% in 2002. The upward trend in indebtedness has in part mirrored rising house prices (see Exhibit 8). Government policies played a role in the build-up of these liabilities. For example, Norwegians receive tax subsidies for house purchases and this has encouraged investment in housing (according to Norges Bank around 80% of household debt is secured against dwellings). 9 SEPTEMBER 30, 2013 CREDIT FOCUS: DENMARK, FINLAND, NORWAY AND SWEDEN: PEER COMPARISON SOVEREIGN & SUPRANATIONAL EXHIBIT 7 Household indebtedness is high in Denmark, Norway and Sweden Household & NPISH Outstanding Debt to Disposable Income (%) Finland Sweden Norway Denmark 2002 2003 2004 2005 350 300 250 200 150 100 50 0 2006 2007 2008 2009 2010 2011 2012 Source: Haver Readily available credit helped to drive up house prices A related determinant of the trend in rising indebtedness and house prices was easy access to mortgage financing, particularly from the early 2000s. Since the global financial crisis, the authorities in Norway and Sweden have attempted (with varying degrees of success) to reduce trend growth rates for both debt and house prices owing to concerns over sustainability. In 2010, Norway’s Financial Supervisory Authority issued a guideline that the loan-to-value (LTV) ratio on residential mortgages should be below 90% (this guideline was tightened to 85% in 2011). The authorities in Sweden have adopted similar guidelines since the financial crisis. In Finland, where house price growth has remained relatively modest, there has been limited policy intervention, although the financial regulator there has also voiced concerns over high LTVs. Denmark is the only country in the group to have witnessed a sustained and sharp fall in house prices (of around 25% since 2006). The fall in this case relates to a decline in credit supply (as banks have adopted more cautious lending practises since 2007 and as households have been deleveraging) and therefore in demand. At the same time, the housing market has a supply over-hang following a construction boom in the years preceding the crisis. EXHIBIT 8 House price trends are a source of uncertainty Index, 1992Q1 = 100 Norway Sweden Denmark Finland 500 400 300 200 100 2013Q1 2012Q1 2011Q1 2010Q1 2009Q1 2008Q1 2007Q1 2006Q1 2005Q1 2004Q1 2003Q1 2002Q1 2001Q1 2000Q1 1999Q1 1998Q1 1997Q1 1996Q1 1995Q1 1994Q1 1993Q1 1992Q1 0 Note: Norway: house price index; Sweden: real estate prices: 1 & 2-dwelling Bldgs for permanent living; Denmark: property prices: residential and business properties; Finland: house price index Source: Haver, National Statistics 10 SEPTEMBER 30, 2013 CREDIT FOCUS: DENMARK, FINLAND, NORWAY AND SWEDEN: PEER COMPARISON SOVEREIGN & SUPRANATIONAL Household assets provide a partial buffer against high debt levels The risk profile of Nordic household balance sheets as a result of the high debt levels is partly mitigated by the fact that households in all four countries also hold significant financial assets (see Exhibit 9). However, although these assets are likely to support the long-term health of the four economies – the bulk of these financial assets are held in pension funds – the short-term economic outlook is likely to prove more mixed, as these pension funds are illiquid in nature. Private consumption (the largest component of GDP in all four economies) in Norway, where unemployment remains low, is expected to remain healthy during 2013-14. Swedish households are likely to provide support to the domestic economy as they also continue to benefit from a relatively stable job market and a broadly positive outlook for the domestic economy. Denmark’s economy faces the most formidable challenges as (in addition to the structural issues highlighted in Section 3) the process of household sector deleveraging and a weak housing market are likely to undermine domestic demand for several years. The relatively low household debt burden in Finland reduces its economy’s susceptibility to a rise in interest rates in comparison to its neighbours. However, although low interest rates are currently supporting the debt-servicing capacity of households, a sharp rise in rates could transmit economic shocks into all four economies. Such a rise in rates would reduce the capacity of the non-banking sector to meet its debt obligations and could result in lower house prices. In such a scenario, their banking sectors could face pressure on their balance sheets through a rise in non-performing loans and falling house prices (housing provides much of the collateral against