Political and economic commentators tend to go a little weak at the knees when it comes to the Nordic countries. Sweden, Denmark, Norway and Finland top leader boards in all sorts of enviable metrics from income equality to economic efficiency and innovation.
In recent periods of market unease, fixed-income investors have also been seeking out the Nordics, soothed by the low public debt burdens and steady growth on offer.
But behind closed doors, those same glowing credit scores and low borrowing costs have encouraged a consumer debt binge that some believe poses a threat to the region’s haven status.
Denmark’s government debt may amount to less than half of GDP but its households are the most indebted in the world, borrowing more than 320 per cent of their disposable incomes.
The International Monetary Fund has warned of the risks this ballooning household debt poses to Nordic countries, and bankers say sovereign debt investors are increasingly wary about the situation.
“We get a lot of questions about household debt from our foreign clients,” says Marcus Soederberg, rates strategist at Danske Bank in Stockholm.
“So far it hasn’t curbed appetite for government debt, but they are watching the situation and if it continues it could become an issue.”
On Tuesday Sweden’s Financial Supervisory Authority announced its long-awaited plan to reduce the risks of household debt, which equals 174 per cent of consumer disposable incomes.
The FSA wants new mortgage borrowers to repay more of their mortgages so that the loan to value rate falls to 50 per cent.
It said it was worried about the potential for households with higher levels of debt to exacerbate economic downturns and reduce economic growth if something unforeseen happened.
The region’s largest country has tried to rein in household debt in recent years by raising interest rates but has reversed its policy in the face of low inflation, and recently cut rates to zero.
In the wake of the cut, short-term bond yields fell temporarily below zero – meaning that investors in effect paid for the security of holding their money in two-year Swedish bonds.
Low yields and relatively small debt markets in some countries have not stopped them from attracting swaths of money from parts of the world with looser monetary policy, although inflows from central banks have slowed since the peak of the eurozone crisis.
Bond yields across the region have fallen significantly this year, most spectacularly in Finland, which uses the euro. The yield on 10-year bonds has dropped from 2.14 per cent to 0.94 per cent.
In October Finland lost its triple A credit rating from Standard & Poor’s, which cited worries about the country’s exposure to Russia’s economic weakness and the eurozone slowdown.
Yet the downgrade did little to damp creditor interest and in a bond auction shortly afterwards investors lent €1bn to the country over 14 years at a rate of 1.41 per cent – no higher than the rate it had previously borrowed at.
Yields on Sweden’s benchmark 10-year bonds have fallen more than 1 percentage point over the same period to 1.25 per cent, and the bonds’ pick-up over Germany’s 0.84 per cent equivalent has proved appealing to US, Asian and European investors.
According to Sweden’s National Debt Office, more than half the country’s government bonds were owned by foreigners by the end of 2012, compared with about a third in 2011.
As a group, what sets Nordic countries apart on debt markets is their low levels of public debt, low government borrowing rates and high levels of household debt, says Jussi Hiljanen, head of fixed-income research at SEB in Stockholm.
Oil-rich Norway is one of the few countries in the world without net debt, and Sweden’s public debt is about half that of its eurozone neighbours.
Fast-rising property prices are worrying but should be viewed through the prism of the countries’ idiosyncrasies, say domestic bankers.
Focusing on the high levels of private debt ignores the particular circumstances that have helped to increase asset prices. Stockholm, for example, is one of Europe’s fastest-growing cities yet few apartments are being built.
Debt investors are less focused on the safety afforded by the countries than the returns available, says Mr Hiljanen at SEB. The bank forecasts that Swedish bonds will outperform their German counterparts next year.
“The size of Scandinavian debt markets has been a limiting factor for some investors, but these bond markets are very well functioning. We see few reasons that the bonds will look less attractive to investors next year.”
Additional reporting by Richard Milne
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