The history of Finnish government borrowing dates back to the 1800s. The government has raised loans to finance infrastructure investments, bolster the Bank of Finland’s foreign reserves and increase the room for fiscal policy manoeuvre. Most of central government borrowing has been carried out through the issuance of bonds in both domestic and international financial markets.
Railways and the Rothschild family
The Finnish economy started to grow strongly after the mid-1800s. The construction of the railway network played a key role in the reform of the economy. The railways made Finland into a more compact whole, as a country, and the Saint Petersburg railway also helped close the distance with the rest of the Russian Empire.
Bond from 1868 (St. Petersburg’s railway)
Lottery bond, 43.5 years, Prussian Thaler, intermediaries Haller, Söhle Co. ja von Erlanger & Söhne, signed by Robert von Trapp
The construction of the railways was almost entirely financed by foreign loans raised by the Finnish government. The Frankfurt-based trading house M.A. von Rothschild served as purveyor to the Senate of Finland from the issuance of the 1862 railway bond. During the bad crop years in the 1860s, the Senate also obtained a loan from the Rothschild family to cover the losses suffered due to the crop failure.
1889 railway bond (redemptions and Carelian railway)
3.5%, 60 years, German mark, Finnish mark and Dutch guilder, intermediaries S. Bleichröder, Direktion der Disconto-Gesellschaft, M. A. von Rothschild & Söhne et al., signed by Herman Molander
The Rothschild House of Banking in Frankfurt was headed by Baron Mayer Carl von Rothschild, who was one of the most influential European bankers of his time. The Rothschild family owned banks in all the big financial hubs of Europe. The House of Rothschild was the best known European banking house in the 1800s, playing a major role in the growth of government bond markets, in particular, in the 1800s.
In the 1890s, the source of Finnish government borrowing shifted from German to French capital markets. Already before this, the Rothschild family had lost some of its influence on Finnish capital markets, with the passing away of Baron Mayer Carl von Rothschild, in 1886. The Frankfurt branch of the multinational banking house was closed down in 1901.
The rise of indebtedness during the war
The war had a devastating effect on central government finances. Central government expenditure increased more than sevenfold between 1938 and 1944. Half of this was accounted for by price rises. Warfare expenses surged to double or triple compared with civil expenses.
The surge in expenditure could be financed out of taxes, domestic and foreign loans and central bank credit. The Winter War had been paid for with seigniorage, i.e. government borrowing from the Bank of Finland. The expenses incurred during the Continuation War were, to a significant extent, financed by tax increases and new taxes.
The war left Finland an indebted nation. While government debt amounted to 13% of GDP at the outbreak of the Winter War, the debt burden had climbed to 64% of GDP by the end of the Continuation War in 1944. Many war time financial market regulations remained in place during the post-war decades.
1941 reconstruction bond
4–5.5%, 4 years, Finnish mark, signed by Mauno Pekkala
During the Winter War, Finland still had recourse to foreign loans from the United States, the United Kingdom
and Sweden. However, during the Continuation War, Finland’s access to foreign loans became more restrained, and the proportion of total borrowing taken by domestic loans exceeded 90%.
During the war, domestic markets were tapped through the issuance of bonds to the public, alongside war loans, known as compulsory loans. Funds were needed to finance war and reconstruction efforts. In summer 1941, a Finnish government bond organisation was set up, in conjunction with the Finnish Government Information agency, for the marketing of government bonds. To step up borrowing, voluntary civic organisations participated in the sale of bonds.
Financial market confidence in Finland
The costs of Finnish government borrowing have reflected not only the state of the international financial
system but also investor confidence in Finland. Despite the costs of government borrowing having surged in bad times, Finland enjoys a long history of being one of the most trusted borrowers in the world.
Financial market confidence can be measured by comparing the costs of Finnish government borrowing with the corresponding costs of other countries. A narrow yield spread reflects a lower credit risk for financial markets. In the euro area, German government bonds are usually taken as a benchmark for the assessments of credit risk.
The credit risk associated with Finland was at its lowest in the late 1800s. Especially between the world wars, Finland met with some suspicion in financial markets, not least because of Finland’s position as a ‘next-door neighbour’ to the Soviet Union, which was perceived as a source of instability. The country’s credit risk fell again in the 1970s, and since then Finland has ranked among the most highly respected borrowers in financial markets.
Credit ratings reflect the credit rating agency’s understanding of the borrower’s ability and commitment
to honour its financial obligations. According to the latest updates in 2019, the credit rating agencies Fitch Ratings, S&P Global Ratings and Moody’s placed the Finnish government bonds in the second best rating group.
Finnish government bonds from different decades
1872 bond (buying of donation lands)
4.5%, 39 years, Finnish mark, signed by Herman Molander
1918 freedom bond
5.5%, 47 years, Finnish mark, signed by Juhani Arajärvi
1920 bond (compensation of war damage)
5.5%, 48 years, Finnish mark, signed by Juhani Wartiovaara
1938 lottery bond (the Olympics)
5 years, Finnish mark, signed by Väinö Tanner