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Finland: Don’t Push Irish into Bailout

From some reports, you get the impression that Finland is saying "no aid for Ireland." However, from a Reuters story it seems more that the Finns’ official position is more that the Irish should not be pushed into a bailout by the Germans and the EU.

Finland is against putting pressure on Ireland to quickly apply for a European Union bailout, saying EU financial aid must be a last resort.

Euro zone finance ministers will discuss Ireland’s debt situation at a meeting on Tuesday amid reports some EU countries are keen for Dublin to quickly tap EU emergency funds to calm markets and stop debt concerns from spreading to other countries, like Portugal.

"Finland strongly opposes the German position that the mechanism should be used just to make the markets calm down," said one euro zone source familiar with Finland’s position. "The mechanism wasn’t created for that purpose."

Since decisions among finance ministers over activating the European Financial Stability Facility (EFSF), which Ireland may need to access, have to be taken unanimously, Finland’s view counts as much as the other 15 members of the euro zone.

Finland’s staunch opposition to pushing Dublin into asking for help is partly based on its belief that the rules must be strictly adhered to but also out of domestic political concerns — there is an election in Finland next year and there is popular opposition to more bailouts.

"Finland is already supporting Iceland, Latvia, Greece and, who knows, possibly Ireland and others," said a Finnish EU source who spoke on condition of anonymity.

"The government will be politically dead if we accept something that is unacceptable to the average Finn. There is no way of explaining it to the average Finn that we are paying all this money but don’t know when it’s coming back."

-Finland seen strongly opposing Ireland EU bailout, Reuters

My read of events is that if the Irish state were on the verge of collapse, it is unclear what the Finnish position would be. However, the Finnish people are not happy to support a bailout of the Irish given the support they have already provided elsewhere. As a result, the government believes that Ireland must resist premature efforts to force EFSF money on the Irish. Taking the money would certainly put the Finnish government in an awkward position come election time.

As context, on my recent article "On The Alleged Irish Bank Deposit Flight" saying the Irish should take the money, a Finnish reader sent me the following comments (slightly cleaned up for readability below).

Isn’t the debt-restructuring also inevitable? After the Greek tragedy, which has been gaining more steam tonight, it was made clear that one purpose to bail-out Greece was to prevent "contagion." As it should be visible already to everyone this is not about contagion, it’s about highly leveraged countries and these countries will eventually need to tap the EFSF on. Now this "contagion" has reached Ireland, which is, by the way, receiving loads of praise for its pre-actioned austerity measures to battle against huge deficits. It didn’t work. Now Greece should battle harder? Suppose there are countries like Portugal, Greece, Italy and Spain also funding Irish bail-out. Aren’t these countries also drowning further? EFSF may succeed in stopping this after Greece, Ireland and Portugal, but looking at 100+ billion euro deficits in Spain, it will be pledging for help pretty soon, too. Spain is big enough to knock Italy down (if not all the euro-countries) and after Italy falls France is also definitely lost.

Because this "blind guiding other blind" structure circulates from one indebted country to another the EFSF is most likely a mere bluff, is it not?

The reader also mentioned the lack of consumer demand coupled with serious animal spirits in the residential property markets in Finland as background to his comments. I should also point out Marc Chandler’s post on the Austrians balking at  Greece’s bailout. The Austrians – along with Slovakia – were holdouts on Greece in May when the bailout was agreed to. The issue, at the time, again, was the credibility of Greece’s commitments to austerity.

My read of all this is that Europe is in deep trouble. Cohesion is really coming apart right now and we had better hope this crisis settles down or we could see a sovereign default.  Ireland was really a model of fiscal virtue before the financial crisis, with current account surpluses and a very low debt to GDP (see the chart here). It is unfortunate but costly that the banking crisis has not only created a gaping hole in the countries finances but that the government is now on the hook for bank losses as well. My view on Ireland is similar to Independent Strategy’s view highlighted in a recent post at FT Alphaville. They write:

Ireland’s sovereign debt was not the ultimate cause of the Irish debt crisis. However, sovereign risk now stands at the centre of the Irish debt crisis.

This is because much of the banks’ risks have been taken over by the government in the form of guarantees of bank liabilities, NAMA bonds, as well as through the creditworthiness of the promissory notes used to finance Anglo Irish Bank and other banks…. Longer term, we reckon that Ireland is solvent and capable of reducing its debt burden to manageable proportions within the next four years. Ireland is a liberalised, young, dynamic, export-oriented economy unlike any other in Europe. Market regulation is low; growth is sensitive to exports; domestic labour costs are now falling; and Ireland’s exports are not so dependent on China and Asia as others in Europe.

The caveat here is that without liquidity, Ireland is insolvent. I still believe Ireland’s is a liquidity crisis masquerading as a solvency crisis. But, if the Irish are forced into default, the whole European experiment will fall apart. In that event, you can kiss the recovery goodbye in Europe and in the US as well.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

2 Comments

  1. Susijumala says:

    This all may seem Finns have just recently became a problem child, but as the polls show about the incoming elections on spring 2011 there may happen something radical, which hasn’t be seen here for decades. To give more of background to readers Finland has typically three major parties: one right-wing, one left-wing and one dabbling in-between. They all held around 20-25% support and all the governments my memory serves have been constructed majority picking two of these major parties and filled with some minor parties (like Green Party, Christian Democrats etc.) It has been a political show that one of the major parties sits in the minority and does mild barking towards the government. It all belongs to the theatre. Finnish people swallowed all the pills government gave, no matter which parties were involved.

    But the winds have been changing and now a 4th party, which agendas have been strictly full of critics towards Finnish budgets, immigration and some other “populists” concepts have been receiving polls that shows steady increasement. And this party has been draining the support from “The Big Three” as we call them. Finns have been getting a picture it has always been political theatre as I described the overall feeling above. On recent question about Irish bail-out our current finance minister told that Finland is going to demand collateral of it, mimicing the 4th party view back in Greek case.

    Should the 4th party win the elections and getting mandate to form a government the political scene may change rapidly, not necessarily the way Austria faced when Jörg Haider and his party won there. It caused Austria to have sanctions from EU, because democracy caused “wrong” outcome. If this 4th party remains below any of The Big Three it will not called to form government, but pressure this party will gain even more foot raises and it may handicap the political scene Finland has been taken for granted. For decades.

    Of course we can see easily why Germany has so much interest “forcing help” towards Ireland. Germany has got about 150 billion reasons for that. And after checking Spain’s liabilities towards governments and institutes in France and Germany it is obvious they don’t want “contagion” reaching Spain.

    But after all this backgrounding I agree mostly that the eurozone is in danger to break apart. It was on discussions already back in May and now I can guarantee such talks have not been gone silent, at least not after what I’ve been reading on Finnish newspapers. I agree it has been gaining populist ground. Most Finns don’t seem to get what happens if Finland separates from euro. But also, ECB cannot do good for every country it reigns if its kingdom consists loads of “different economies.”

    Anyways, Finland is rather small country and compared the political influence e.g. on Merkel’s statements making bondholders carrying risks etc. has way much more impact on market reactions than what Finnish representatives can do.