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9th Dec 2022

Ratings agency says EU bailout deal at risk

  • Finnish fans celebrate hockey win. Politicians in Helsinki fear the country's collateral demands will make it unpopular in Brussels (Photo: ZeroOne)

Ratings agency Moody's has warned the EU's new bailout package for Greece could unravel over demands for loan collaterals. EU anti-crisis measures are also facing fresh political risks in Germany and Italy.

The US-based ratings agency in a note on Monday (22 August) predicted other eurozone countries will reject a deal between Finland and Greece for Athens to put around €600 million in an escrow account in case it is unable to pay back Helsinki's part of its second bailout.

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Moody's added that the escalating dispute over collateral poses questions about the eurozone's broader ability to handle the crisis.

"A proliferation of collateral agreements would ... imply that the some euro-area countries would bear disproportionately large shares of the risk associated with the provision of financial support ," it said. "We expect other euro-area members to ultimately reject the Finland-Greece deal ... but the message sent by the calls for such agreements confirms that Europe is conflicted over the very decision to provide financial support to its members, not just the amount of support."

Finnish Prime Minister Jyrki Katainen has warned that if the collateral deal is thrown out, Finland will not sign up to the second Greek bailout.

Katainen's position, which has already seen Austria, the Netherlands and Slovakia explore possibilities for their own collateral arrangements with Greece, attracted criticism from Dutch finance minister Jan Kees de Jager on Monday.

"The Netherlands is no supporter of this proposal ... It is not compatible with the principle of equal treatment of all euro countries," de Jager said in an open letter to the Dutch parliament.

The potential proliferation of collateral requests is not the only emerging risk to the EU's self-imposed deadline to get the new bailout arrangements ratified by all 17 eurozone countries by the end of September.

The German central bank in its latest monthly report indicated that the eurozone deal, which also involves provisions for the EU bailout fund, the EFSF, to buy bonds from struggling euro economies, might breach German law by marking a new surrender of sovereign fiscal powers to Brussels.

"Far-reaching extra risks will be shifted to those countries providing help and to their taxpayers, and entail a large step towards a pooling of risks from particular EMU [European Monetary Union] states with unsound public finances," the Bundesbank said.

"Unless there is a fundamental change of regime involving a far-reaching surrender of national fiscal sovereignty, it is imperative that the 'no bail-out' rule – still enshrined in the treaties - should be strengthened by market discipline, rather than fatally weakened."

The bank's statement lends weight to a legal challenge to the bailout deal filed in Germany's constitutional court ahead of the judge's verdict, due in the coming weeks.

For their part, regional authorities in the Hessen lande have threatened to invoke a special mediation mechanism between the German parliament and the regional assembly, the Bundesrat, to examine the implications of the EU bailout deal in a move which could delay German ratification.

"I am not going to support a mechanism today that binds the hands of generations of politicians," Hesse's jutsice minister, Joerg-Uwe Hahn, said in a letter to MPs.

In Italy a fresh political rift between Prime Minister Silvio Berlusconi and his coalition partner, Umberto Bossi, the head of the nationalist Northern League party, has also cast doubt on parliamentary approval of Rome's proposed new €45 billion austerity package.

Bossi's party on Monday drafted changes to the proposed cuts one day before the Italian senate is due to hold initial talks on the deal, calling to scrap a planned increase in Value Added Tax and in Italy's retirement age.

Bossi also angered Berlusconi by predicting that Italy is destined to split into two, with the rich industrialised north leaving the south to its own problems.

"I am sorry, this time, to not agree with my friend Umberto Bossi. I am deeply convinced that Italy will always exist," the Berlusconi said in a rare public disagreement with the Northern League chief.

Euro states set to agree second loan for Greece

Eurozone leaders look set to greenlight a new loan for Greece as well as establish what will effectively be a European Monetary Fund, according to draft conclusions circulating on Thursday afternoon.

Ireland and Portugal get lower interest rates on bailouts

Ireland and Portugal on Thursday were given longer deadlines and interest rates to pay back their loans under their respective EU-IMF bailouts, but eurozone leaders made it clear that no private investors will be involved in their rescue, as it is the case with Greece.

Finland puts Greek bailout package under pressure

The eurozone's second bailout for Greece, agreed in July, already looks in trouble as a series of smaller EU countries demands that Athens puts up collateral in return for national loans.

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