Finland's sterling image cracks, S&P downgrades outlook to 'negative'

AHELSINKI (AFP) - Standard and Poor's on Friday downgraded Finland's outlook to "negative," putting a crack in the credit image of one of the few countries to hold the top-notch "AAA" rating.

Prior to that, Finland was the only eurozone country to hold both the prized "triple A" rating and a stable outlook from all three ratings agencies - S&P, Fitch and Moody's.

Finland has long prided itself for having extremely strict fiscal management that has allowed it to avoid ever breaking EU fiscal rules.

But S&P said a persistent sub-par growth rate was reflective of "deep structural demographic and economic imbalances that hamper the government's efforts to achieve fiscal consolidation."

"The outlook revision reflects our view of Finland's protracted economic stagnation, with average GDP per capita growth over the past decade of close to zero," it said.

It said it now expected gross domestic product in 2013 to have contracted by 1.4 per cent, rather than the 0.5 per cent it was forecasting during its last Finland review in October.

Growth assumptions for 2014-2016 have been lowered to 1.0 per cent, from the previous estimate of 1.4 per cent.

S&P analysts cited cost pressures on Finland's vital wood and paper industry and the decline of mobile telecom pioneer Nokia as contributing factors.

"The economy remains vulnerable to any slowdown of economic activity in the euro area or among other major trading partners, such as Russia," whose growth prospects have been hard hit by Moscow's standoff with the West over the crisis in Ukraine.

The governor of the Finnish central bank, Mr Erkki Liikanen, said in an interview with Finland's public broadcaster YLE last March that the crisis in Ukraine was "the third big shock" for Finland, on top of the impact of an ageing population and its industrial decline.

Russia is Finland's top source of imports and third largest export market.

The agency further explained its negative outlook by predicting a one-in-three chance it would lower the AAA rating within two years "should no clear signs emerge that Finland's negative economic and fiscal debt trends are being reversed." Finland also faces a relatively high unemployment rate, at 8.5 per cent in February.

"We haven't made enough reforms," Nordea chief economist in Finland Aki Kangasharju told AFP.

The government announced in late 2013 deep structural reforms to boost the economy and fight debt, but they have proven hard to implement, due to the diverse composition of the cabinet, which includes left and right-wing parties.

Social services and health care have been some of the thorniest issues in the negotiations, but the government finally announced an agreement in March, without specifying many details.

Mr Kangasharju labelled the announced reforms "too vague" and "not concrete enough".

The political situation in the country is also delicate, as Prime Minister Jyrki Katainen announced earlier this month that he will step down in June.

"With Katainen leaving, the government's capacity to implement reforms could be weakened," Mr Kangasharju said.

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