July 3, 2012

Euro Summit Deal Threatened by Finland, Netherlands

Both plan to oppose bailout fund bond buying in secondary markets

The agreement worked out so painfully during a recent European Union (EU) summit meeting to soothe markets and help Spain and Italy is being threatened. Finland and the Netherlands say they will not support bond buying on secondary markets by the euro zone’s European Stability Mechanism (ESM).

Reuters reported late on Monday that Finnish leaders said the two countries, which take a hard line on the debt crisis, would not approve the measure, which was designed to allow Spain and Italy continued access to markets without continued increases in yields.

Last week Finland had proposed that Spain and Italy should issue covered bonds that were backed by state assets or future revenues. That would allow Helsinki to avoid demanding collateral for bailout loans; however, the measure failed.

Although Prime Minister Jyrki Katainen's spokesman said the country’s position on the ESM was unrelated to the blocking of the Finnish proposal, Finland’s refusal—along with that of the Netherlands—to sign off on the ESM bond-buying arrangement could make things more difficult.

While ESM bond buying in secondary markets is supposed to require unanimity among euro zone members, there is an escape hatch: the rules governing the ESM say that if the European Central Bank (ECB) and European Commission (EC) feel the euro zone is under threat, the rescue fund can act with only an 85% majority.

Last Friday Dutch Prime Minister Mark Rutte also said he was not in favor of using limited ESM funds to buy bonds on the secondary market. He said, “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. The instrument exists but it can only be applied with unanimous support."

Netherlands legal experts also opined that the treaty would have to be amended and re-ratified, but the EC said it would not.

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