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Tags: Finns | Dutch | Eurozone | doubt

Finns, Dutch Cast First Doubt on Eurozone Deal

Monday, 02 July 2012 08:58 AM

Finland and the Netherlands, the eurozone's most hard-line creditor states, cast the first doubts on Monday 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, despite an agreement among leaders' last Friday that the fund could be activated to stabilize markets.

The euro fell, European stocks gave up gains and safe-haven German Bunds reversed losses on news of the Finnish statement, which raised fears that the latest deal which drew a positive initial market reaction could unravel.

Several previous market rallies after eurozone crisis agreements have fizzled within a day or two as investors have 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 EFSF and permanent ESM rescue funds.

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

The report gave no explanation for the apparent volte-face but EU diplomats noted that a Finnish proposal that Spain and Italy should issued 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.

However 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 told Reuters.

Dutch Finance Ministry spokesman Niels Redeker said the Netherlands did not support using the bailout fund to buy bonds on the secondary market and would evaluate purchases case-by-case.

Dutch Prime Minister Mark Rutte said last Friday he was "not a big fan of purchasing bonds with the existing instruments because it is costly," Redeker said.


EU officials said the leaders had agreed in principle that the rescue funds would be empowered to buy bonds both at auction when they are first issued, and on the open market, if a government makes a request and signs a memorandum of understanding on macroeconomic conditions.

A European Commission spokesman also insisted that no changes to the treaty governing the ESM were required to enable the fund to recapitalize banks directly.

He was responding to doubts raised in the Netherlands by legal experts who said the treaty would have to be amended and ratified again.

The Commission's spokesman on economic and monetary affairs said articles 14-18 of the treaty set out the instruments the European Stability Mechanism (ESM) has at its disposal to maintain financial stability in the euro area.

"Article 19 continues that the board of governors may decide to make changes to that list," spokesman Simon O'Connor told a regular news briefing.

"That is our understanding of where we stand on that, that it would not require a change to the treaty," he said.

A Dutch newspaper quoted legal scholars as saying the Dutch parliament and other national parliaments in Europe would have to ratify the eurozone's ESM rescue fund again after EU leaders decided to directly capitalize banks from the fund.

"Direct funding to banks is not possible under the current treaty," professor of constitutional and administrative law Wim Voermans of Leiden University was quoted as saying in Dutch daily Het Financieele Dagblad.

Voermans' colleagues at Leiden University, Michiel van Emmerik and Michal Diamant, supported his view, the paper said.


Sources close to European Council President Herman Van Rompuy, who chaired last week's summit, said the leaders had taken great care to avoid any decision that would require ratification because of bitter past experience.

A deal to expand the scope and effective lending capacity of the temporary European Financial Stability Facility (EFSF) last July exacerbated bond market turmoil after a brief rally when it became clear it would take months to ratify.

Finland threw a spanner in the works by demanding collateral on its share of EFSF loans to Greece, requiring months of tricky negotiation, and Slovakia's coalition government fell apart over the EFSF deal, delaying ratification until mid-October.

Other factors that have spooked investors include the risk of Germany's powerful constitutional court delaying the entry into force of the ESM and possibly placing restrictions on its scope of action, and the fact that the Brussels summit did not increase the overall size of the rescue funds.

Some investors may calculate that the sums available to support Spain and Italy in the bond market are too small to bring their borrowing costs down in a sustained way. The European Central Bank spent some 210 billion euros ($265 billion) in the last two years to buy Greek, Irish, Portuguese, Spanish and Italian bonds without achieving any lasting improvement.

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 license and allowing it to borrow from the central bank.

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

Asmussen has become the ECB's main international negotiator since he joined the board at the start of this year. He also urged Greece to focus on implementing economic reforms rather than losing time trying to renegotiate its EU/IMF bailout.

© 2022 Thomson/Reuters. All rights reserved.

Monday, 02 July 2012 08:58 AM
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