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(Updates with krone in fifth paragraph.)
Nov. 16 (Bloomberg) -- Norway is prepared for a worsening of the euro area debt crisis as leaders struggle to convince investors they are capable of halting its spread, Finance Minister Sigbjoern Johnsen said.
“The best thing we can do in Norway is to prepare for that things can go from bad to worse in Europe,” Johnsen said today in an interview in Oslo. “We have seen some increases in yields in both Spain and France and that shows that this isn’t over and that uncertainty is still high.”
Inaction by leaders and resistance from the European Central Bank to expand purchases of government bonds raised the prospect of contagion to so-called core euro nations such as Finland and Austria. Italy’s 10 year-bond yield opened today above the 7 percent threshold that prompted Greece, Ireland and Portugal to seek EU aid before bonds began to gain.
Leaders in the U.S. and the U.K. also urged European policy makers to intensify efforts. President Barack Obama said in Canberra today he was “deeply concerned,” while the Bank of England and the U.K. Treasury said the woes are the biggest threat to the economy. German Chancellor Angela Merkel said that Europe’s biggest economy is prepared to cede some sovereignty to the EU for closer economic and political ties.
Norway’s krone weakened 0.1 percent to 7.7931 to the euro and 0.7 percent to 5.7857 per dollar as of 2:53 p.m. in Oslo.
While “much has happened” in the euro area with Italy and Greece appointing national-unity governments “market reaction has gone in both directions,” Norway’s Johnsen said. “It’s important that they keep up the pressure to strengthen the trust in the European economy.”
European finance ministers pledged this month to roll out a bulked-up rescue fund in December, agreeing to recapitalize banks and force bondholders to take a 50 percent writedown on Greek debt in what they called a comprehensive approach.
Norway, which is the world’s seventh-largest oil exporter and has a $550 billion sovereign wealth fund, has so far been sheltered from the crisis. Its mainland economy, which excludes oil, gas and shipping, is expected to grow 3.1 percent next year, the government forecasts.
Falling unemployment and rising credit growth are posing challenges for the country’s central bank, which has signaled it doesn’t want its main rate to stray too far from those on in Europe to avoid fueling krone gains that hurt exports.
Policy makers last month postponed a series of planned rate increase into the second half of next year. Governor Oeystein Olsen has signaled he is ready to cut interest rates if global prospects worsen even as house price gains hover close to 10 percent and credit growth accelerates.
“The low interest rates in Europe of course would establish pressure for a downward slide in the interest rate,” Johnsen said. “If you look at the housing sector in Norway, that could pull the opposite way.”
Norges Bank has kept its overnight rate at 2.25 percent since May. The European Central Bank unexpectedly cut its benchmark rate by 0.25 percentage point this month to 1.25 percent. Fitch on Nov. 3 warned that the ECB’s move increased risks of further house price rises and overheating domestic demand in Norway as the bank keeps monetary policy loose.
“We have room to maneuver in both directions, also to meet any prolonged or accelerated turbulence in international markets, and if that happens, and happens in a sustained way, yes we might cut the rate,” Olsen said last week.
Norway’s central bank next meets on Dec. 14 to decide on interest rates.
--Editors: Jonas Bergman, Christian Wienberg
To contact the reporter on this story: Josiane Kremer in Oslo at firstname.lastname@example.org
To contact the editor responsible for this story: Tasneem Brogger at email@example.com