… and we are prepared for all scenarios,” said Finnish finance minister Jutta Urpilainen earlier in the month.
‘ALL SCENARIOS’, you say?
JP Morgan’s Flows & Liquidity team looked to put some flesh on that claim on Friday, in a note tackling the idea of “creditor exit” from the euro. Finland is a lender to other eurozone countries on net (versus Greece, a debtor exit).
They ignored the political costs of Finland leaving the euro, bar to say they would be very high, as, to be fair, they are pretty damn tough to calculate.
On the economic front, it’s a heady mix of Target2 balances, a current account surplus… and Nokia.
Over to JPM (with our emphasis):
In terms of the narrowly-defined economic costs, with Finland being a creditor nation, there are no direct losses to the rest of the Euro area via official sector or TARGET2 liabilities. The cross border claims (i.e. claims not matched by local liabilities) of non-domestic banks on Finnish public and private sectors stood at over €60bn at the end of 2011. Most of these cross-border claims are Finnish public sector liabilities (€50bn) according to the BIS, the vast majority of which (93%) are under local law. So in a Finnish exit, these public sector liabilities will likely be redenominated to the new Finnish Markka. Assuming that the new Finnish Markka appreciates post exit, those banks that are holders of Finnish assets under local law are likely to gain. Claims under internationallaw are likely to remain denominated in euros.
The cost to Finland itself: the Central Bank of Finland had a €77bn or 40% GDP claim against the Eurosystem as of the end of June (mostly via TARGET2). The counterpart of this claim is deposits of Finnish commercial banks with the Finnish central bank. In a negotiated exit, where Finland exits and the rest of EMU survives, Finland is unlikely to face losses on this €77bn claim on the Eurosystem. We see two options. First, following an EMU exit, the Finnish central bank remains a member of TARGET2 (non-EMU central banks such the Danish central bank can be members of TARGET2), and maintains its TARGET2 surplus. The second option is that Finland exits TARGET2 and its Eurosystem claims become FX reserves. At the same time, the central bank exchanges the previous euro deposits of its commercial banks with new Finnish money. Under both cases, the Finnish central bank or theFinnish commercial banks should be able to replace their euro deposits quickly with other euro assets such as Bunds, if they feel this is safer asset. In fact, Finnish commercial banks could replace their deposits with the Finnish central bank with other assets ahead of a potential exit.
Finland could face losses on both its TARGET2 claims as well as SMP bond holdings via its ECB share, in an EMU breakup where both the EMU and the Eurosystem ceased to exist. Under such a scenario, Germany, the Netherlands and Finland, the biggest creditor nations, will only recapture a fraction of their claims on peripheral central banks/ sovereigns. In this narrow sense, there is a first mover advantage for a core country exiting.
And to currency appreciation:
Together, the real exchange rate and balanced current account suggest that the new Markka might not appreciate much following a Finnish exit. By comparison, Denmark and Switzerland, each in receipt of substantial capital inflows, partly on expectations of an upward currency revaluation vs the euro, have large (Denmark) or very large (Switzerland) current account surpluses.
Finland’s net international investment position (NIIP) reached a small surplus in 2011 (5-10% of GDP) from a deficit of 175% of GDP at the end of 1990s (again due to Nokia). A small net international investment position (NIIP) means that Finland does not face a big loss on its foreign assets vs. foreign liabilities unless one assumes a big currency mismatch between assets and liabilities following an exit and a large appreciation of the newly introduced Finnish Markka. According to Figure 1, Finland is indeed in the middle interms of its NIIP balance suggesting more limited costs from its international claims relative to other creditor nations such as Germany and the Netherlands.In fact the costs arising from the country’s international position, are perhaps even smaller for Finland than that shown by Figure 1. As explained above, Finland could potentially escape losses on its TARGET2 claims with careful negotiating and planning. Subtracting TARGET2 claims, the NIIP of Finland is actually negative, i.e. the country has a net international liability of around-€50bn.
In conclusion, JPM think that a euro exit would be “easier and less painful” for Finland than Greece: “there is a first mover advantage for a creditor nation exiting, assuming the rest of the EMU survives.”
And then we just have contagion to worry about…