Heidi Schauman : A centre-led coalition to lead Finland Nordea Research, 19 April 2015

The lead by Juha Sipilä, a successful businessman, took a convincing and expected victory in the Finnish parliamentary elections today. If success in the elections is an indication of which parties the Centre will form a coalition with, the and the look increasingly interesting. The election outcome will not lead to a meltdown in Finnish bond markets, but the outcome will have more long-term effect on markets.

The strong performance by the Centre Party was no surprise. The party takes an expected leap from the opposition straight to being the prime minister party. Juha Sipilä, the , has convinced the Finnish people he is the best candidate for turning the Finnish ship away from the economic stagnation the country has suffered from during the past years.

Election outcome, forecast, 92,7 % of votes counted No clear coalition preference

The biggest question going forward is which other parties the winner will form government with. Many seem to believe that the party winning the second position will be the best nexus.nordea.com/research candidate, but the Centre Party has emphasized that the most important thing is how compatible the programs are, not the ranking. The Centre Party, with its chairman Juha Sipilä, has been very quiet on its preferred partners and also on what reforms it will begin to push through.

According to polls Centre Party voters favour the Social as a coalition partner, but among the three parties following the Centre party in size, the Social Democrats did not fare well in the elections. The Finns Party was the largest winner among these three, but also the fared better than the Social Democrats.

The Centre Party will play a key role going forward. They can, based on the election outcome, chose who they want to cooperate with. While we see it as the most plausible outcome, a cooperation between three big parties is not the only alternative. A coalition between the Centre Party, The National Coalition Party, The Green League and the Swedish People’s party is one of the options, but so is a Centre- Social Democrat- Finns coalition. The Centre party will not tie its hands at this point, but will play the game going forward in order get a government programme that is as much as possible in line with their own friendly line.

The only clear thing is that the Social Democrats and the National Coalition Party, which formed the core of the former coalition, will not be in the same government after the meltdown of their coalition cooperation during the past year.

Including the Social Democrats in the government will most likely lead to rather slow fiscal consolidation. As a result, more ratings downgrades cannot be excluded. A government tilted more towards right, probably including the National Coalition Party, would have a stricter consolidation programme.

But can the Green League, the second winner, be ignored?

The Green League was one of few winners in the elections, besides the Centre Party. The surprisingly good results for the Greens might stir the government negotiations since nexus.nordea.com/research many perceive that clear winners should have a place around the negotiation table.

The Green League has however not been one of the favourite candidates for government in the speculations before the elections. The success of the Greens opens up new coalition alternatives for the Centre Party.

Other smaller parties can by no means be excluded from government negotiations. The Swedish People’s Party almost always tends to end up in government, and their convincing election results suggest that they cannot be ignored this time either. The Swedish People’s party is the only of the previous government’s parties that made a good election.

A rocky road ahead

Independent of what the coalition will look like the negotiations that are just beginning will be extremely difficult. Finland is fighting with many parallel problems; population aging, lack of competitiveness, weak foreign and domestic demand and a struggling public to mention a few.

All the potential coalition parties admit the need for reforms, but there appears to be a lack of consensus on which the largest problems are and how these problems should be solved. It still seems rather likely that the next government won’t be prepared to do what it would take to really boost the outlook for the Finnish economy.

Short-term moves limited, but market should pay attention to the risks

Finnish politics is seldom a notable market driver of the Finnish bond market, and we do not expect this time to be any different. Finnish bond spreads are thus unlikely to experience additional volatility in the coming days despite the remaining uncertainty relating to the formation of the government and the details of the government programme.

Longer out, however, bond investors should pay close attention. We see a clear risk that the still rather likely between the Centre Party, the Social Democrats and the Finns does not tackle the Finnish problems with sufficient determination, and will once again nexus.nordea.com/research put too much hope on growth running to the rescue. Reforms will no doubt be seen with this combination, but it looks it will be too little too late, at least as far as protecting the remaining Finnish triple-A ratings is concerned. We find further downgrades likely.

The election results also make a government between the Centre Party, the National Coalition Party and the Finns -or instead of the Finns maybe a combination of the Swedish People’s Party and the Green League- possible. We find such a government the most market friendly one, as among the likely alternatives, it is the most likely one to implement quick reforms and fiscal consolidation. All hope is not yet lost regarding the future of the remaining Finnish triple-A ratings.

Finnish bonds still with potential vs the Netherlands

In the short term, it will be the ECB purchases that continue to set the course for markets. We continue to think Finnish bonds will benefit more from the purchases compared to Austrian and Dutch bonds.

The ECB expanded the list of QE eligible agency issuers by three Dutch agencies and a Finnish one, among others. While the Dutch agencies will expand the universe of eligible Dutch QE debt considerably, the Finnish agency added only has two rather small EUR bonds at the moment. In other words, there is more potential for the Dutch agency purchases to diminish the share of the Dutch purchases going into government bonds compared to Finland.

We thus repeat our positive view on Finnish bonds especially vs Dutch bonds, wherever Finnish bonds can be bought at a pick-up or at par vs the Dutch curve.

nexus.nordea.com/research Remaining Finnish triple-A ratings in jeopardy

nexus.nordea.com/research

Disclaimer and legal disclosures

Disclaimer Origin of the publication or report This publication or report originates from: Nordea Bank AB (publ), Nordea Bank Danmark A/S, Nordea Bank Finland Plc and Nordea Bank Norge ASA (together the “Group Companies” or “Nordea Group”) acting through their unit Nordea Markets.

