UPDATE: Thanks largely to uncertainty caused by the Greco-Finnish deal, Greek 10-year bonds dropped preciptiously Wednesday, with yields again close to 18 per cent — right where they were before July’s bail-out agreement.
The ongoing dispute between Finland and other eurozone members over the side deal Heslinki struck with Greece as part of Athens’ new €109bn is beginning to make market analysts jittery.
For those unfamiliar with the controversy, Finland has insisted that it get collateral from Greece to guarantee its portion of the new bail-out, and last week struck a deal which would have Athens putting an estimated €500m into a Finnish escrow account. Other countries have begun to cry foul, however, asking why Finland should get special treatment. Talks between eurozone finance ministry officials are expected to resume via teleconference on Friday.
As we reported earlier this week, the Moody’s rating agency has already weighed in with its concerns, saying the Finnish deal could not only delay the Greek bail-out but calls into question eurozone support for all future bail-outs. But other market watchers are beginning to raise similar alarms. Here is a quick cross-section of views that we’ve seen in recent days.
Mujtaba Rahman, a Europe analyst for the New York-based Eurasia Group, paints three possible scenarios, and concludes that the most likely path – Finland dropping out of the bail-out completely – could set the worst precident.
Rahman says he does not believe Finland will back down, because of the political price new prime minister Jyrki Katainen would have to pay. Equally, giving a few other eurozone countries similar deals is unlikely, he argues, because it would open the door to others – including potentially Spain, Italy and even the IMF – to request collateral, too.
That leaves, in his view, to an inevitable Finnish withdrawal from the Greek deal – or from the eurozone’s €440bn bail-out fund entirely. Writes Rahman:
The most likely option at this stage would be for Finland to abstain from participating in the second Greek bailout, or, in a more extreme case, remove itself from participating in the [bail-out fund]. Indeed, the former option is permitted under the vehicle’s current legal framework, providing that all of the other countries consent to allowing Finland to cease issuing further guarantees. A more extreme variant of this policy would be for Finland to remove its wholesale participation in the vehicle. In this case, which is the lesser-likely option, the Finnish guarantees (€13.9bn [of the €440bn fund]), could either be covered by the other member states, or more likely the ceiling of the [fund] would need to fall by the equivalent amount. Both would set an unhelpful precedent, as countries experiencing domestic difficulties could then seek to replicate the Finnish example, further undermining confidence that Eurozone leaders are capable of dealing with this crisis.
Barclays Capital weighed in late last week with similarly dire predictions, saying the dispute presents “a major downside risk”, since it will likely delay the centrepiece of the Greek bail-out: the much-touted series of bond swaps and roll-overs which European leaders believe will allow Greece to delay €54bn in debt repayments during the next three years. Writes Barclays:
In our view, the growing discontent apparent towards the Finnish agreement just serves to highlight the risks surrounding the second Greek bailout package. Other risks around this arise from the still-uncertain nature of private sector involvement, which itself would then a prerequisite for the IMF (as well as EU) to determine its potential future involvement…. To reiterate, Finland’s insistence on collateral unduly complicates the process to come to a swift agreement on Greece, thus increasing the risk of political noise in the coming days and weeks.
Capital Economics sees less dire consequences in the short term, since Greek financing this autumn is assured through the old €110bn bail-out agreed to last May. But they worry it could reopen the entire deal, especially since they believe the bond swap and roll-over plan is not going over too well with investors, who have shown signs of not committing their bonds to the exchange in sufficient numbers:
[T]his latest development will inevitably raise concerns that the second rescue package may flounder before it is even up and running. After all, doubts over whether enough private-sector creditors will agree to exchange their bonds for new assets, a key element of the deal, have recently intensified. Reports suggest that a lackluster response from investors to the deal means that creditors holding bonds maturing after 2020 may now be asked to take part. If some core governments deem private sector involvement to be too limited, they might seek to make other alternations to the package.