The root of European debt crisis

The European debt crisis has been the spotlight in the world. One question we may raise quickly is : what the hell root of this crisis? In order to answer this question, let us take a look at Finland, one of six AAA rated euro countries, which may face a similar fate to junk-graded Portugal in the next decade.

The northernmost euro member grapples with the decline in its two main industries, technology and paper.

Mobile-phone maker Nokia Oyj’s take off in the 1990s to become the world’s largest mobile-phone maker helped pull Finland out of recession. At the peak in 2000, Nokia accounted for 4 percent of Finland’s GDP. But now, the company’s days as the powerhouse of Finnish growth are over. Nokia has announced 1,900 job cuts in Finland since last year, or 10 percent of its local workforce, as its market value plunged almost 50 percent since January.

Europe’s two biggest papermakers, Stora Enso Oyj and UPM-Kymmene Oyj, was built on its forests. Since the 1960s, the country’s pulp industry has languished as emerging markets produce cheaper timber.

As the underlying competitiveness is diminishing, the problem across the Europe has been escalated in Finland: an imbalance in public finances exacerbated by the aging population. The number of workers for every pensioner will drop to three from four by 2015. That’s about five years earlier than in the rest of Europe.

While the government is not able to generate enough capitals to fund the spending, like a company, it must raise debt. In Finland’s case, it is estimated that debt will swell in 2011 to more than 50 percent of gross domestic product from 34.1 percent three years ago.

What happened in Ireland

Ireland had a AAA rating, a lower debt level than Finland and a surplus in its public sector, but then the crisis hit and the situation changed rapidly. Moody’s Investors Service cut Ireland to junk on July 2011, arguing the 85 billion euro ($119 billion) bailout may not be enough to keep it afloat. While Ireland’s plunge was linked to over-leveraged banks, its example remains relevant for economies where growth can’t keep pace with government spending.

Europe’s debt crisis has shown that failure to tackle fiscal weakness in time can force governments to impose severe austerity measures later. If there are no turnaround in the corner, Finland risks having to take emergency action” to fix its finances if the country’s budget drain isn’t fixed promptly.

So who would be the superstar to engine the Finland’s economy if the government is still struggling to find a unity need for cuts? The “Angry Birds”? Is it a lesson that the economy is focused on too few industries which is case similar to the lack of diversification in investment?

Credit rating agency faces government's challenge

Credit-ratings companies may be forced to disclose the internal analyses they use when they decide to cut a European Union government’s rating, the region’s financial services commissioner said.

Nations may win the right to check the data used by the companies in advance of downgrades of their sovereign ratings. The battle derived from Moody’s Investors Service’s cut of Portugal’s credit rating by four levels last week, prompting criticism from the EU that ratings companies are unnecessarily exacerbating the region’s sovereign-debt crisis. European Commission President Jose Barroso, who is a portuguese, said he “deeply” regretted the timing and magnitude of the downgrade and said proposals for increasing regulation of the rating companies in Europe would come out this year.

The governing body is considering introducing requirements which would allow a government to check the accuracy of the data used by an agency in advance of any downgrading. The proposals may also include measures for investors to take ratings companies to court when there has been negligence or violation of applicable rules. They want more competition and diversity in this business.

On the other side, governments shouldn’t abuse the ability to check the data used by ratings firms by attempting to delay downgrades to their sovereign rating. It is human nature that governments whose ratings are downgraded are often too ready to shoot the messenger rather than tackle their debt problems.