Finland and Greece agree on bailout terms
Cash deposits as collateral
Minister of Finance Jutta Urpilainen (SDP) announced on Tuesday the terms that Finland and Greece had agreed on for Finnish participation in the Greek bailout package. If it is implemented, the deal reached between the two countries would be very advantageous for Finland, compared with the burden taken on by other euro countries.
Under the proposed arrangement, Greece would put up cash, rather than islands or other holdings, as collateral for the loans which Finland is guaranteeing. The cash would be placed on a Finnish state account, from where it would be invested in low-risk securities with as high a yield as possible.
If Greece is unable to pay back its loans to the temporary stability mechanism, Finland would take possession of the capital put up by Greece following a procedure agreed upon in advance.
If Greece pays off its debt, it would get back the money that it put up as collateral, as well as the income derived from it.
The aim of the Greek support package is to help the seriously indebted country get back on its feet financially, and to prevent the crisis there from spreading to other countries.
“The model that was put forward now is not efficient. Finland guarantees a loan to Greece, which immediately returns a large portion of it to Finland”, says Jan von Gerich, head analyst at Nordea Bank.
Urpilainen would not say on Tuesday exactly what the monetary value of the Greek collateral would be. The reason is that the details of the new Greek loan package remain open. Leaders of the eurozone countries agreed in late July that they and the International Monetary Fund would grant about EUR 109 billion in additional loans. The euro countries would lend the money through the temporary mechanism, and their share of the total sum would be at least EUR 73 billion.
According to initial calculations, Finland will guarantee Greek loans to the tune of at least EUR 1.4 billion.
Under the deal between Finland and Greece, the cash guarantee that Greece gives to Finland should, with interest, eventually cover the sum that Finland initially lent. Nordea’s Jan von Gerich says that the Greek guarantees could be about 40 per cent of the total sum. If the portion of the loan guaranteed by Finland is EUR 1.4 billion, Greece would be expected to put up cash guarantees of over half a billion euros.
Finland would then invest this half billion in low-risk state bonds, which would earn back the whole EUR 1.4 billion in about 30 years.
However, there is one impediment to the Finnish guarantees – the other euro countries.
The collateral arrangement would require the approval of the other countries in the eurozone. In the stability mechanism all guarantors should be treated equally. As Greece is short on money of its own, it would have to use some of the funds that it borrows from other countries to put up the collateral, or sell off state-owned enterprises.
“In practice, this would mean that Finland would participate in backing up Greece to a considerably lesser degree than the other euro countries”, von Gerich says.
Jan von Gerich suspects that the other euro countries might not accept the agreement between Finland and Greece without some kinds of changes.
“If Finland were to get benefits that the other countries do not get, it would be a worrying message for the market on cooperation in the eurozone. If one country gets special rights, others will undoubtedly also want them”, von Gerich says.
Urpilainen says that she kept other euro countries informed about the discussions throughout the summer. Official reactions will come this week when the Greek bailout programme is discussed in Brussels at a meeting of eurozone civil servants.
Finance Minister Urpilainen repeated what has become a virtual mantra: that Finland can participate in the Greek loan programme only if it gets collateral for its share of the loan guarantees.
“Now it is up to the other countries to assess if they will demand these kinds of arrangements, or if they will understand this outcome of the negotiations”, Urpilainen said.
At a press conference on Tuesday Urpilainen said that she does not believe that Finland would have lost political capital among euro countries through its demands for collateral.
She also reiterated that Finland opposes increasing the shared liability, and the establishment of common debt of the euro countries through so-called euro bonds.
More on this subject:
Soini and Kiviniemi criticise terms of agreement, Katainen praises outcome of talks
Previously in HS International Edition:
Katainen rejects opposition accusations of overstepping authority in euro crisis (3.8.2011)
Katainen attending first EU summit (23.6.2011)
Greek bailout to come before Parliament possibly in July (7.6.2011)
Greek Finance Minister: Finland will be repaid (31.5.2011)