Monday 11 December 2017

Finnish and Dutch governments cast doubt on latest eurozone deal

Terhi Kinnunen

Both countries say they will block ESM from buying bonds in secondary markets

FINLAND and the Netherlands, the eurozone's most hardline creditor states, cast the first doubts yesterday on a European summit deal designed to save Spain and Italy from being engulfed by the currency bloc's debt crisis.

The Finnish government told parliament that Helsinki and its Dutch allies would block the eurozone's permanent bailout fund buying bonds in secondary markets.

Eurozone leaders agreed last Friday that rescue funds could be used in a "flexible and efficient manner" to lower government borrowing costs. Their statement gave no further detail. The euro fell and safe-haven German bunds reversed losses on news of the Finnish statement, which raised fears that the latest deal could be fraying.

Several previous market rallies after eurozone crisis agreements have fizzled out within a day or two as investors fretted about the lack of detail, the risk of delay and national vetoes, or the inadequate size of the rescue funds available.

The 17 eurozone leaders agreed in Brussels on steps to shore up their monetary union and bring down borrowing costs for Spain and Italy, regarded as too big to fail but also too expensive to rescue if they are shut out of markets. They gave few details on the use of the temporary European Financial Stability Facility (EFSF) and permanent European Stability Mechanism (ESM) rescue funds.

ESM bond buying in secondary markets would require unanimity among eurozone members and that seems unlikely because Finland and the Netherlands are against it, the Finnish government said in a report to parliament.

Under threat

That is essentially true but there is a get-out clause in the ESM's rules which states that if the ECB and European Commission feel the eurozone was under threat, then the rescue fund could act on the basis of an 85pc majority vote to do so.

A Finnish proposal that Spain and Italy should issue covered bonds, backed by state assets or future revenues, to avoid Helsinki having to demand collateral for any bailout loans, failed to find agreement last week.

Finnish Prime Minister Jyrki Katainen's spokesman said the ESM stance had nothing to do with others blocking Finland's proposal. Helsinki simply did not consider secondary market purchases an effective way to counter the crisis, he said.

Dutch Prime Minister Mark Rutte said last Friday he was not in favour of using limited rescue fund resources, which run to a maximum of €500bn, to try and turn the bond market.

"The chance of that is very small because I don't see the point at all of buying on the markets because you need a lot of money to do so," Mr Rutte said.

"The instrument exists but it can only be applied with unanimous support."

The ECB spent some €210bn in the last two years to buy Greek, Irish, Portuguese, Spanish and Italian bonds without achieving any lasting improvement.

EU officials said the leaders had agreed in principle that the rescue funds would be empowered to buy bonds at auction when they are first issued and on the open market.

In Athens, ECB executive board member Joerg Asmussen ruled out another widely canvassed solution to the debt crisis, backed by France, which would involve giving the ESM a banking licence and allowing it to borrow from the ECB.

"There is no silver bullet," he said in a speech. "Those who advocate 'once and for all solutions' -- be that a banking licence for the ESM, a European transfer system, or the like -- are contenting themselves with a superficial analysis." (Reuters)

Irish Independent

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