Un- ‘Finnish’ business

natalie hamill, 24 August 2011

Greece’s second bailout package looks to be on the cusp of unravelling, as several member states are pushing for their own conditions in return for their bailout contributions. The ring leader, Finland’s new government, is proving a thorn in the side of the would-be Eurozone ‘fixers’, obstinately refusing to roll over and ‘play ball’ and leading others along the path of rebellion. The bailout package, agreed only last month, may well not be ready for Greece’s September payments and, after all the thrashing to try to stay afloat, Greece could finally go under.

Finland’s new 2011 coalition government already proved itself a prickly customer during the Portuguese bailout negotiations; the right-wing True Finns party threatened to derail the whole process by refusing to contribute to the bailout. However, a vote in the parliamentary committee for European Affairs saw those in favour secure a difficult victory, meaning the government reluctantly relented. With this history in mind, the AAA-rated county’s lack of team feeling regarding this second Greece bailout should come as no surprise – though, then again, who really is feeling particularly team-spirited? But, whilst other disgruntled member states seem to fall into line, the Finnish government announced it could only agree to a loan in exchange for collateral from Greece, to ensure against a default on their part of the bailout. Under pressure, Greece granted Finland’s wishes and the two announced a bilateral agreement whereby Greece is to make a cash deposit covering Finland’s part of the loan. This has left other EU member states smarting at the preferential treatment.

Within days, Austria, the Netherlands, Slovenia and Slovakia had announced they wanted the same conditions if the bailout was to proceed. Although the loans from these member states represent only a small percentage of the total €109 bailout figure, their demands put Greece under further pressure and undermine any pretence of ‘solidarity’ between member states.

The jittery markets which seem to drop at the slightest display of member state self-interest over sacrificing all to keep the euro afloat, have not reacted well; neither has the German Chancellor, Angela Merkel, who appears thoroughly irritated by the whole fiasco. Last week’s Franco-German mini summit did little to appease international markets; in fact, Merkel is faring rather badly in the eyes of her electorate (although still better than President Sarkozy in the eyes of the French) but appears as determined as ever to have her way. The Greco-Finnish deal will require the consent of all 17 Eurozone countries, according to Chancellor Merkel – accustomed to having the final say in Eurozone matters – and she is openly against it.  Unfortunately, not all of her ministers seem like-minded. While Merkel has explicitly rejected calls for governments to put-up gold in return for loans, the deputy leader of Merkel’s CDU party has taken a different stance, saying that if Greece was forced to do as Finland has suggested, it would ‘ensure that agreements [regulating a second bail-out] won’t be broken’.

But, even if Merkel can’t count on the support of her party, she can count on that of the Netherlands (for now). Originally in favour of a similar move, they have now sided against Finland after it became apparent that the ‘collateral’ security they require would come from the other Eurozone loans and push up the cost for everyone else.

Greece’s situation is notoriously weak; while the wrangling continues the second bailout being delayed is a very real possibility. To make matters worse, earlier this week, Greece’s finance minister Evangelos Venizelos announced that their annual output is forecast to shrink in 2011, by more than 4.5 per cent of GDP. Venizelos spoke of the vicious cycle of the recession, aggravated by both domestic and international factors pulling the country deeper into the mire. Whilst there is still €8 billion to be accessed from the first loan package, which should be ok’d after the next official EU/IMF visit at the end of the month, disagreements over the security of a second loan could see Greece pushed to default in September, ratings agency Moody warned.

With Finland insisting that it cannot sign up to a second bailout without Greece coughing up some collateral, and other member states unlikely to approve of such preferential arrangements, the Eurozone is fast approaching a dangerous deadlock. Austria has tried to placate both sides, suggesting that those with a low-level of Greek bonds should be reassured with collateral (i.e. Finland), whereas the Eurozone pillars, such as Germany, which are already heavily invested in Greece, should not request collateral cover. Yet such efforts seem unlikely to move things any further; indeed, it may well be, as former US finance chief Alan Greenspan predicted earlier this week: the ‘euro is breaking down’.