Household debt worsens economic vulnerability

Finnish household debt is now historically high, said a press release issued by the Bank of Finland.

Household indebtedness has also been fuelled by loans taken out by housing companies to finance newly built construction or renovations.

Households have now more avenues to accumulate debt due to the easing of consumer credit standards and the proliferation of digital financial services.

Deeply indebted households, relative to their respective incomes and wealth, are particularly vulnerable to the effects of rising interest rates, economic difficulties, and falling house prices.

Growing indebtedness not only poses a risk to households themselves but also undermines the economy’s ability to adapt to negative shocks.

When faced by economic difficulties, Finnish households generally respond by reducing consumption and increasing savings, in anticipation of worse to come. This reduces aggregate demand and erodes the profitability of businesses.

“High levels of household indebtedness can quickly lead the economy into a vicious circle when cyclical conditions deteriorate: reduced consumption erodes the corporate operating environment and increases bankruptcies, leaving banks in possession of defaulted corporate loans,” Bank of Finland Board Member Marja Nykänen told a press briefing.

“These loan losses, in turn, weaken banks’ capital adequacy as well as their lending capacity. Reduced lending impacts on aggregate demand, restricting economic activity and deepening the recession still further,” Nykänen added.