Spanish bailout strengthened by Finland deal
July 18, 2012 1 Comment
Guest post by Jenny.
A decade ago, it would have been surprising to know that in 2012 Spain would be one of the countries desperately in need of a bailout from the Eurozone. With a ratio of debt to GDP only slightly more than half that of Germany’s, and Madrid earning more in tax revenue than its total spending, Spain was in a strong economic position.
The country’s current economic situation is, in some ways, a victim of its own success. Twin problems of a burst property bubble that caused the construction industry to collapse, leaving hundreds of thousands of people out of work, and a lack of trust in banks leading to a rumored billion euros being withdrawn from Spanish banks, the country’s economy has been left in trouble.
However, Spain’s future is looking a little more secure now, as a deal has been agreed with Finland to secure the country’s portion of the bailout loan to be given to Spain’s desperate banks.
For the past few days, there had been many rumors regarding the outcome of the talks between the Finnish government and a fund owned by Spanish banks, as well as Finland’s general inclination towards the bailout and the euro. There was even suggestion that the Finns were planning on pulling out of the euro. Speculation was ended on Tuesday 17th July when Finland and Spain agreed a deal.
Finland, one of only four countries in the Eurozone with a triple-A credit rating, has received an agreement for collateral on 40% of its share in the loan, equivalent to 770 million Euros ($942million). Now that the collateral, the main condition Finland had been seeking, has been agreed to, the Finnish parliament is expected to discuss the bailout program for Spain on Thursday, with a vote on the issue taking place on Friday.
Jutta Urpilainen, Finland’s Finance Minister, said, “Despite a tight, tough schedule, we have been able to get for Finland and Finnish taxpayers a collateral arrangement that safeguards our position, and limits Finland’s risks.”
It is expected that the Finnish parliament, having secured its main condition, will vote in favor of the new measures. The country has been seeking collateral in order to protect its taxpayer’s money. There is a feeling in Finland that the recipients of EU bailouts are getting an easy ride while Finns have the face austerity measures at home.
In exchange for collateral, Finland has had to agree to some conditions of its own. The main term being that the country will pay its portion of the loan money to Europe’s permanent stability fund (ESM) in a single upfront payment, rather than five. Urpilainensuggested that other countries had been put off by the large upfront payment. Finland is the only country to seek collateral on its loan. By accepting the collateral, Finland has also agreed to forgo its share of interest margin profits that may have been generated by the recapitalization program.
The deal is based upon a similar deal agreed between Finland and Greece last year in order to secure the former’s participation in the second Greek bailout. As with the previous deal, Spain will be expected to put up cash guarantees for 40% of Finland’s contribution. This money will be invested in low-risk state bonds of the top five countries in the Eurozone. Over a period of many years, these bonds will slowly earn back the entire amount of the loan.
That Finland has opted for similar conditions for its involvement with the Spanish bailout is sure to raise a few eyebrows. Finland’s demands for collateral from Greece a year ago created some anger amongst Eurozone countries. As well as provoking several other countries, including Austria and Slovenia, to express interest in securing similar deals, it also jeopardized the entire Greek bailout. All 17 euro member countries were required to approve the bailout deal and Finland’s deal with Greece, and with the Netherlands disapproving of the deal, the future of the bailout looked uncertain.
Finland was prompted to ask for collateral after a demand by the Social Democratic Party, Finland’s second largest party. The bailout package is estimated to be worth 100 billion euros ($118 billion). Finland’s share of the package is around 1.9 billion euros ($23.3 billion).
Jenny is a finance blogger who writes on behalf of the UK’s third largest landlord information and advice portal. She is currently based in Manchester, England but spent most of last year in the beautiful Gulf Shores, Alabama area.