Scientific Monographs, Bank of Finland
No E:37/2006:
Foreign capital and Finland
Mika Arola ()
Abstract: The main objective of the study is to evaluate the Finnish
central government’s foreign borrowing between the years 1862 and 1938.
Most of this period was characterised by deep capital market integration
that bears resemblance to the liberal world financial order at the turn of
the millennium. The main aim is to analyse the credit risk associated with
the state and its determination by evaluating the world financial market
centres’ perception of Finland. By doing this, the study is also expected
to provide an additional dimension to Finland’s political and economic
history by incorporating into the research the assessments of international
capital markets regarding Finland during a period that witnessed profound
political and economic changes in Finnish society.
The evaluation of
the credit risk mainly relies on exchange-rate risk free time series of the
state’s foreign bonds. They have been collected from quotations in the
stock exchanges in Helsinki, Hamburg, Paris and London. In addition, it
investigates Finland’s exposure to short-term debt and Moody’s credit
ratings assigned to Finland. The study emphasises the importance of the
political risk. It suggests that the hey-day of the state’s reliance on
foreign capital markets took place during last few decades of the 19th
century when Finland enjoyed a wide autonomy in the Russian Empire and
prudently managed its economy, highlighted in Finland’s adherence to the
international gold standard. Political confrontations in Finland and, in
particular, in Russia and the turbulence of the world financial system
prevented the return of this beneficial position again.
Through its
issuance of foreign bonds the state was able to import substantial amounts
of foreign capital, which was sorely needed to foster economic development
in Finland. Moreover, the study argues that the state’s presence in the
western capital markets not only had economic benefits, but it also
increased the international awareness of Finland’s distinct and separate
status in the Russian Empire and later underlined its position as an
independent republic.
Keywords: credit risk; government borrowing; financial market; government bonds; state finances; (follow links to similar papers)
JEL-Codes: E65; G15; H63; N13; (follow links to similar papers)
254 pages, December 29, 2006
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