Bloomberg News

Finland Firm on Collateral as Spain Aid Terms Discussed

July 03, 2012

Finland underlined its determination to get collateral in exchange for loans to Spain’s banks as the Nordic country targets similar terms to those won last year on its contribution to Greece’s second bailout.

“We have the requirements of collateral on the loans that are from the temporary vehicle,” Jukka Pekkarinen, director general at the Finnish Finance Ministry in Helsinki, said in an interview in Oslo yesterday. “The details are still open, but the principle standpoint is the same” as in the case of Greece, he said.

Euro-area nations agreed in Brussels last week to ease the terms of Spain’s bank bailout after the country’s borrowing costs soared above 7 percent. Finland is fighting its corner to reassure taxpayers they’re no worse off after euro-zone leaders decided Spain’s emergency loan of as much as 100 billion euros ($126 billion) won’t give preferred status to contributor countries. Finland has demanded collateral for any loans that don’t give taxpayers seniority.

“In negotiations everything can happen,” Pekkarinen said. “That is a kind of substitute for the seniority.”

Leaders of the 17 euro countries agreed that crisis loans to Spain’s banks will be made through the euro region’s temporary bailout fund and, when it becomes available, transferred to the European Stability Mechanism without gaining seniority status.

Collateral Demand

Finland, one of only four AAA rated nations left in the euro area, threatened to hamper efforts to agree on a second bailout for Greece by insisting on collateral last year. The Nordic country was the only nation to negotiate security in exchange for loans from the temporary fund, or the European Financial Stability Facility, because the vehicle doesn’t give its creditors preferred status.

“I think this has to do a lot with domestic politics in Finland, because the government has been promising that they don’t want to lend money without collateral,” Jussi Hiljanen, head of fixed income research at SEB AB in Stockholm said by phone.

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.

Top Rating

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.

The Nordic country yesterday questioned the ability of the permanent rescue fund, the ESM, to purchase bonds through the secondary market. Finland, which opposes such purchases, argues the process would require unanimity inside the euro area to be possible.

There exists no unanimous agreement on the bond purchases because Finland and the Netherlands reject the model, the Finnish government said in a report dated June 29 and presented yesterday by Prime Minister Jyrki Katainen to the parliament’s Grand Committee in Helsinki. The government reiterated its opposition today, citing the rescue funds’ limited resources and the shown “ineffectiveness” of bond purchases.

Can’t Block

Spain’s Economy Minister Luis de Guindos said today that the two countries won’t be able to block Spain from receiving aid via the euro region’s permanent rescue fund.

“There is a fundamental point in the ESM and that is that decisions are taken with a qualified majority, not unanimously,” de Guindos told journalists in Madrid. “I don’t want to go into calculations but Holland and Finland won’t have the capacity to block an agreement.”

The rules of the ESM include an emergency voting procedure, which requires a qualified majority of 85 percent of the votes cast if the European Commission and the European Central Bank see a threat to the economic and financial sustainability of the euro area. Finland’s parliament voted on June 21 to approve the permanent bailout fund and the Dutch upper house of parliament approved it today.

German Chancellor Angela Merkel declined to take sides in the dispute over sovereign-bond buying, saying “we have to respect” Finland’s opposition to such aid. Conditions for emergency financial aid to euro countries will be decided case by case, she said in Berlin today.

Sovereign bond purchases by the region’s permanent rescue fund could reduce pressure on rising yields, which have threatened to cut off Spain’s access to bond markets. The country’s borrowing costs declined after the decision last week to ease repayment rules for emergency loans to banks in the euro area’s fourth-biggest economy.

“I have difficulties in seeing that Finland could be a show-stopper on these issues when it comes to the Spanish package,” said Hiljanen.

To contact the reporter on this story: Josiane Kremer in Oslo at jkremer4@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net


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