Finland is contesting the wording of an agreement struck last week in Brussels, arguing it doesn’t adequately address the possibility that loans to Spain from Europe’s permanent rescue fund can give taxpayers seniority.
A June 29 statement from the 17 euro-area leaders stripping the European Stability Mechanism of its preferred creditor status in Spain was incomplete, said Martti Salmi, a Finnish Finance Ministry official. The 100 billion-euro ($126 billion) bank bailout could provide seniority to contributor nations if fresh funds are transferred by the ESM, he said.
Last week’s release out of Brussels “gives the impression that the entire bailout is without seniority,” Salmi, a director at the Finance Ministry under Jutta Urpilainen, said in a phone interview yesterday. “This is not the case exactly.”
Since euro-area leaders emerged from last week’s summit with a list of measures to stem the debt crisis, Finland and the Netherlands have cast doubt over the success of the talks by signaling disagreement with a number of key points. The government of Prime Minister Jyrki Katainen this week underscored its opposition to using the ESM to purchase bonds on the secondary market, while Finland has also said it expects collateral in exchange for any aid commitments that don’t give it preferred creditor status.
“We reaffirm that the financial assistance will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status,” euro leaders said of Spain’s bailout in their June 29 statement. The release was incomplete, Salmi said.
European Union President Herman Van Rompuy also addressed the point in his post-summit press briefing. “Financial assistance to Spain will be provided without seniority status for the financing provided by the EFSF/ESM,” he said.
That’s not air-tight, according to Salmi.
It’s “technically possible” that some part of Spain’s rescue would be paid directly from the permanent bailout fund, Salmi said. Taxpayers would have seniority in that event, he said.
“After the June summit, the market took at face value the drop of the seniority rule, as well as the ESM’s bond buying and direct bank recapitalization roles,” Thomas Costerg, an economist at Standard Chartered Bank, said in an e-mailed response to Salmi’s comments. “The reality might be more complex” and people are starting “to realize that many details still need to be sorted out.”
That means that the July 9 euro group meeting, at which the bloc’s finance ministers will meet to fine tune the summit’s conclusions, “could be more tumultuous than expected,” Costerg said.
Euro-area leaders sought to ease the terms of Spain’s bank bailout by assuring bondholders their claims won’t be junior to those of taxpayers. Last week’s summit also brought Europe closer to a fiscal and financial union. The measures sent Spanish bonds higher amid confidence the crisis won’t spin out of control.
Euro-area finance ministers may decide on July 9 whether the entire Spanish bailout will come from the EFSF, according to Salmi. Use of the temporary fund means Finland will demand collateral, a privilege the country has already paid for after agreeing to forgo any profits the EFSF may generate, he said. Finland also agreed to make its contribution to the ESM up front as a condition for receiving collateral. The country has yet to make that transfer, according to the Finnish Treasury.
What the collateral from Spain will be “remains to be seen,” Salmi said. “Greece is of course a kind of precedent.” Some preliminary talks with Spain’s government on collateral have already started, he said.
Finland, one of only four AAA rated nations left in the euro area, threatened to hamper efforts to agree on a second bailout for Greece by insisting on extra security last year. The Nordic country was the only nation to negotiate collateral in exchange for loans from the temporary fund because the vehicle doesn’t give its creditors preferred status.
Voters in Finland, which kept its deficit within the EU’s 3 percent threshold even as its economy contracted 8.4 percent in 2009, rewarded groups critical of Europe’s rescue mechanisms in April 2011 elections, when the anti-euro “The Finns” party become the nation’s third-largest.
“Finland’s requests might start to resonate with electorates in other northern countries, who could feel that assistance to southern countries has already reached its limits, especially if economic conditions deteriorate at home,” Costerg said. Finland’s request for collateral could also raise the cost of the bailout, he said.
Inside the euro area, Finland shares its top credit rating with Germany, Luxembourg and the Netherlands at the three main rating companies. The other countries in the monetary union are Austria, Belgium, Cyprus, Estonia, France, Greece, Ireland, Italy, Malta, Portugal, Slovakia, Slovenia and Spain.
Finland’s government on July 2 reiterated its opposition to secondary market bond purchases using the ESM, citing the rescue fund’s limited resources and what it called the proven “ineffectiveness” of such measures. Such interventions could cost as much as “hundreds of billions of euros,” and be a deal-breaker for Finland, Salmi said.
Evoking an emergency-voting clause to override unanimous decision-making and enable bond buying would be moot in the event of a real emergency because such purchases wouldn’t be enough to sustain the euro economy, Salmi said.
“Our interpretation of this is that it’s very hard to see that the existence of the euro area would depend on starting or not starting a bond purchase program,” he said.
The Netherlands also underlined its skepticism toward bond purchases as the government of Prime Minister Mark Rutte said “any request for the use of this instrument will be done on a case-by-case basis,” in a letter to parliament today.
“We think it’s quite unlikely that some member countries would think it sensible to ignore the views of others, because that could have consequences,” he said. “All parties here are playing hard ball.”
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