Collateral Thinking

The eurozone's embarrassing collateral-for-loans spat continues, with member states disagreeing over whether Finland should be allowed to get collateral from Greece in return for giving Athens fresh loans. Who should guarantee the guarantees remains the thorny question.

To re-cap: Under a special deal with Greece, agreed on the sidelines of the 21st July summit, Finland would get collateral of some form, in a bid to appease taxpayers at home. The exact nature of the collateral wasn't agreed, and as it turned out, the creditor countries had very different interpretations of the exact meaning of the deal. It was almost as if they hadn't thought it through properly (shock horror!)...

Unfortunately for the Finns, the deal between Athens and Helsinki now has to be ratified by all eurozone governments. The reason is simple: since the collateral that Greece will post with Finland will probably come from the bailout funds (Athens is a bit short of cash) it will be other eurozone countries that actually underwrite the collateral that Finland has demanded. Hardly surprising, not everyone is happy - Austria, the Netherlands, Slovakia, Slovenia and also Germany have all rejected the collateral agreement, calling it unfair.

This has left the eurozone in yet another tricky situation. If everyone asks for collateral, the second Greek bailout will go down the tube, as Greece won't be left with enough cash. But if the Finnish deal isn't approved, Helsinki has threatened not to participate in the bailout - or it may be forced to go back on its word to taxpayers, in turn leading to a political backlash at home.

So now what? Here's the latest from the five main protagonists.

Finland

With the anti-euro "True Finns" party (which continue to lead in the polls) breathing down its neck, the Finnish government is sticking to its guns, with Prime Minister Jyrki Katainen unequivocally answering "yes" when asked if Finland would pull out altogether of the second Greek bailout if it were denied the requested collateral, adding,

"It is our parliament's decision that we demand it as a condition for us joining in."

Finnish government representatives have repeated the “no collateral, no loans” mantra - at least when speaking to a home audience (internationally, the tone has been more accommodating). And with the Finnish Presidential elections coming up - in January 2012 - no candidate is keen on explaining to voters why the government has 'sold out' to Europe (sounds familiar?). That would be a gift for the True Finns.

However, the Finnish are also pragmatists and derailing international agreements doesn't come naturally to them. As Katainen has pointed out,

"Of course the Finland-Greece collateral deal cannot block the [bailout] package, but in any case we demand that collateral."

In fact, in recent days, he has stressed that he's flexible on the nature of the collateral (gold, cash, land, etc). But there needs to be some sort of collateral nonetheless, begging the question whether the eurozone can reach a minimalist deal that will allow Katainen to save face.

Netherlands

In a letter to the Dutch Parliament, Dutch Finance Minister Jan Kees de Jager insisted that the Greco-Finnish agreement needs to be ratified by all eurozone member states and the IMF - signalling that it would veto it:

"Finland has unilaterally announced the bilateral agreement. Because of that, the incorrect image has emerged that there would be a legal agreement between Finland and Greece...To execute the current proposal is unworkable."

The Dutch Social-Democrats, whose support is needed for the second Greek bailout to go through the Dutch Parliament, added,

"It can't be the case that the Finns obtain guarantees at the expense of the Netherlands. That's not acceptable and if it comes that far, the Netherlands should veto it."

Austria

And there's not much love from Vienna either. The Austrians don't necessarily consider collateral a precondition for lending more money to Athens, but if Helsinki obtains it, then everyone should get it. Austrian Finance Minister Maria Fekter said,

"It's not a viable option when Finland makes a deal with Greece to receive 20% collateral and all the other euro countries should pay."

Last week, Austria put forward an alternative plan, under which the amount of collateral would be inversely proportional to each country’s private banking sector exposure to Greece. Countries (including Austria) whose banks have little exposure to Greek debt would be allowed to get collateral from Greece, while countries whose banks are heavily exposed (Germany and France spring to mind) would not get any collateral at all. A bit cheeky, but not entirely unreasonable.

Slovakia

Slovakian Finance Minister Ivan Miklos - clearly not a fan of the eurozone bailouts in the first place - has made it clear that he considers it

"unacceptable for any country to not have the collateral if other countries have it. Because if this is a loan, and that is what everyone is calling it, the debtor should have no problem offering collateral for the loan."

Incidentally, Prime Minister Iveta Radičová said on Monday that Slovakia will be the "last country" to ratify changes to the EFSF - the eurozone's temporary bailout fund - and to agree to the establishment of its permanent successor, the ESM. The Freedom and Solidarity (SaS) party - a junior partner in the Coaliton government - doesn't support expansion of the EFSF. Negotiations between the parties are ongoing. Speaker of the Slovakian Parliament and SaS leader Richard Sulík said,

"I'm not aware of any reason why Slovakia ought to rush to be the first to put itself in a position that's not good for us. Let the rest of the EU reach agreement or not, we'll follow up with discussion then."

Germany

German Labour Minister Ursula von der Leyden - who is also a prominent leader of German Chancellor Angela Merkel's CDU party (see picture) - broke ranks yesterday when she suggested that Greece should post either gold or stakes in state-owned companies as collateral in return for further loans. However, her proposal was quickly dismissed by the German government. Also, in a meeting with CDU MPs, Merkel voiced her opposition to the Greco-Finnish agreement, reportedly saying,

"It can't be that one country gets extra collateral."

So, in short, eurozone leaders have landed themselves in a right old mess. You have to wonder why no one saw this coming on July 21st.