which loans to the household sector have been provided). EXHIBIT 9 Financial assets remain considerable Households & NPISH Financial Assets (% of GDP) Norway Finland Sweden Denmark 300 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Haver 11 SEPTEMBER 30, 2013 CREDIT FOCUS: DENMARK, FINLAND, NORWAY AND SWEDEN: PEER COMPARISON SOVEREIGN & SUPRANATIONAL Ratings History Foreign Currency Ceilings Bonds & Notes Government Bonds Bank Deposit Foreign Currency Local Currency Outlook Long-term Short-term Long-term Short-term Date Denmark Rating Raised Aaa -- Aaa -- Aaa -- -- August-99 Outlook Changed -- -- -- -- -- -- Positive February-99 Outlook Assigned -- -- -- -- -- -- Stable March-97 Ratign Raised -- -- -- -- -- Aaa -- November-86 Rating Raised Aa1 -- Aa1 -- Aa1 Aa1 -- August-86 Rating Assigned -- -- -- -- -- Aa -- July-86 Rating Assigned Aa -- Aa -- -- -- -- April-85 Rating Assigned -- P-1 -- P-1 -- -- -- April-80 Rating Assigned -- -- -- -- Aa -- -- September-67 Rating Withdrawn WR WR WR WR -- -- -- July-99 Rating Raised Aaa -- Aaa -- Aaa -- -- May-98 Review for Upgrade -- -- -- -- Aa1 -- RUR+ March-98 Outlook Assigned -- -- -- -- -- -- Stable March-97 Aa1 -- Aa1 -- Aa1 -- -- January-97 Rating Assigned -- -- -- -- -- Aaa -- January-97 Rating Lowered Aa2 -- Aa2 -- Aa2 -- -- January-92 Rating Lowered Aa1 -- Aa1 -- Aa1 -- -- October-90 Rating Raised Aaa -- Aaa -- Aaa -- -- February-86 Rating Assigned Aa -- Aa -- -- -- -- November-81 Rating Assigned -- P-1 -- P-1 Aa -- -- October-77 Finland Rating Raised Norway Rating Raised 12 SEPTEMBER 30, 2013 Aaa -- Aaa -- Aaa -- Stable September-97 Outlook Assigned -- -- -- -- Aa1 -- Positive March-97 Rating Assigned -- -- -- -- -- Aaa -- August-95 Rating Lowered Aa1 -- Aa1 -- Aa1 -- -- July-87 Rating Assigned -- P-1 -- P-1 -- -- -- March-80 Rating Assigned Aaa -- Aaa -- Aaa -- -- January-78 CREDIT FOCUS: DENMARK, FINLAND, NORWAY AND SWEDEN: PEER COMPARISON SOVEREIGN & SUPRANATIONAL Foreign Currency Ceilings Bonds & Notes Government Bonds Bank Deposit Foreign Currency Local Currency Outlook Long-term Short-term Long-term Short-term Date Sweden Rating Raised Aaa -- Aaa -- Aaa -- Stable April-02 Rating Raised Aa1 -- Aa1 -- Aa1 Aaa Stable August-99 -- -- -- -- -- -- Positive February-99 Aa2 -- Aa2 -- Aa2 -- Stable June-98 Review for Upgrade -- -- -- -- Aa3 -- RUR+ May-98 Outlook Changed -- -- -- -- -- -- Positive June-97 Outlook Assigned -- -- -- -- -- -- Stable March-97 Rating Assigned -- -- -- -- -- Aa1 -- January-95 Rating Lowered Aa3 -- Aa3 -- Aa3 -- -- January-95 -- -- -- -- Aa2 -- RUR- October-94 Aa2 -- Aa2 -- Aa2 -- -- February-93 -- -- -- -- Aa1 -- RUR- October-92 Rating Lowered Aa1 -- Aa1 -- Aa1 -- -- January-91 Rating Assigned Aaa -- Aaa -- -- -- -- November-79 Rating Assigned -- -- -- -- Aaa -- -- November-77 Rating Assigned -- P-1 -- P-1 -- -- -- December-76 Outlook Changed Rating Raised Review for Downgrade Rating Lowered Review for Downgrade 13 SEPTEMBER 30, 2013 CREDIT FOCUS: DENMARK, FINLAND, NORWAY AND SWEDEN: PEER COMPARISON SOVEREIGN & SUPRANATIONAL Moody’s Related Research Credit Analysis: » Denmark, December 2012 (148527) » Finland, May 2013 (154474) » Norway, March 2013 (151455) » Sweden, September 2012 (145192) Credit Opinions: » Denmark, Government of » Finland, Government of » Norway, Government of » Sweden, Government of Issuer Comments: » Despite Deficit Overshoot in 2012, Denmark Shows Commitment to Fiscal Sustainability, August 2012 (145092) » Norway's Substantial Budget Surplus and Commitment to Fiscal Discipline Are Credit Positive, May 2012 (142237) Rating Methodology: » Sovereign Bond Ratings, September 2008 (109490) To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients. 14 SEPTEMBER 30, 2013 CREDIT FOCUS: DENMARK, FINLAND, NORWAY AND SWEDEN: PEER COMPARISON SOVEREIGN & SUPRANATIONAL Analyst Contacts: LONDON Report Number: 157683 +44.20.7772.5454 Kilbinder Dosanjh +44.20.7772.1376 Vice President - Senior Analyst [email protected] Author Kilbinder Dosanjh Financial Writer Maya Penrose Sarah Carlson +44.20.772.5348 Vice President – Senior Credit Officer [email protected] Production Specialist Shubhra Bhatnagar Editor Matthew Bridle Yves Lemay +44.20.772.5512 Managing Director – Banking [email protected] NEW YORK +1.212.553.1653 Kristin Lindow +1.212.553.3896 Senior Vice President [email protected] © 2013 Moody’s Investors Service, Inc. and/or its licensors and affiliates (collectively, “MOODY’S”). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. 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