Finland’s collateral demands and bailout fatigue

Finland?s demand for collateral on new Greek loans leaves European leaders with two choices: accept the AAA rated nation?s terms and risk the rescue plan, or reject collateral and help bring Finnish euro-skeptics to power.

Prime Minister Jyrki Katainen ?can?t back down on the collateral demand as his government would likely collapse,? said Timo Tyrvaeinen, Chief Economist at Aktia Oyj in Helsinki. ?That could mean new elections quite soon? and risk the euro- skeptic Finns party, which has rejected all bailouts, coming to power.

Luxembourg Prime Minister Jean-Claude Juncker, who also chairs the euro-area finance meetings, said yesterday he was ?confident? an agreement could be reached by mid-September, while criticizing the call for collateral. ?I don?t like this mechanism and I don?t like the bilateral arrangements,? he told the European Parliament?s economic committee in Brussels, referring to Finland?s agreement with Greece for protection.

Collateral accords would be ?fatal? for bailout aid, said Michael Meister, the senior finance and economy spokesman for German Chancellor Angela Merkel?s Christian Democrats, in Berlin today. Euro-area governments ?must talk to Finland? about its demands, he said.

The collateral flap reflects the bailout fatigue that is spreading in the more fiscally prudent countries of northern Europe, fueling support for political parties opposed to aid to the region?s more profligate members. National politics is increasingly at odds with efforts to forge European unity, complicating a comprehensive response to the debt crisis that now threatens Spain, Italy and France.

Political discussions at an informal meeting of euro zone finance ministers are needed to resolve the issue, Austria?s Finance Minister Maria Fekter said in Vienna today. ?It is emerging that the civil servants alone aren?t coming up with a solution.?

EU leaders initially agreed toKatainen?s demands for protection at the July 21 summit that hashed out the 159 billion-euro ($231 billion) rescue for Greece. Then details of the collateral deal Finland negotiated with Greece emerged this month, triggering a backlash and demands for similar treatment from nations including Austria and the Netherlands, threatening to delay or scupper the Greek plan.

Far from resolving the debt crisis, contagion continued after the summit and the European Central Bank began buying Spanish and Italian bonds to help bring down yields that reached euro-era records. Divisions over collateral contributed to a further slump in Greek bonds with the yield on the country?s two-year notes topping 45 percent yesterday.

?What?s at stake is ultimately, if you were to put this to the extreme, the entire second rescue package for Greece by the euro area,? Frank Engels, co-head of European economy at Barclays Capital in Frankfurt, said by phone on Aug. 26.

Merkel also faces a growing storm in her coalition over the bailouts of Greece, Portugal and Ireland. Her Free Democratic Party coalition partner has threatened to oppose the start of a permanent EU bailout mechanism set to take effect in 2013.

Anti-bailout forces were already on the ascendency in Finland prior to the new Greek deal. It took Katainen two months and he needed backing of six parties to build a ruling coalition after winning elections in April that saw a surge in support for the Finns party. Finance Minister Jutta Urpilainen, who heads the Social Democrats, campaigned on the collateral issues as she tried to beat back the challenge from the Finns, who emerged as the third-biggest party in the vote.

It would be ?totally irresponsible? of the Finnish government ?to throw in the towel? and back down on its demands, Urpilainen said on Aug. 25. Her Social Democratic party is the second-biggest in the coalition.

Finland responded to the criticism from its EU partners, by offering to broaden a collateral deal to include other nations who might want similar protection.

Extending the deal could ?blow-up? the rescue plan, Austria?s Fekter said on Aug. 18. European Commission spokesman Amadeu Altafaj said on Aug. 19 that the EU must avoid ?excessive collateralization? in the Greek bailout.

All discussions on resolving the issue of collateral will be in line with July 21 decisions, the Greek Finance Ministry said in an e-mailed statement today.

Greece received a three-year, 110 billion-euro rescue in 2010 from the European Union and International Monetary Fund that anticipated the country returning to financial markets next year. With its 10-year bond yielding about 18 percent, financing in the markets proved unrealistic and the EU was forced to draw up a second rescue package to fully fund Greece for three years.

?It?s getting very tight in terms of the time lines? for approving the economic measures to stabilize the region, Engels said. ?By end September we could be very close to agreement on all this and then move forward, if there is a willingness to agree on this, that is a big ?if? I think.?