Nordic countries go on the defensive

SWEDEN and Norway rushed to defend their currencies following Finland's devaluation yesterday, desperate to show that they are not going down the same road.

The shock this will deliver to the region's economy is the latest in a series. Each Scandinavian country has been hit by financial collapses, capital outflows and political uncertainties that have become a dreadful spiral.

All have tried to link their currencies to the European Monetary System by pegging their currencies to the ecu. They are outside the system, without access to its currency support facilities, but all the same tied to it. When money is flooding out of peripheral currencies, this is the worst of all worlds.

Finland started yesterday's collapse when it let the markka float and saw it devalued by about 14 per cent. The evaporation of the Soviet Union, formerly its largest export market, has crippled the country. It devalued last November by 12.3 per cent, but quickly moved to re-establish a link with the ecu. However on this occasion the separation is expected to be longer: 'It is not a matter of days or weeks,' Sirkka Hamalainen, the Bank of Finland governor, said. 'It is a question of a longer period of time.'

Finland is one of the richest countries in Europe, largely because of its relationship with Moscow. The devaluations are effectively reducing its standard of living to one more consonant with its resources, while improving export competitiveness.

The Finnish government said its aims of low inflation and reductions in state spending would continue, despite unemployment of nearly 14 per cent. Its intention to join the European Community also remains unaffected and it says that commitment 'implies that fixed exchange rate relations with the other European currencies will be restored as soon as circumstances permit'. But its economic problems are bound to destabilise the centre-right government.

Sweden was forced to follow suit as the Finnish instability cast doubt on its own ability to manage a link to the ecu, undercut competitiveness and led to a flood of cash entering the Helsinki bourse. The decision to raise the marginal lending rate in Sweden from 16 per cent to a record 24 per cent shows the depths to which confidence has sunk and the central bank matched its aggressive action to maintain the krona's position by its words: 'The Riksbank is ready to use all means at its disposal to defend the present rate.'

Sweden also has a centre-right government committed to economic cuts and EC membership, and it, too, will be weakened.

Norway has remained relatively isolated from the markka's plunge so far. But Norwegian short-term rates reached four-year highs of just over 17 per cent yesterday and the central bank emphasised that the krone would stay pegged to the ecu. '(We) will do whatever is necessary to maintain the exchange rate,' an official said. The overnight lending rate was raised one point to 11 per cent on Monday, the first move in a year.