Finland’s Collateral Demand Hampers Bailout Exits, Rehn Says

Finland’s demand for safeguards on loans to fellow euro members is stopping Portugal from taking a credit line to help exit its bailout, according to European Commissioner for Economic and Monetary Affairs Olli Rehn.

“Finland’s collateral demand had a negative impact on Ireland’s consideration and is having an impact on Portugal’s consideration,” Rehn told reporters in Helsinki today. “For these countries, it’s in practice politically more sensible to make a clean exit from the program, even though it’s economically more risky.”

Five euro-area countries received international bailouts since 2010 as policy makers battled to stop the monetary union from crumbling under market pressure. Finland’s government has required collateral for any loans that don’t treat it as a preferred creditor, following a 2011 campaign pledge by Finance Minister Jutta Urpilainen. Urpilainen declined to comment, according to a message relayed by her spokesman.

“Over the past few years, Finland has assumed a contrarian stance without gaining any particular benefit from it just to show the domestic audience we are being strict in European decision making,” Rehn said. “We need to choose the issues where we should be strict and push forward things that are significant for Finland.”

Program Exits

Ireland exited its bailout in December without a precautionary credit line, which has strings attached, such as fees and foreign oversight of budgets. Portugal’s aid program is due to end May 17. Greece is close to selling its first bond since 2010, the Finance Ministry said today.

“A precautionary credit line like by the International Monetary Fund would generally be a better way to exit a bailout so that there would be a facility to draw upon if the situation worsens,” Rehn said. “Usually it doesn’t need to be used because the markets know it’s there.”

Finland negotiated total return swap contracts with Greece to cover its share of the Hellenic country’s second bailout in 2012 as well as with Spain to allow it to join the bank rescue. It received 1.22 billion euros ($1.68 billion) in collateral, invested in top-rated sovereign bonds in the euro area, according to the Finance Ministry. Payments from the permanent European Stability Mechanism give creditors a preferred status and Finland has required no collateral for them.

“The debate over the Greek collateral was quite a waste of political capital,” Rehn said. “I hope that Finland’s next government could reconsider” its stance on collateral, “because it’s against the interests of both Finland and Europe.”

Rehn is currently on leave from his job as commissioner to campaign for the May 22-25 European Parliament elections. He’s running as a candidate of the Finnish Center Party, part of the Alliance of Liberals and Democrats for Europe, for whom Rehn is a lead candidate with Guy Verhofstadt.

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