The International Monetary Fund warned Thursday that the Nordic countries’ large, shared banking sector, high household debt and property prices pose a financial risk for the region.
The Nordic countries’ “robust social institutions” and sound macroeconomic policies helped them recover more quickly than others from the global financial crisis, the IMF said, though it warned the banking sector is heavily reliant on wholesale funding.
Household debt in parts of the area is among the highest among developed economies and authorities need to restrict the availability of interest-only mortgages, the fund said. Because large parts of the banking sector are shared across the Nordic region, a sudden drop in housing prizes in one country could have negative effects on consumption and unemployment in the entire region.
To avoid this, it is important to maintain strong fiscal buffers and phase out preferential tax treatment of housing investments, it said in a regular review of the region.
Overall, the IMF commended the countries for their ongoing reforms and sound financial policies, and welcomed measures to set up mechanisms to deal with distressed banks.
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