Early 1990s recession in Finland
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The early 1990s recession in Finland was one of the worst economic crises in Finland's history, even worse there than the depression of the 1930s.
The depression of 1991-1993 had a deep effect on the economy of Finland throughout the 1990s, especially in terms of employment but also in culture, politics and the general sociopolitical atmosphere. During this period the gross national product decreased 13% and the unemployment rose to 18.9% from 3.5%. Since then, despite overall recovery, the unemployment has been persistent, and Finland has never returned to the state of near full employment that existed before the crisis.
Underlying the depression of the 1990s was the economic policy of the 1980s. Finland experienced a strong economic boom throughout the 1980s which dragged on and "overheated" the economy, leading to the corrective contraction of the depression. One reason for this was a change in Finnish banking laws in 1986 which allowed Finnish companies to more easily seek credit from foreign banks, which was considerably less expensive than Finnish domestic credit. This led to a large-scale search for foreign loan sources, which helped to undermine the strength of the Finnish central bank. Additionally, regulation of consumer credit was drastically relaxed, and the consumer loan portfolio increased dramatically, at times by more than 100% per year. These factors led to the strong short-term growth which in turn raised commercial and residential property values, and increased the amount of money in the national economy in an unsustainable manner. Stock and real estate bubbles created an environment in which large short-term profits were posted, leading to an artificially inflated appearance of great wealth in the economy. The term "casino economy" was used to describe using loans to get very rich very quickly on paper through exploiting these bubbles.
The big devaluation that was made in November 1991 increased the debts of Finnish companies holding foreign loans. The loans that were taken in foreign currencies did not properly scale with the devaluation which the Kouri–Porter model had shown as early as in 1974. This model was not followed in Finland in connection with the freeing of money market. However, the number of the foreign currency loans was only 15% of the whole loan stock.
The collapse of the Soviet Union also played an important role, as it had represented 15–20 per cent of Finland's foreign trade, the so-called bilateral trade. Thus a key Finnish export market disappeared nearly overnight. The rising price of oil during the years 1973 and 1979 combined with the advent of Finland becoming much more "motorized" had also raised the level of the bilateral trade with the Soviet Union. During this period, oil itself often was used as currency for international trade between the two countries.
Furthermore, political decisions based on the strength of the Finnish mark (among other decisions) weakened the international competitiveness of Finnish industry. The paper industry in particular, on which much of the Finnish economy was reliant, also experienced worldwide overproduction during this time.
Consumption and investment fell in the both public and private sector as a consequence of the depression. The number of the bankruptcies of companies rose strongly, and these bankruptcies in combination with the weak economic situation caused mass unemployment. Unemployment during the years 1992–1997 was consistently over 12 per cent and went as high as 36.7% in construction industry during year 1994. Smaller banks ended up absorbed by big ones, due to difficulty maintaining profitability as a result of risky loans made to companies which consequently went bankrupt, resulting in a nationwide bank crisis.
The budget deficit of the state of Finland was several per cent of the GNP. Furthermore, Finland's sovereign credit rating was downgraded.
Economic policy which has followed crisis
The liquidity of the banking system of Finland weakened as a consequence of the bank crisis. The government answered here by guaranteeing in 1991 the debts taken by the Finnish banks. To help the export industry Finland performed devaluations during the years 1991 and 1992. At the same time the entrepreneurs who had taken foreign currency loans got into an extremely difficult situation.
To save banks the state deposit insurance fund (bad bank), OHY Arsenal, was established and divided among loan-making banks. The biggest recipients were the savings bank group Suomen Säästöpankki and Säästöpankkien keskusosakepankki (SKOP), a bank owned by small local savings banks. All the other banks also got bank support. The savings bank group was liquidated and divided among the Osuuspankki Group, KOP, Postipankki and Yhdyspankki. In 1994, KOP had to merge with Yhdyspankki to form Merita Bank, which was later merged to Nordea.
National government and municipal spending were strongly cut to guarantee the liquidity of the country. This weakened, among others, social services. In 1995 Lipponen continued to operate under these austerity measures which had restricted government expenditures even for a period after the depression had formally ended.
The Finnish economy began to gradually recover beginning in the middle of the 1990s. The depression of the beginning of the 1990s was mainly localized in the Nordic countries, and each nation's economic difficulty had a reverberating effect among the others. In other parts of the world the economy, however, grew in an ordinary way, and Finland indeed recovered quite nicely in short order, especially with export-led economic growth after Finland's local financial matters had been settled. The guiding star was the then-conglomerate Nokia, which focused its efforts on mobile telephony and grew into a world market leader in less than a decade.