Quarantined Cruise Liners Pose Hidden Risk to Finnish Economy

(Bloomberg) --

The damage wrought by the coronavirus on the luxury cruise-liner business may hurt the economy of Finland more than most other countries’.

The Finnish government has granted an “exceptionally high” number of export guarantees to cruise lines that have ordered luxury vessels from the Nordic country’s shipyards. So it’s more vulnerable than most to a slump in demand, according to Juhana Brotherus, chief economist at mortgage provider Hypo in Helsinki.

The risk to Finland is both concentrated and, to a large extent, hidden. The bulk of the guarantees involves just one industry and, because they exist outside the government budget, they’re largely excluded when calculating the state’s liabilities. But Finnish taxpayers are ultimately on the hook for as much as 11 billion euros ($12 billion) of credit risk stemming from these guarantees.

“If the cruise lines were to get into financing difficulties, it would be a blow to the Finnish economy with very severe consequences,” Brotherus said by phone. “Sovereign debt would suddenly rise by tens of billions of euros.”

The amounts are sizable relative to the AA+ rated Finnish economy: its 2020 budget is a little under 60 billion euros and central government debt was about 108 billion euros at the end of January.

Finnvera Oyj, the country’s export credit company, has guaranteed loans for Royal Caribbean Cruises Ltd. and Carnival Corp. The loans are typically drawn when the companies take delivery of a new ship from a shipyard and amortized over a 12-year period, during which they represent a credit risk to the state. While canceled orders for vessels wouldn’t result in credit risk, they would hurt the economy through lost exports.

Pandemics are one element Finnvera includes in its credit-risk assessments on the cruise industry, Jussi Haarasilta, who oversees its large corporates business, said by phone. While it’s too early to assess the impact of the coronavirus, “a central element among the industry’s risks is a decrease in demand, which could be prompted by a pandemic,” he said.

Though a full-blown crisis in the cruise industry remains unlikely, it “forces Finnish decision makers to keep an eye on the development of the coronavirus,” Brotherus at Hypo said.

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.