Finland’s victory in securing Greek collateral saved the government’s face. It may fail to protect Finnish taxpayers from the costs of funding the next bailout.
“The value of the deal is in the eye of the beholder,” Ville Pernaa, head of the Center for Parliamentary Studies at the University or Turku, west of Helsinki, said in an interview. “But this isn’t really what Finland sought to begin with.”
The northernmost euro member’s insistence it get collateral had threatened to derail Europe’s crisis-management efforts and spread disgruntlement as other euro nations sought similar terms. Finland, one of only six AAA rated euro members, was forced to abandon a bilateral deal with Greece granting it cash collateral, and has instead been cornered into accepting an arrangement that renders its claims junior to a number of other creditors.
The government’s failure to deliver a better deal to Finland’s bailout-weary voters may fuel support for the country’s euro-skeptic bloc, already the third-biggest in the parliament.
“The Finns” party, whose leader Timo Soini says Greece should be allowed to default and calls the euro a failed experiment, is the country’s second-most popular after Prime Minister Jyrki Katainen’s National Coalition party, according to a Sept. 8 poll by newspaper Helsingin Sanomat.
The watered-down collateral arrangement “is an incessant source of rhetoric for Soini,” Pernaa said. “It makes it easy for him to keep delivering the message that the system doesn’t work.”
Under the accord, Greek bonds will be transferred from Greek banks to a trustee, which will sell them and invest the proceeds in AAA rated bonds with maturities of 15 to 30 years.
“The arrangement is sufficiently unattractive to ensure that none of the other AAA rated countries will follow Finland,” Morten Hessner, a senior analyst at Nykredit A/S in Copenhagen, said in a note.
Finance Minister Jutta Urpilainen said she navigated a “jungle” of hurdles in achieving a collateral accord “that would be acceptable to all euro countries and that would of course first and foremost be good from Finland’s point of view,” at a meeting of European finance ministers in Luxembourg yesterday.
In exchange for the special treatment, Finland will speed its payments into a planned permanent rescue fund and forgo a share of profits from loans granted by the European Financial Stability Facility. Collateral wouldn’t cover its entire Greek exposure. In the event of default, it couldn’t cash in on the collateral until Greece’s official loans mature, a wait that might last 30 years.
Finland won’t be protected from losses if Greek bonds suffer a haircut bigger than 40 percent, said Pasi Kuoppamaeki, chief economist at Sampo Bank, a unit of Danske Bank A/S, in Helsinki. “A 40 percent haircut isn’t big enough to bring Greece’s debt ratio to a level markets find credible,” he said. “Greek bonds need a 50 percent haircut or more.”
The financial structure behind Finland’s collateral deal is “complicated,” said EFSF Chief Executive Officer Klaus Regling, who brokered the arrangement. He and Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of euro-area finance ministers, said Finland is the only country likely to take advantage of it.
The compromise shows “even the people with the money have no clue what to do,” Peter Tchir, founder of hedge fund TF Market Advisors in New York, said by e-mail.
“Until Europe is willing to address the reality of the situation and take some simple but painful steps rather than complex, unworkable ones that sound good but do nothing, the problems will increase,” Tchir said.
Finland’s 10-year bond yields jumped seven basis points, the most in a week, to 2.26 percent today. Two-year yields gained four basis points to 0.61 percent. The euro lost 0.3 percent to 1.3304 against the dollar as of 2:04 p.m. in London.
Dutch Finance Minister Jan Kees de Jager said the Netherlands is unlikely to request any collateral. Austrian Finance Minister Maria Fekter said the model isn’t “so attractive” for her country.
“Over the summer and autumn, Finnish politicians have gradually come to the conclusion that it’s not possible to hit the jackpot at the expense of other euro countries,” Pernaa said. “This is more of an escape clause.”
Katainen’s six-party government has had to balance Finnish voter resentment over funding more bailouts against the risk of damaging the Nordic country’s standing as a responsible member of the euro area. The collateral spat “will leave a mark on Finland’s reputation” in the union, Katainen said yesterday.
Finance Minister Urpilainen, whose Social Democrat Party had pushed hardest for the collateral, said the episode won’t “leave any permanent mark on Finland’s reputation,” at a press briefing with reporters in Helsinki today. “Quite the opposite in fact. Each country has its own important goals and defends its national interests.”
The difference between Finland’s 10-year government bond yield and yields on similar maturity German bunds was little changed today at 47 basis points. That’s the second-narrowest spread in the euro area after the Netherlands.
The country’s share of the second Greek rescue is 1.94 percent of the total estimated euro members’ contribution of 73 billion euros ($96 billion) to be made through the EFSF. The Nordic nation gave Greece a 1.5 billion-euro bilateral loan in the first bailout.
“Finland has spent a lot of political capital in pushing this collateral deal,” Kuoppamaeki said. “That may make it hard in the future for Finland to get what it wants.”