Finland Wants Collateral for Spanish Bank Aid From EFSF

Finland's Finance Minister Jutta Urpilainen
Finland's Finance Minister Jutta Urpilainen said granting Spain a bailout “will take several weeks, as we need a very precise analysis on the condition of Spanish banks.” Photographer: Henrik Kettunen/Bloomberg

Finland will demand collateral for its share of emergency loans to shore up the Spanish banking system should the money come from the euro-region’s temporary bailout fund, Finance Minister Jutta Urpilainen said.

“It remains undecided whether the bailout will be granted via the temporary facility, in which case Finland will require collateral,” Urpilainen told reporters in Kokkola, Finland, yesterday. The other alternative is to grant the loan through the European Stability Mechanism, the “permanent crisis mechanism, which will provide better security for taxpayers” and won’t result in demands for extra guarantees, Urpilainen said.

Euro-area finance ministers agreed to bail out Spanish banks in a rescue worth as much as 100 billion euros ($125 billion) after the country’s access to market funding narrowed. The exact amount will be decided after an audit of the nation’s banks is complete later this month, Urpilainen said.

Finland demands collateral for payments from the European Financial Stability Facility, the temporary rescue fund, because it lacks a preferred creditor status. The ESM’s preferred status and the rules on private-sector burden sharing in case of default mean the permanent fund is less likely to incur losses, Finnish Finance Ministry aide Martti Salmi said yesterday.

Fund Active

The added security means Finland doesn’t seek collateral for payments by the ESM, Urpilainen said. The ESM is scheduled to become active next month. Using the EFSF as the vehicle for the aid would mean Spain wouldn’t participate in the bailout and other euro members’ contributions would increase, Urpilainen said.

Granting the bailout “will take several weeks, as we need a very precise analysis on the condition of Spanish banks,” Urpilainen said. “Thus it’s possible that the recapitalization will be organized through the permanent mechanism.”

International Monetary Fund Managing Director Christine Lagarde said the potential scale of the aid package to Spain “gives assurance that the financing needs of Spain’s banking system will be fully met.”

Finland was the only nation last year to demand collateral in exchange for its contribution to a second Greek rescue as the government sought to appease bailout-weary voters. The country also threatened to withdraw its backing for the ESM in December over initial plans to drop unanimous voting rules, a move Finland said would compromise national sovereignty.

Of the euro area’s 17 members, Finland, Germany, Luxembourg and the Netherlands have top AAA credit rating. The other countries in the monetary union are Austria, Belgium, Cyprus, Estonia, France, Greece, Ireland, Italy, Malta, Portugal, Slovakia, Slovenia and Spain.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE