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Finland Rejects Talk of Euro Exit After Backing Spain Rescue

July 20, 2012

Finland Rejects Talk of Euro Exit After Backing Spain Rescue

Finland, one of four remaining AAA rated euro nations, this week reached a deal with Spain to get collateral for its guarantees, signaling it’s prepared to back the bloc as it strives for more integration. Photographer: Simon Dawson/Bloomberg

Finnish Prime Minister Jyrki Katainen dismissed speculation his government is considering dropping the euro should the debt crisis deepen after the Nordic nation’s parliament agreed to back a Spanish bank bailout.

“We will not and do not consider exiting the euro,” the premier said today in an interview in Helsinki. “We want to be at the heart of European development. A stronger euro, a better euro is the only, and reasonable, thing for Finland.”

Finland’s demand that bailouts come with strict terms such as austerity and burden sharing, coupled with Katainen’s rejection of common bonds, has prompted economists including Nouriel Roubini to suggest the nation may ultimately quit the euro in protest.

The northernmost euro member today sanctioned the Spanish bailout, as parliament interrupted its summer break for the first time in 50 years to guarantee a part of Spain’s 100 billion-euro ($122.6 billion) bank rescue. Finland, one of four remaining AAA rated euro nations, this week reached a deal with Spain to get collateral for its guarantees, signaling it’s prepared to back the bloc as it strives for more integration.

Euro area finance ministers also gave final approval today to the Spanish assistance, paving the way for the European Financial Stability Facility to raise 30 billion euros to be held in reserve for the banks, which will be able to receive payments after submitting approved restructuring plans.

‘Unpopular’

“We believe that we need to a certain extent more integration,” Katainen said. “It doesn’t mean mutualizing liabilities, but it means we have to have better rules.”

Finland, which saw the anti-bailout party the “The Finns” become the third-biggest in elections in 2011, also demanded collateral to back a second bailout for Greece last year. It was not an easy decision to back Spain, Katainen said.

“It was a necessary decision to take, even though it’s very hard,” he said. “It’s unpopular, but we have to take responsible moves and steps because the economic situation is so challenging.”

Sales abroad account for about 40 percent of Finland’s economy, and a third of its exports go to the single-currency bloc. That dependence means a direct hit on the economy from a decline in demand for Finnish goods. The economy contracted 8.5 percent in 2009 when the post-Lehman Brothers Holdings Inc. credit crunch led to the collapse in trade worldwide.

Misplaced Concerns

Concerns that Finland might abandon the single currency are “largely misplaced,” Jan von Gerich, chief fixed-income analyst at Nordea Bank AB (NDA) in Helsinki, said in a note to clients today. “For now, there is no real alternative, and one will not be found quickly either.”

The current crisis has caused a widening rift between sovereign bond yields within the euro area. Finland’s two-year yields fell below zero for the first time this week, as the country joined Germany in being paid to hold investors’ money for that long. Spain’s two-year debt yields 5.35 percent and Italy’s 3.75 percent.

Katainen rejected that the idea that low borrowing costs would compensate for the decline in demand.

“Finland isn’t benefiting from the crisis,” he said. “We’re an export-driven economy and once the European market isn’t doing well, we suffer a lot.”

“The Finns” surge in the elections in April last year put Finland’s commitment to the bloc to the test and pushed Finance Minister Jutta Urpilainen’s Social Democrats to demand extra security in any bailouts. Katainen agreed after two months of talks, forming his six-party coalition.

No Concessions

“Finland is likely to continue to act as a counterweight to growing demands for less onerous bailouts and greater support for the peripheral economies,” Ben May, European economist at London-based Capital Economics Ltd, wrote in a note yesterday. The demand for collateral from Spain “suggests that Finland remains in no mood to offer major concessions to the euro zone’s peripheral economies.”

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.

Finland’s stance toward bailouts has been consistent since Katainen’s cabinet was sworn in a year ago, von Gerich said.

“Despite Finland playing hard ball regarding future aid packages, the country remains very committed to the euro project,” he said.

To contact the reporter on this story: Kati Pohjanpalo in Helsinki at kpohjanpalo@bloomberg.net

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


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