22 October 2012

WSJ: Northern European investors steer clear of needy South

Pension managers in Finland who long ago stopped buying bonds of troubled eurozone countries aren't changing their policy just because the European Central Bank has expressed readiness to buy the bonds.

By some measures things have recently looked up for the bedraggled eurozone. The ECB's newly aggressive strategy, under its pragmatic chief Mario Draghi, has been widely applauded. Its intention to buy bonds has calmed markets, and on Thursday Spain was able to sell €4.6 billion of debt, offering less in interest than it had in the past.

The ultimate measure of the ECB's success, however, will come in the longer term: Can it persuade the foreign investors who direct the eurozone's big storehouses of cash—insurance companies and pension funds, for instance—to take a serious interest in Spain and Italy again? Those two countries need a lot of cash: Together, they are expected to issue about €300 billion of bonds this year.

For much of the common currency's existence, the economies of Northern Europe have generated savings: They produce more than they consume. Those of the south have run deficits. The euro's integrated financial system lent the savings of the north to the needy south. That has stopped, and a look at Finland makes plain the challenges of restarting it. With 5.4 million people, Finland is a small country. Its pension funds couldn't single-handedly save Spain, a country of 46 million, even if they wanted to. But its rock-solid finances and its large pool of savings, given its size, make it a bellwether for the attitudes of Europe's north.

The bailouts, especially of Greece, have deeply rankled Finland. A nationalist party once known as the True Finns (but now just as The Finns) swelled in elections last year to become Finland's third-largest on the strength of an anti-bailout message. Its success caused the two major parties to tack swiftly right. Finland's leaders have demanded, and won, side deals that entitle the country to special compensation if a bailed-out country can't repay its rescue loans.

Even Finland's comparatively healthy economy has suffered in the crisis. It slumped to a slight contraction in the second quarter, heightening tension over the cost of the bailouts. A broad view in Finland is that peripheral countries must get their debt loads under control before they become reasonable investment destinations.

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