Century of sovereign debt management

by Teppo Koivisto

Photos by Lauri Rotko

The Republic of Finland celebrated its 100th birthday as a sovereign state in 2017. Central government debt management has been a fundamental part of the Finnish success story for the century. The central government’s ability to fund, particularly in times of stress, has provided crucial fiscal flexibility for the state, allowing the government to overcome even the most severe challenges.

The newborn republic issued its first domestic bonds in April 1918. Rebuilding after the war was one of the first missions for the fragile nation. Access to foreign capital was gained a few years later in 1923, when the Republic of Finland issued its first dollar bond in New York. During the Second World War domestic issuance and war bonds provided an important source of funding for the war effort and subsequent war reparations.

In the 1960s the recovery of international financial markets and economic integration of Western Europe re-opened foreign capital markets for Finland, providing long-hoped-for relief for an economy with a chronic external deficit. In the early 1990s the Nordic banking crisis and collapse of the former Soviet Union shook the Finnish economy, resulting in a deep recession, devaluations and rising government debt. Increasing borrowing needs required intensive domestic and foreign issuance in an environment of weaker credit quality and higher costs.

The foundations of our current debt issuance practices were laid in 1999 when a common currency, euro, was introduced as a result of growing European integration. The Finnish domestic debt was redenominated into euros. Debt issuance was concentrated into large euro benchmark bonds and the aim was to build a liquid and cost-efficient yield curve for Finland.

Experiences of the past have strongly shaped our philosophy on central government debt management and issuance. It is fair to say that our pragmatic euro market approach, accompanied with strong tradition and experience, played an important role in our successfully withstanding even the darkest moments of the euro crisis in 2009–2012.

Teppo Koivisto

Teppo Koivisto

Teppo Koivisto is Director of Finance and Head of the Finance Division at the State Treasury of Finland. Mr Koivisto is in charge of the central government debt management function, which includes funding, liquidity management, investor relations and interest rate risk positioning of the government debt.

Creditworthiness is the key

Finland has never defaulted on its debt. Creditworthiness is an ultimate and fundamental basis of our debt management. Finland’s reputation as a reliable debtor was established in 1933, when Finland continued to pay off its war-related debt acquired from the United States in 1919. In the aftermath of the Great Depression in 1931, President Hoover granted its European debtor countries a moratorium, which allowed them to postpone repayment of the debt for one year. The Republic of Finland became the United States’ only debtor country that continued to pay its debt until maturity as every other country took the moratorium to mean a pardon and left their debt unpaid from 1933 onwards. Capital markets seem to have a long memory since every now and then we still hear this Hoover anecdote in our investor meetings.

Today, the creditworthiness of the Republic of Finland appears very stable. The economy grew over 3% in 2017, the fastest rate in many years. The growth has been supported by private investments and exports that have been growing by almost 7% in 2017. All types of private investment are expected to develop strongly while exports benefit from better price competitiveness and stronger international demand. Positive developments improve the likelihood of the government attaining its goal of stabilizing public finances after a prolonged period of negligible growth and sizeable budget deficits. The public sector debt ratio is expected to fall below 60% in 2019 due to the rapid growth in Finland’s GDP.

Ready for next 100 years

The mission of the State Treasury is to safeguard the liquidity and funding for the central government. In 2017, the Republic of Finland successfully fulfilled its EUR 20 billion issuance programme. For 2018 the scale of our financing programme is slightly less. The overall gross borrowing requirement, including short-term funding, will be EUR 18.1 billion. The central government net borrowing requirement is estimated to be EUR 3.1 billion.

The Republic of Finland will continue its well-known funding strategy of issuing two new euro-denominated benchmark bonds in 2018. Market conditions permitting, a new 15-year euro denominated bond issue will take place in the first half of the year. In our baseline funding scenario a 10-year euro benchmark will follow in the latter half.

Keeping our bonds attractive to investors remains our long-term goal entering into the next 100 years of our debt management. We are convinced that Finland’s strong credit outlook will continue to support our bonds and serve our investors in the best possible manner for the next century as well.