Finland and the Netherlands, the euro zone’s most hardline creditor states, cast the first doubts on Monday on a European summit deal designed to save Spain and Italy from being engulfed by the currency bloc’s debt crisis.
The Finnish government told parliament that Helsinki and its Dutch allies would block the euro zone’s permanent bailout fund buying bonds in secondary markets, despite an agreement among leaders’ last Friday that the fund could be activated to stabilise markets.
The euro fell and safe-haven German Bunds reversed losses on news of the Finnish statement, which raised fears that the latest deal which drew a positive initial market reaction could be fraying.
Several previous market rallies after euro zone crisis agreements have fizzled within a day or two as investors have fretted about the lack of detail, the risk of delay and national vetoes, or the inadequate size of the rescue funds available.
The 17 euro zone leaders agreed in Brussels on steps to shore up their monetary union and bring down borrowing costs for Spain and Italy, regarded as too big to fail but also too expensive to rescue if they are shut out of markets. They gave few details on the use of the temporary EFSF and permanent ESM rescue funds.
ESM bond buying in secondary markets would require unanimity among euro zone members and that seems unlikely because Finland and the Netherlands are against it, the Finnish government said in a report to a parliamentary committee.
That is essentially true but there is a get-out clause in the ESM’s rules which states that if the European Central Bank and European Commission feel the euro zone was under threat, then the rescue fund could act on the basis of an 85 percent majority vote to do so.
That would leave the Finns and Dutch unable to block.
The report gave no explanation for the apparent volte-face but EU diplomats noted that a Finnish proposal that Spain and Italy should issued covered bonds, backed by state assets or future revenues, to avoid Helsinki having to demand collateral for any bailout loans, failed to find agreement last week.
Prime Minister Jyrki Katainen’s spokesman said the ESM stance had nothing to do with others blocking Finland’s
proposal. Helsinki simply did not consider secondary market purchases an effective way to counter the crisis, he said.
Dutch Prime Minister Mark Rutte said last Friday he was not in favour of using limited rescue fund resources, which run to a maximum of 500 billion euros, to try and turn the bond market.
“The chance of that is very small because I don’t see the point at all of buying on the markets because you need a lot of money to do so,» Rutte said. «The instrument exists but it can only be applied with unanimous support.”
The ECB spent some 210 billion euros ($265 billion) in the last two years to buy Greek, Irish, Portuguese, Spanish and Italian bonds without achieving any lasting improvement.
EU officials said the leaders had agreed in principle that the rescue funds would be empowered to buy bonds both at auction when they are first issued, and on the open market, if a government makes a request and signs a memorandum of understanding on macroeconomic conditions.
A European Commission spokesman also insisted that no changes to the treaty governing the ESM were required to enable the fund to recapitalise banks directly.
He was responding to doubts raised in the Netherlands by legal experts who said the treaty would have to be amended and ratified again.
The Commission’s spokesman on economic and monetary affairs said articles 14-18 of the treaty set out the instruments the European Stability Mechanism has at its disposal to maintain financial stability in the euro area, and stated that its board of governors may decide changes to that list.
“That is our understanding of where we stand on that, that it would not require a change to the treaty,» spokesman Simon O’Connor told a regular news briefing.
Dutch newspaper daily Het Financieele Dagblad quoted legal scholars as saying the Dutch parliament and other national parliaments in Europe would have to ratify the euro zone’s ESM rescue fund again after EU leaders decided to directly capitalise banks from the fund.
Sources close to European Council President Herman Van Rompuy, who chaired last week’s summit, said the leaders had taken great care to avoid any decision that would require ratification because of bitter past experience.
A deal to expand the scope and effective lending capacity of the temporary European Financial Stability Facility (EFSF) last July exacerbated bond market turmoil after a brief rally when it became clear it would take months to ratify.
Finland threw a spanner in the works by demanding collateral on its share of EFSF loans to Greece, requiring months of tricky negotiation, and Slovakia’s coalition government fell apart over the EFSF deal, delaying ratification until mid-October.
Other factors that have spooked investors include the risk of Germany’s powerful constitutional court delaying the entry into force of the ESM and possibly placing restrictions on its scope of action, and the fact that the Brussels summit did not increase the overall size of the rescue funds.
Some investors may calculate that the sums available to support Spain and Italy in the bond market are too small to bring their borrowing costs down in a sustained way.