Finland Closer to Backing Portugal Aid as True Finns Wait

Finnish Finance Minister Jyrki Katainen
Finnish Finance Minister Jyrki Katainen, seen here, said in an interview, “Countries with an unhealthy pension system are likely to have higher risk premia on debt than the countries where pension systems are sustainable”. Photographer: Hannelore Foerster/Bloomberg

Finland moved closer to supporting a bailout for Portugal as the parliament’s biggest party decided to keep negotiations on Europe’s crisis-handling tools separate from coalition talks with the euro-skeptic True Finns.

The parliament’s grand committee, which comprises party representatives, will decide what Finland’s stance on bailouts should be before a meeting of European Finance Ministers on May 16, two days before official coalition talks start, said Finance Minister Jyrki Katainen, who is leading government negotiations after his National Coalition Party won the most votes in the country’s April 17 election.

“It would be detrimental for Finland to block a bailout,” Katainen told reporters yesterday. “I’m going to defuse this impasse through talks with the parliamentary groups.”

The True Finns, which became Finland’s third-largest party last month, can join a pro-bailout government with a “clear conscience” provided a decision on Portugal is taken before a coalition is formed, party leader Timo Soini said on May 2. The Social Democrats, Finland’s second-biggest party since the election, signaled this week it may back a bailout while the opposition Green League reiterated its support for Europe’s rescue measures.

A `Workaround'

“This is a workaround,” said Tuomo Martikainen, professor emeritus in political science at the University of Helsinki, by phone yesterday. “It allows the parties to save face. Without this measure, a government can’t be formed and the parliament would be in paralysis.”

The spread between Portuguese two-year notes and German bunds of the same maturity narrowed 28 basis points on the news yesterday to 994, the biggest decline since April 6, when the country said it will seek a bailout. The 10-year spread narrowed eight basis points to 630.

Portugal reached an agreement on a 78 billion-euro ($116 billion) bailout, Prime Minister Jose Socrates said in Lisbon yesterday. The three-year plan will give the country more time to reduce its budget deficit after it last month became the third euro member to seek a financial rescue.

Portuguese two-year spreads narrowed 65 basis points today to 929. Socrates didn’t provide details on the interest rate that Portugal will pay for its rescue plan.

Finnish Stance

“If Finland has a stance on” the Portuguese bailout “by May 16, it’s clear we don’t have to negotiate this in government talks,” Katainen said. “Then the laws will be processed in the parliament at a later date.”

Finns are split in their view on bailouts, according to a TNS Gallup Oy survey published yesterday by Helsingin Sanomat. Thirty-eight percent back financial aid, 36 percent are opposed and a quarter undecided. The poll had a margin of error of about 3 percentage points.

Katainen said he still expects any government formed after May 18 to be a “responsible” coalition. Parties have until May 9 to respond to his questions on policy, he said. Government talks were originally scheduled to start on May 9.

Support for the True Finns rose by almost 15 percentage points to 19 percent in last month’s election, after Soini promised to prevent taxpayer funds contributing to more bailouts. Katainen’s pro-Europe National Coalition won 20.4 percent and the Social Democrats had 19.1 percent support.

Support Likely

“Although the euro-skeptic True Finns received a huge increase in votes at the April 17 election, there is a large pro-euro majority in parliament, so that support of the euro-area rescue measure by Finland is likely,” Juergen Michels, chief euro-area economist at Citigroup in London, said in a note.

The Social Democrats, which voted against backing bailouts for Greece and Ireland, said May 2 Finland’s next government needs to be “active” in helping stabilize Europe’s economy and preventing future crises.

“If the True Finns are not in a position to block Portugal, then that is obviously going to be positive,” Michala Marcussen, global head of economics in London at Societe Generale, said by phone yesterday. “The market sees the Finnish issue as being a delaying factor, but not a factor that would potentially put a complete stop to the bailout for Portugal. I think you would have seen a very different market reaction then.”

Constructive Policy

European leaders still need to agree the details of how to bring the region’s 440 billion-euro rescue facility to its full capacity.

“We trust that Finland can and will be part of a decision on the program of economic adjustment for Portugal,” European Commission spokeswoman Amelia Torres told reporters in Brussels yesterday. “We trust Finland will continue pursuing effective and constructive European policy.”

Katainen’s announcement yesterday leaves open the question of whether Finland will ratify the permanent bailout mechanism that Europe’s leaders had hoped to pass in June. Katainen declined to comment on whether he may end up in a government that could block the European Stability Mechanism.

Voters in the euro area’s six AAA rated members are showing signs of dissatisfaction over funding bailouts for Europe’s most indebted countries. German Chancellor Angela Merkel’s Christian Democrats were punished in regional elections as Europe’s biggest economy bears the brunt of funding rescue measures. France’s anti-euro National Front leader Marine Le Pen may win more votes than President Nicolas Sarkozy in the first round of next year’s election, some polls show.

“There’s a concern that what’s happened in Finland is not just a Finnish issue but a broader-based issue in Europe of discontent with the financial assistance programs,” Marcusson said. “The risk is then that it will be harder to reach a permanent facility and leave Europe muddling along with a messy patchwork of solutions.”

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