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Wednesday, May 22, 2024

Warnings issued over interest rates

High debt levels in Norway combined with a sudden spike in interest rates could quickly hit the country’s economy harder than cutbacks in the oil industry have. Bankers, economists and financial planners warn Norwegians against being blind to the prospect, even though the central bank’s board is expected to keep rates stable at its next meeting on Thursday.

The folks working inside Norway's central bank, "Norges Bank," have decided to keep interest rates steady. PHOTO: Norges Bank
The executive board of Norway’s central bank, “Norges Bank,” will be setting interest rates again later this week. Most economists expect the key lending rate will be kept at 0.5 percent, but borrowers are being warned that rates could spike quickly and unexpectedly at any time. PHOTO: Norges Bank

Gunn Wærsted, the former head of Nordic bank Nordea in Norway who’s now board leader of Telenor, recalls that the most important lesson she learned in her long banking career was how interest rates can rise quickly and unexpectedly.

“What worries me the most is that many have expectations that (the current) abnormally low interest rate level has become normal,” Wærsted told newspaper Dagens Næringsliv (DN) on Tuesday. Borrowers have taken on large mortgages, because of high and rising housing prices in Norway, with monthly payments that are manageable given today’s record-low interest rates. While banks are charged with making sure borrowers qualify even if interest rates rise, those with large mortgage payments may not manage payments if interest rates spike.

Should brace for a four-point rise
Wærsted herself experienced how mortgage rates hit as high as 18 percent in Norway in the late-1980s, because of high inflation and undercapitalized banks that ultimately collapsed in the early 1990s. That’s when the state had to step in and nationalize the banks, and why the state still holds a major stake in DNB. The banks that had to merge to form DNB both had to be bailed out, and shareholders lost all their money.

Banks now must demand higher levels of capital from borrowers, which is why many parents and grandparents have felt obliged to provide funds or guarantee loans for the next generation facing high housing prices. Wærsted herself has helped her own sons buy homes, but has also warned them about the possibility of higher interest rates.

“I have told them for several years that they must be prepared for interest rates at least four percentage points higher than they are now,” Wærsted told DN. “Even though they are prepared, I have the impression they don’t think it will happen. I think that’s very common.”

‘We were spoiled’
Norway’s economy has shown surprising resilience even in the face of cutbacks in its most important industry, oil, and high debt levels. In the 1980s, high debt growth contributed towards sending the housing market into the dumps. It was not unusual for prices to fall below the level of the mortgages on the property. Wærsted doesn’t think that will happen again, but household debt in Norway today is at record high levels, more than 230 percent of disposable income. Higher rates can cause acute discomfort, especially if borrowers also lose their jobs.

DN reported how Kjersti Aske Kersbergen, age 39, is among those who lost her job last year after spending her entire career in the oil business. Her husband still has a job in the industry and she found a new job, in the automobile business, but her monthly take-home pay has fallen by NOK 20,000. Now her family is being more careful about household finances.

“We were spoiled,” Kersbergen told DN. “We were paralyzed by the consumption we have had. We haven’t needed to think about what we should spend our money on. Now we need to re-evaluate, and that’s an adjustment.” During her short period of unemployment, she went to their bank to request, and receive, permission to only make interest payments on their home mortgage. One local bank said that’s become more common.

“We haven’t had any marked increase in payment defaults, but we have had an increase in those not paying down principal,” Christian D Asserson of Sparebank1 SR-Ban told DN. That can continue for up to a year, before the bank sits down with the customer to evaluate a workout plan. Berglund



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