The Group Companies are supervised by the Financial Supervisory Authority of their respective home countries.

Content of the publication or report This publication or report has been prepared solely by Nordea Markets.

Opinions or suggestions from Nordea Markets may deviate from recommendations or opinions presented by other departments or companies in the Nordea Group. The reason may typically be the result of differing time horizons, methodologies, contexts or other factors.

Opinions and price targets are based on one or more methods of valuation, for instance cash flow analysis, use of multiples, behavioural technical analyses of underlying market movements in combination with considerations of the market situation and the time horizon. Key assumptions of forecasts, price targets and projections in research cited or reproduced appear in the research material from the named sources. The date of publication appears from the research material cited or reproduced. Opinions and estimates may be updated in subsequent versions of the publication or report, provided that the relevant company/issuer is treated anew in such later versions of the publication or report.

Validity of the publication or report All opinions and estimates in this publication or report are, regardless of source, given in good faith, and may only be valid as of the stated date of this publication or report and are subject to change without notice.

No individual investment or advice The publication or report is intended only to provide general and preliminary information to investors and shall not be construed as the basis for any investment decision. This publication or report has been prepared by Nordea Markets as general information for private use of investors to whom the publication or report has been distributed, but it is not intended as a personal recommendation of particular financial instruments or strategies and thus it does not provide individually tailored investment advice, and does not take into account the individual investor’s particular financial situation, existing holdings or liabilities, investment knowledge and experience, investment objective and horizon or risk profile and preferences. The investor must particularly ensure the suitability of an investment as regards his/her financial and fiscal situation and investment objectives. The investor bears the risk of losses in connection with an investment.

Before acting on any information in this publication or report, it is recommendable to consult one’s financial advisor.

The information contained in this publication or report does not constitute advice on the tax consequences of making any particular investment decision. Each investor shall make his/her own appraisal of the tax and other financial merits of his/her investment.

Sources This publication or report may be based on or contain information, such as opinions, recommendations, estimates, price targets and valuations which emanate from:

Nordea Markets’ analysts or representatives, Publicly available information, Information from other units of the Group Companies or other companies in the Nordea Group, or Other named sources.

To the extent this publication or report is based on or contain information emanating from other sources (“Other Sources”) than Nordea Markets (“External Information”), Nordea Markets has deemed the Other Sources to be reliable but neither the companies in the Nordea Group, others associated or affiliated with said companies nor any other person, do guarantee the accuracy, adequacy or completeness of the External Information.

The perception of opinions or recommendations such as Buy or Sell or similar expressions may vary and the definition is therefore shown in the research material or on the website of each named source.

Limitation of liability Nordea Group or other associated and affiliated companies assume no liability as regards to any investment, divestment or retention decision taken by the investor on the basis of this publication or report. In no event will entities of the Nordea Group or other associated and affiliated companies be liable for direct, indirect or incidental, special or consequential damages resulting from the information in this publication or report.

Risk information The risk of investing in certain financial instruments, including those mentioned in this document, is generally high, as their market value is exposed to a lot of different factors such as the operational and financial conditions of the relevant company, growth prospects, change in interest rates, the economic and political environment, foreign exchange rates, shifts in market sentiments etc. Where an investment or security is denominated in a different currency to the investor’s currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. Past performance is not a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. When investing in individual shares, the investor may lose all or part of the investments.

Conflicts of interest Companies in the Nordea Group, affiliates or staff of companies in the Nordea Group, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned in the publication or report.

To limit possible conflicts of interest and counter the abuse of inside knowledge, the analysts of Nordea Markets are subject to internal rules on sound ethical conduct, the management of inside information, handling of unpublished research material, contact with other units of the Group Companies and personal account dealing. The internal rules have been prepared in accordance with applicable legislation and relevant industry standards. The object of the internal rules is for example to ensure that no analyst will abuse or cause others to abuse confidential information. It is the policy of Nordea Markets that no link exists between revenues from capital markets activities and individual analyst remuneration. The Group Companies are members of national stockbrokers’ associations in each of the countries in which the Group Companies have their head offices. Internal rules have been developed in accordance with recommendations issued by the stockbrokers associations. This material has been prepared following the Nordea Conflict of Interest Policy, which may be viewed at www.nordea.com/mifid.

Important disclosures of interests regarding this research material are available at: http://www.nordea.com/sitemod/upload/Root/www.nordea.com%20-%20uk/AboutNordea/Markets_Discloser_Disclaimer.pdf

Distribution restriction The securities referred to in this publication of report may not be eligible for sale in some jurisdictions. This research report is not intended for, and must not be distributed to private customers in Great Britain or the US. This research report is intended only for, and may be distributed only to, accredited investors, expert investors or institutional investors in Singapore who may contact Nordea Bank, Singapore Branch of 3 Anson Road, #22-01, Springleaf Tower, Singapore 079909. This publication or report may be distributed by Nordea Bank Luxembourg S.A., 562 rue de Neudorf, L-2015 Luxembourg which is subject to the supervision of the Commission de Surveillance du Secteur Financier. This publication or report may be distributed by Nordea Bank, Singapore Branch, which is subject to the supervision of the Monetary Authority of Singapore. This publication or report may not be mechanically duplicated, photocopied or otherwise reproduced, in full or in part, under applicable copyright .