Finland says banks, ECB to take hit from debt crisis

The European Central Bank like commercial lenders faces the risk of writing down the value of some of its assets due to the debt crisis gripping Greece and other euro zone members, Finland's finance ministry said on Monday.

In a quarterly report on the prospects for Finland's economy, the ministry also said the financial crisis in some parts of Europe may last longer and have a greater impact on the overall region than its new forecasts for growth assume.

"There is a risk that some banks, including the ECB, will have to write down the values of the securities they hold, which means that governments may have to spend more than expected on supporting the banking sector in a situation where they are already struggling to provide funding for the public sector," it said. The ministry raised its forecast for Finland's economic growth this year but forecast a slowdown in the following years and said there was a risk that a vicious cycle of rising costs could jeopardize growth.

It forecast its own public debt to continue rising, an issue the newly formed government under prime minister-elect Jyrki Katainen is trying to address. GDP will expand 3.9% in 2011 compared to a March forecast of 3.6% before slowing to 2.8% in 2012 and to 2.4% in 2013. Consumer prices will likely rise 3.4% in 2011. "Inflation will ease towards the end of the outlook period, but still remain relatively high," it said. "A vicious cycle of rising costs would certainly jeopardize the growth that has now resumed."

It forecast government debt-to-GDP to climb to 52.4% by 2013, around 50 bln euros ($71 bln) more than before the financial crisis of 2008 prompted various stimulus measures. The outlook was formed before the new government unveiled plans to cut spending and borrowing.

"Unless firm measures are taken to improve the sustainability of public finances, recovery from the next crisis or recession will be much harder," the ministry said.