Monday

29th Aug 2016

Finland threatens summit deal over bailout fund

Finland is rejecting a just-agreed deal on letting the eurozone's permanent bailout fund (ESM) buy government bonds on the open market, a change meant to lower Italy and Spain's borrowing costs.

Markets' post-summit euphoria was dealt a blow on Monday (2 July) after a senior Finnish official briefed journalists in Helsinki about the government's position.

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  • Finnish Prime Minister Jyrki Katainen - under fire at home for signing up to the summit deal (Photo: consilium.europa.eu)

"Finland finds it an inefficient way to stabilise markets," the source was quoted as saying by several news wires.

A report outlining the Finnish government's position delivered to the parliament on Monday said: "Due to intervention of Finland and, among others, the Netherlands, the possibility of ESM operations in the secondary markets was blocked."

Finnish Prime Minister Jyrki Katainen came under fire from opposition MPs claiming that he had overstepped his mandate in agreeing to the deal struck at last week's summit in Brussels. Under the agreement, the ESM may eventually recapitalise banks directly and buy up bonds.

"The information war has been frenzied and they could have got the wrong idea," Katainen said. He noted that all these novelties would not come into force before a single supervisory authority for eurozone banks is established (a German condition).

"In that case, it will be possible, if there is unanimous agreement, to capitalize banks directly. And in exchange, owners would lose their money and the (bailout fund) would gain holdings in the banks," he explained.

A spokesman for the EU commission on Monday explained that unanimity of the 17 countries in the eurozone - represented on the ESM board - is required for the changes to come into force.

Dutch opposition too

The Netherlands meanwhile also signalled it would oppose bond-purchasing action on the secondary markets where bonds are traded freely, as opposed to primary markets where buyers trade with governments directly.

“The Prime Minister said on 29 June he is not in favour of buying up bonds. Using the existing instruments to buy up bonds will be expensive and can only be done if there is unanimity. That means the Netherlands would need to vote in favour," Niels Redeker, a spokesman for the Dutch finance ministry said.

In last week's conclusions, eurozone leaders, including the Finnish and Dutch, said they had agreed to deploy the existing and future bailout funds "in a flexible and efficient manner in order to stabilise markets" for countries that are not bailed out but that are experience market pressure - a clear reference to Italy.

Under existing rules, the temporary bailout fund (EFSF) can be used to buy up bonds on secondary markets, following a request by a country which then signs up to a memorandum of understanding outlining the deadlines for the economic reforms it has to pursue.

The only concession Italy gained from Germany, who opposed any relaxation of those rules, was for the International Monetary Fund not to be involved.

But Finland and the Netherlands are sceptical that the bailout fund, which has only €240 billion left, out of which €100 are earmarked for Spain's banks, contain enough money to prop Italy. They also do not want to see the ESM - which is yet not in force and which should have €200bn lending power by the end of the year - bogged down in billions of expensive debt purchasing.

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