Finnish Vote Dents Euro Area’s Debt-Crisis Shield, Analysts Say
Finnish Vote Dents Euro Area’s Debt-Crisis Shield, Analysts
Markku Ulander/AFP/Getty Images
The European Union may have to work around Finnish opposition to the rescue of Portugal while facing new hurdles to a reinforced bailout system, say analysts.
The European Union may have to work around Finnish opposition to the rescue of Portugal while facing new hurdles to a reinforced bailout system, say analysts. Photographer: Markku Ulander/AFP/Getty Images
April 18 (Bloomberg) -- Ulla-Maj Wideroos, a former minister in Finland's Finance Department, talks about the prospects for the country supporting the Portuguese bailout package after the euro-skeptic True Finns jumped almost 15 points to 19 percent in the Finnish elections. She speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)
The European Union may have to work around Finnish opposition to the rescue of Portugal while facing new hurdles to a reinforced bailout system, say analysts including Guntram Wolff of the Bruegel research institute.
The EU’s ability to plug possible holes in the safety net for the government in Lisbon would still leave a euro-skeptic Finnish administration in a position to block the euro area’s blueprint to counter debt crises.
The EU plans 80 billion euros ($114 billion) of aid for Portugal as Finland prepares to form a government that may include the True Finns party, which criticized the rescues of Greece and Ireland and may enter government after finishing third in the April 17 vote. That prospect added to mounting concerns of a Greek default to trigger a drop in the euro and debt of nations at Europe’s periphery.
The election “is a sign that the willingness of the northern countries to increase the size of the bailout mechanism has decreased,” Wolff, a research fellow at Bruegel in Brussels, said in a telephone interview. “It adds to the political uncertainty and makes it likely that bond spreads will continue to be elevated.”
Portuguese and Greek government bonds slumped yesterday, pushing two- and 10-year yields to euro-era records. The euro lost 1.6 percent against the dollar, the most in almost four months.
EU nations in the North face growing voter unhappiness about taxpayer-funded aid for debt-laden euro-area countries, undermining attempts to draw a line under the financial crisis. Before Finns voted, German Chancellor Angela Merkel’s party lost regional elections as domestic resistance grew to bailouts of distressed euro countries.
Backlash
The voter backlash in richer euro countries may undermine the euro area’s plans to raise to the maximum 440 billion euros the lending capacity of the European Financial Stability Facility, whose need for buffers to secure a AAA credit rating now caps possible aid from the facility at around 250 billion euros. That step needs domestic approval in euro-area nations including Finland, which is one of the region’s six AAA rated countries backing the EFSF.
The public resentment may also undermine a March EU agreement to replace the EFSF with a permanent debt-crisis mechanism starting in 2013. That too needs parliamentary support in euro nations.
Finland’s election result “will make it harder for the region to provide support for the periphery,” David Mackie, chief European economist at JPMorgan Chase & Co. in London, said in a research note. “This result will clearly add to the uncertainty and volatility that the euro area is experiencing.”
Finnish Veto Possible
The next Finnish government could veto the EFSF share of a rescue package for Portugal or future EFSF aid for the country. Finland isn’t able under current practices to opt out as a guarantor of the EFSF because that right is given only to euro- area nations that receive aid from the facility, according to EFSF spokesman Christof Roche. Finland accounts for around 2 percent of the EFSF’s 440 billion euros in guarantees.
Other European countries would combine to plug holes in the planned bailout for Portugal in case the new Finnish government won’t pay its share, an EU official said.
In an understanding last year, euro leaders vowed to prevent one country from blocking aid, said the official, who declined to be named because the accord isn’t in writing.
A precedent exists in the Greek package of national and IMF loans approved last year before the creation of the EFSF. When Slovakia backed out of providing its share of the 110 billion euros in loans, the remaining euro-area governments made up the difference. The Slovak government also threatened to withhold its support for the EFSF before succumbing to euro-area demands to respect a pledge to sign up.
True Finns
The True Finns, whose leader is Timo Soini, jumped almost 15 points to 19 percent in Finland’s vote. Offsetting that result, Finance Minister Jyrki Katainen’s pro-Europe National Coalition won 20.4 percent to become Finland’s biggest party for the first time. The Social Democrats, which also opposed the bailouts for Greece and Ireland, won 19.1 percent.
Katainen has pledged to work only with parties that support the euro area’s rescue tools, saying “Finland has always been a responsible European Union country” and “I’m convinced the new government, whoever is in it, will want to continue this policy.”
The True Finns will seek a majority that allows them to renegotiate Finnish participation in the euro region’s rescue system, according to Soini, who said: “Our money shouldn’t be thrown into mechanisms that don’t work.”
EU View
The European Commission, the 27-nation EU’s executive arm, said the Finnish election results have no impact on its preparation with the European Central Bank and International Monetary Fund of an aid package for Portugal.
“It hasn’t changed anything for us,” said Pia Ahrenkilde- Hansen, spokeswoman for commission President Jose Barroso. “We are fully confident that Finland will continue to honor its commitment.”
Mackie and Wolff said they doubt the next Finnish government would veto an aid package for Portugal. The euro area aims to reach an accord on a Portuguese rescue on May 16, three days before a new Finnish government is tentatively scheduled to be appointed.
“Our view is that a new Finnish government would not veto EFSF support for Portugal, but it might argue for much tougher conditionality,” said Mackie. Wolff also said Finland may insist on extra aid conditions for Portugal.
To contact the reporters on this story: Jonathan Stearns in Brussels at jstearns2@bloomberg.net; James G. Neuger in Brussels at jneuger@bloomberg.net
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net
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