STOCKHOLM, Oct 4 (Reuters) - Widely praised for budget discipline during the financial crisis, cracks are appearing in the economies of the Nordic region.
Five years after the collapse of Lehman Brothers the economies of Sweden, Finland, Denmark and Norway are growing sluggishly as weak euro zone demand crimps exports - and there are increasing worries about rising debts.
The IMF and central bankers have warned that overheated housing markets in Sweden and Norway threaten the kind of trouble that pushed Denmark into recession three times in five years.
Finland’s decline is epitomised by the sale of mobile phone giant Nokia to Microsoft.
“We have taken some measures but I believe those measures are not enough to change the game,” Kari Jarvinen, managing director of Finnish state fund Solidium, told the Reuters Nordic Summit. “We have to be smarter and we have to work more.”
Nordic governments have sought to hold down public debt and euro zone member Finland, whose economy contracted nearly a tenth during the crisis, has been particularly critical of bailout recipient Greece. The Nordics were among a handful of European countries to retain AAA status in their credit ratings.
Thanks to oil wealth, Norway only needs to issue debt to provide a benchmark for its corporate borrowers. Sweden’s debts are heading down to around 25 percent of output in 2017 against an average level of 90 percent in the euro zone.
But easy credit, mortgage tax breaks and housing shortages in major cities have left households in Norway and Sweden with debt levels among the highest in the developed world.
A sharp drop in prices would hit consumption and push up unemployment while rising defaults would hurt lenders, the International Monetary Fund has warned.
It reckons house prices are as much as 40 percent too high in Norway and overinflated by more than 15 percent in Sweden.
“The debt ratio in households is very high and a lot of households are vulnerable to even slight raises in interest rates,” Norwegian Finance Minister Sigbjoern Johnsen said in an interview at the summit.
“The sharp rise in housing prices that we have seen the last years is not sustainable for a long period of time.”
Neighbour Denmark is an example of what happens when bubbles burst. House prices have dropped around 20 percent on average since mid-2007, dozens of smaller banks have failed or been forced to merge and GDP has yet to recover to pre-crisis level.
Five years after the crisis, Denmark’s economy is set to grow a paltry 0.3 percent this year.
“We are positive in the sense that we think we have reached the bottom,” said Thomas Borgen, chief executive of Denmark’s largest bank, Danske.
To avoid a similar crash, Norway and Sweden have tightened rules for borrowers and lenders in recent months.
Banks have to hold more capital for possible losses from mortgage lending. Borrowers have to stump up more in deposits.
But such measures risk weighing on an already weak upturn and there is little incentive in Sweden to squeeze home owners before an election next year.
Sweden’s economy shrank 0.2 percent in the second quarter. Company bankruptcies there are running nearly 10 percent higher this year than last and up 16 percent in Norway.
Although Norway was Europe’s best performing economy last year, the central bank has cut its 2013 mainland growth forecast to 1.75 percent from 2.5 percent.
Sweden’s and Norway’s central banks have resisted calls to ease policy, fearing it would encourage households to borrow.
“The financial crisis has taught us that high debt levels, either in the private or public sector, are poison for an economy,” said Swedish central bank deputy governor Cecilia Skingsley.
For exporters, this means a stronger currency has made their exports more pricey just when demand is weak.
Jan Johansson, CEO of Swedish tissue and hygiene firm SCA , said the firm’s Ortviken plant, where it makes publication paper, was one of the world’s most productive.
“If not even that can be run profitably, then you have a problem. And that is all down to the crown,” he said.
Erik Olsson, CEO and founder of the Erik Olsson Fastighetsformedling, a real estate agency in Sweden, said measures under discussion such as forcing borrowers to pay down debt rather than just interest could hurt household spending.
“House prices would then drop significantly, not because you had a bubble, but because of unemployment,” he said. “You can see how you could push the economy into a negative spiral.”
In Finland, industries such as paper have struggled to compete with Asian rivals.
Borrowing is expected to breach the European Union’s limit of 60 percent of gross domestic product next year and rather than stimulating growth, the government plans spending cuts and tax hikes of 5 billion euros ($6.8 billion).
“The change in competitiveness between Germany and Finland has been quite dramatic and now we’re suffering from that,” Solidium’s Jarvinen said. (Additonal reporting by Mette Fraende, Erik Matzen and Teis Jensen in Copenhagen, Mia Shanley, Niklas Pollard, Daniel Dickson, Oskar von Bahr and Johannes Hellstrom in Stockholm, Balazs Koranyi in Olso and Ritsuko Ando in HelsinkiReporting by Christina Fincher; London newsroom +44 207 542 7748)