Finnish Prime Minister Jyrki Katainen said Europe has managed to avert a deepening of the debt crisis as he prepares to explain Spain’s bailout to taxpayers at home.
“In politics, it’s not always easy, but we have to be ready to take responsible actions even if they are difficult to understand, and they are very difficult,” Katainen told reporters yesterday at a meeting of Nordic prime ministers in Aa, a fishing village on the Lofoten Islands in northern Norway. “So far we have managed to avoid a total mess, even though decisions have been very difficult.”
Spain this weekend became the fourth euro member to seek a bailout as the bloc’s finance ministers agreed to provide as much as 100 billion euros ($125 billion) to save the country’s banks. Katainen, whose government will demand collateral if the loan is transferred via Europe’s temporary rescue fund, has struggled to win backing in his six-party coalition to endorse more aid. While Europe’s failure to stem the crisis is lamentable, withdrawing support isn’t an option, he said.
“It is frustrating for ordinary citizens, but it is also frustrating for the politicians,” Katainen said. “But we always have to choose the smaller risk. We have to do whatever it takes to safeguard the stability within the euro area.”
Yields on the 10-year bonds of Spain, Italy, Portugal and Greece eased today. The yield on Spain’s 5.85 percent note due 2022 fell 17 basis points to 6.05 percent. Borrowing costs on similar-maturity German debt rose five basis points to 1.38 percent. Finnish 10-year yields also gained five basis points to 1.71 percent.
The cost of euro-area bailouts has ballooned since the bloc’s debt crisis started at the end of 2009. The rescue package for the currency area’s fourth-largest economy adds to the 386 billion euros in pledges to Greece, Ireland and Portugal that European governments and the International Monetary Fund have made since 2010. Spain is twice the size of those three economies combined.
Euro-area leaders haven’t yet decided whether the temporary European Financial Stability Facility or its permanent successor, the European Stability Mechanism, will be used to pay for Spain’s loan. Granting the bailout “will take several weeks, as we need a very precise analysis on the condition of Spanish banks,” Finnish Finance Minister Jutta Urpilainen said on June 9. “It’s possible that the recapitalization will be organized through the permanent mechanism,” she said.
Finland, one of only four AAA rated nations left in the 17-member euro area, demands collateral for loans to the temporary fund because the vehicle doesn’t give its creditors preferred status. Should the ESM provide Spain’s loan, its contributors would be senior to holders of outstanding government debt, though they’d be junior to the International Monetary Fund. The ESM is due to become operational next month.
The collateral clause was pushed by Urpilainen, who leads the Social Democrat Party. Voters in Finland, which kept its deficit within the European Union’s 3 percent threshold even as its economy contracted 8.4 percent in 2009, rewarded groups critical of Europe’s rescue mechanism in April 2011 elections, when the anti-euro “The Finns” party become the nation’s third-largest.
Katainen underlined his government’s commitment to Europe’s crisis-fighting efforts as the turmoil threatens to splinter the 13-year-old region. Pledging support to Spain before Greece’s June 17 elections was crucial, he said. The currency bloc’s most indebted nation faces the prospect of exiting the euro should anti-austerity parties form a government in Athens.
“Of course it is always frustrating to see that the crisis will continue no matter what you are doing,” Katainen said.
Spain’s loan will be channeled through its state-run FROB bank-rescue fund, and will add to the country’s debt, which the European Commission estimates reached 68.5 percent of gross domestic product last year. Should Spain request the maximum amount, it would add about 10 percentage points to that number.
Inside the euro area, Finland shares its top credit rating with Germany, Luxembourg and the Netherlands. The other countries in the monetary union are Austria, Belgium, Cyprus, Estonia, France, Greece, Ireland, Italy, Malta, Portugal, Slovakia, Slovenia and Spain.
Katainen distinguished between Spain, which he said had shown commitment to budget deficit reduction, and euro nations in a worse state.
“The Spanish government has done a good job bringing the deficit down and strengthening the competitiveness,” Katainen said in response to Bloomberg questions after the press conference. “The banks have caused a threat to the work that the government has done. Now it is important to do whatever it takes to help the Spanish government to solve the banking recapitalization problem in order to avoid serious trouble with the government itself.”