When Time Becomes the Problem: Finland’s Delayed Debt Adjustment
Written 11.09.2026
ECONOMICSMACROECONOMICS
Stefan-Niko Tanskalainen
9/11/20265 min read
When Time Becomes the Problem: Finland’s Delayed Debt Adjustment
My previous paper, Finland Entering a Dual-Deleveraging Trap, examined the possibility that Finland could become trapped between private-sector deleveraging and increasing public-sector debt within the constraints of the euro area. The central problem was not simply the size of Finnish debt, but the interaction between weak private demand, limited nominal growth and a growing public balance sheet.
A natural continuation of this argument is to ask a different question: what happens if the adjustment is simply postponed?
The answer may be more uncomfortable than a simple increase in the debt ratio. Time itself can become part of the problem.
Debt can be postponed, but imbalances cannot
Long-term government bonds can provide valuable fiscal space. Extending maturities reduces immediate refinancing pressure and prevents a government from having to refinance a large share of its debt during an unfavourable period. There is nothing inherently problematic about long-term borrowing.
The problem begins when additional time is mistaken for an additional solution.
A government can use long-term debt to move the adjustment further into the future. However, if nominal economic growth remains weak while public debt continues to increase, the underlying imbalance is not removed. Instead, the debt stock becomes larger, interest expenditure gradually becomes more important, and the government's sensitivity to future interest rates and market confidence increases.
This creates a simple but important distinction:
Long-term debt can buy time, but it cannot create time.
If that time is used to restore productivity, investment and sustainable fiscal growth, long-term borrowing can be part of a successful adjustment. If it is used merely to postpone adjustment, the eventual problem can become substantially more difficult.
Finland's recent debt development illustrates why this matters. General government debt reached 88.5% of GDP in 2025, while the nominal debt stock increased by more than €21 billion during the year. By the first quarter of 2026, the debt ratio had risen to 89.8% of GDP.
The important question is therefore not only whether Finland can continue borrowing. It is whether the economy can generate enough nominal growth to prevent the debt burden from becoming progressively harder to manage.
The cost of waiting
Debt dynamics become increasingly difficult when three developments occur simultaneously:
more debt → higher interest expenditure → less fiscal space
This does not mean that every increase in debt produces a crisis. A country can sustain a high debt ratio when nominal growth, interest rates and investor confidence remain favourable.
The problem is that these conditions cannot be assumed indefinitely.
A country that postpones adjustment for many years may eventually face a much narrower range of policy options. Fiscal tightening can weaken already fragile domestic demand. Higher interest rates can increase the cost of servicing existing debt and discourage investment. Continued borrowing can further increase future refinancing requirements.
The result is not necessarily one dramatic crisis. It can instead be a gradual deterioration in the number of policies that remain politically and economically acceptable.
This is where debt becomes more than a fiscal variable. It becomes a constraint on future policy.
Monetary sovereignty does not erase accumulated debt
A return to a sovereign currency would fundamentally change Finland's policy environment. A national central bank could, in principle, provide liquidity to the government bond market and allow the state to finance a greater share of its deficit domestically.
But monetary sovereignty would not make the accumulated imbalance disappear.
Instead, it would introduce another possible adjustment mechanism: inflation.
If fiscal consolidation remained politically difficult and economic growth remained insufficient, monetary financing could become increasingly attractive. Initially, this might appear to provide relief. The government could reduce the real burden of existing nominal debt while avoiding an immediate fiscal contraction.
Yet the adjustment would not be free.
Persistent monetary financing could put downward pressure on the currency, increase import prices and eventually feed into domestic wages and prices. The real value of nominal debt would fall, but so would the real value of financial assets and cash holdings denominated in the currency.
In this sense, inflation can become a delayed form of balance-sheet adjustment.
The important point is therefore not that Finland would inevitably “print money” after returning to a national currency. Rather, the longer the fiscal imbalance is allowed to accumulate, the greater the temptation to use monetary policy to resolve a problem that fiscal policy was unable to resolve earlier.
That creates a different form of instability.
When normal policy becomes abnormal
History provides a useful illustration of how quickly a monetary regime can move from apparently normal conditions into an environment that would have seemed absurd only months earlier.
Sweden's early-1990s crisis is particularly instructive.
In September 1992, the Swedish central bank raised its marginal lending rate to an extraordinary 500% in an attempt to defend the fixed exchange rate of the krona. The policy ultimately failed, and in November 1992 Sweden abandoned the fixed exchange rate and allowed the krona to float.
The importance of the 500% figure is not that Finland would experience anything similar. The economic circumstances were different, and historical comparisons should not be treated as forecasts.
Its importance is psychological and institutional.
A financial system can appear to operate within a familiar range of interest rates for years. Then accumulated imbalances can suddenly make previously unthinkable policy measures appear necessary.
Five percent can become ten.
Ten can become twenty.
And eventually the system can reach a point where 500% is considered preferable to abandoning the monetary regime immediately.
That is what makes delayed adjustment dangerous. The problem is not merely that the eventual correction becomes larger. It is that the relationship between policy instruments can change.
Protecting the exchange rate may require extremely high interest rates. Lowering interest rates may accelerate capital flight. Allowing the currency to depreciate may increase inflation. Fiscal tightening may deepen the recession. Continuing to borrow may increase concerns about future debt sustainability.
The result is what could be described as a policy cacophony: several instruments remain available, but each solution creates a new problem elsewhere in the economy.
The danger of accumulated instability
This suggests a broader interpretation of Finland's debt problem.
The most important variable may not be the exact debt ratio at any particular moment. It may be the direction and duration of the imbalance.
A debt ratio of 90% of GDP is not automatically a crisis.
Neither is 100%.
Neither is a long maturity structure automatically dangerous.
The problem is the combination of rising debt, weak nominal growth, increasing interest costs and insufficient time for the underlying productive economy to adjust.
If these trends continue for long enough, the eventual correction may no longer be a single fiscal decision. It may become a conflict between several necessary but mutually damaging policies.
This is why delaying adjustment can be more dangerous than the debt ratio alone suggests.
Time is not neutral in a debt crisis.
Every year in which debt grows without a corresponding improvement in productive capacity changes the starting position from which the next adjustment must take place.
Long-term bonds can smooth that adjustment. They can prevent a liquidity problem from becoming an immediate solvency problem. But they cannot substitute for economic growth, investment or fiscal sustainability.
Eventually, the bill for postponed adjustment still has to be paid.
The only question is which balance sheet pays it, and through which mechanism.
For a country inside the euro area, that adjustment is constrained by the absence of an independent national monetary policy. For a country with monetary sovereignty, the menu of options becomes larger — but so does the possibility that inflation and currency depreciation become part of the adjustment mechanism.
This leads to a paradox.
Monetary sovereignty can provide an escape from one constraint without providing an escape from the underlying imbalance.
If Finland eventually regains monetary sovereignty after years of accumulating public debt, the central question will therefore not simply be whether it can issue its own currency.
It will be whether it has used the time before that moment to make such monetary sovereignty unnecessary as a mechanism of debt adjustment.
The longer the answer is postponed, the more unstable the eventual choice may become.