Finland May Abandon Greek Bailout If Collateral Not Granted, Katainen Says

Finnish Prime Minister Jyrki Katainen said his country may not contribute to a second Greek bailout package if demands for collateral in exchange for new loans aren’t met.

Such an outcome “remains a possibility,” Katainen told reporters after delivering a speech in Helsinki today. “It depends on the collateral issue.”

Finland is at the center of a collateral dispute that threatens to stall Greece’s second rescue package and exacerbate Europe’s debt crisis. Katainen had earlier this month pledged to find a model that satisfies the AAA rated nation’s insistence on extra assurances its bailout funds be repaid without putting other euro members or creditors at a disadvantage.

“The collateral issue is a small detail in a larger package,” Katainen told reporters. “We’re looking for a solution. But we can’t wait forever, as the issue must be resolved in the next few days.”

The euro pared gains and was trading 0.3 percent higher against the dollar at 1.4040 at 1:19 p.m. in London after having risen as much as 1.1 percent earlier in the day.

Greek 10-year yields climbed above 20 percent for the first time. The yield difference, or spread, between Greek 10-year bonds and similar-maturity German bunds widened to a record 1,817 basis points, or 18.17 percentage points. Two-year note yields jumped as much as 111 basis points to 53.42 percent.

Multiple Threats

The deadlock over Finland’s collateral demands is just one of multiple threats to euro-region stability. In Greece, the so- called Troika of the International Monetary Fund, the European Commission and the European Central Bank have delayed their next economic review as the government in Athens predicts a deeper recession. In Italy, the euro region’s third-largest economy, commitment to austerity measures shows signs of wavering.

Finland still wants to be a part of Greece’s bailout, Katainen said in the speech.

The northernmost euro member “must earn its influence inside the European Union,” he said. “Finland’s success depends on the success of the EU.”

Finland, which was forced to abandon an earlier bilateral arrangement with Greece that gave the Nordic country cash collateral, must now find a deal that protects the IMF’s priority creditor status. The Washington D.C.-based fund, which has provided a third of the bailout loans given to Europe so far, would oppose any deal that overlooks its rights, four people with direct knowledge of the matter said last week.

‘Fatal’ for Bailout

The clause on collateral, enshrined in the July 21 decisions by EU leaders, sparked a torrent of criticism after it was unveiled on Aug. 16. Austrian Finance Minister Maria Fekter warned Finland’s deal threatened to “blow up” the region’s rescue mechanism, while Michael Meister, senior finance spokesman for German Chancellor Angela Merkel’s Christian Democrats, said such accords would be “fatal” for the bailout.

A meeting of finance chiefs from three of the euro area’s AAA rated countries failed to break the deadlock yesterday, Dutch Finance Minister Jan Kees de Jager said.

“Technical” issues remain unresolved, De Jager told reporters in Berlin late yesterday after he met with German Finance Minister Wolfgang Schaeuble and Finnish Finance Minister Jutta Urpilainen. Any Finnish accord needs to be approved by all euro members.

Finland’s share of the second Greek rescue is 1.94 percent of the total estimated euro members’ contribution of 73 billion euros ($102 billion) that will be made through the European Financial Stability Facility. The Nordic nation gave Greece a 1.5 billion-euro bilateral loan in the first bailout.

‘Can’t Afford to Fail’

Europe can’t allow itself to keep failing in its efforts to enforce fiscal responsibility and end a debt crisis that shows signs of deepening, Katainen said.

“The best medicine for the euro area crisis would be a transparent program from each country with concrete measures and a schedule for balancing the budget, reducing debt and increasing competitiveness,” Katainen said. “Italy, Spain and France are drawing up such programs and I hope these programs win the markets’ trust. We can’t afford to fail anymore.”

Joint liability such as the introduction of common euro bonds is no answer, he said.

De Jager said that the next tranche of money can’t be paid out to Greece unless the Greek government complies with the terms of its aid package, echoing comments made to German lawmakers by Schaeuble.

“What’s holding up everything in the present situation is Greece and whether or not they are compliant in the current program,” De Jager said. “We are very confident that if it is on the table we will solve” the collateral dispute, which relates to the second Greek bailout, not the current aid package. “Much more urgent is the issue of compliance.”

To contact the reporter on this story: Kati Pohjanpalo in Helsinki at kpojanpalo@bloomberg.net.

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net.

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.