August 26, 2011
By Riva Froymovich, The Australian
EURO-ZONE policy makers appeared no nearer to settling a dispute over Finland's collateral demands in exchange for participating in a bailout for Greece, raising concerns that Athens may default.
Markets have grown more worried about the potential for a Greek debt default amid an apparent lack of progress in resolving the collateral issue this week.
Finland, meanwhile, shows no sign of backing down.
German Chancellor Angela Merkel also unexpectedly cancelled a trip to Russia in early September to shepherd through parliament a crucial change to the euro-zone bailout fund.
The cancellation comes at a sensitive time for relations with Russia, and amid growing nervousness about dissent within the ranks of her own party over her handling of the euro-zone debt crisis.
"The date collides with the introduction of the (European Financial Stability Facility) treaty into the Bundestag," a German government official said, adding that the chancellor wants to stay in Berlin due to the significance of the issue.
Yields on Greek two-year bonds rocketed to a record of over 43 per cent, according to Tradeweb, and the cost of insuring Greek government bonds against default also rose sharply.
Greek five-year sovereign credit-default swaps were 1.37 percentage points wider at 22.75 percentage points, according to Markit.
No multi-lateral talks on the collateral issue took place Wednesday or Thursday, a person familiar with the situation said, despite an initial intention to hash out an agreement by the weekend.
However, the person didn't rule out the possibility that bilateral talks are under way.
Euro-zone governments are looking into alternative forms of collateral after a cash deal reached earlier between Greece and Finland was rejected by key member countries, including Germany and the Netherlands.
Under terms of that deal, Greece would pay Finland hundreds of millions of euros from its bailout loans as collateral for those same loans at the expense of other euro-zone countries.
Since Finland is set to contribute just 2 per cent of Greece's total rescue package, guarantees from the richer euro-zone nations would be going directly to Finland.
The collateral dispute, if not resolved soon, could derail a second bailout package for Greece agreed by euro-zone leaders on July 21.
Without support from all 17 euro-zone countries, no funds can be released, while changes to the European Financial Stability Facility, the currency bloc's bailout fund, can't go forward either.
At last month's summit, leaders agreed to expand the fund and make it more flexible, so that it could buy bonds on the secondary market and provide credit lines to countries locked out of markets.
National parliaments across the euro area must approve the changes, however, and the collateral issue must be settled before the final EFSF proposal is written.
The European Commission, the EU's executive branch, has asked that all the details for the EFSF legislation be clarified by the end of August.
German officials have said they expect to approve the new EFSF at a cabinet meeting on Wednesday.
A parliamentary vote is likely to take place September 23.
A commission spokesman said that there is no formal deadline for concluding talks.
Still, "it's good for that to be done toward the end of the month," he said.
Germany insists on a solution acceptable to all euro-zone countries.
The International Monetary Fund, which has been contributing to Greek bailout loans, opposes any deal that would threaten its preferred-creditor status, which ensures the fund is always first to be repaid.
Finland said that it continues discussions with Greece and other euro-zone countries to find a solution. Officials refrained from further comment.
"The issue has become so politicised that no one here at the Finance Ministry wants to talk about it at the moment," said Anita Sihvola, a spokeswoman for the Finnish finance ministry.
On Wednesday, Finnish Finance Minister Jutta Urpilainen reiterated that Finland would not take part in the €110 billion Greek ($150bn) bailout unless it obtained collateral.
Finland's policy is partly the result of April's general election, in which support for the True Finns Party, which opposed the Greek bailout, soared to 19 per cent from 4.1 per cent in 2007.
The True Finns finished third, and the election led to a new government coalition of six parties.
Euro-zone officials have indicated they are exploring other forms of collateral, such as state property or other non-cash assets.
But this option would be anathema in Greece, especially as many of the government's assets are already earmarked for privatisation.
The government has strongly opposed any deals that would involve putting up Greek land or real estate as collateral, viewing the step as a threat to the country's territorial sovereignty.
"It seems that a possible outcome is either collateral for all member states or no country will get it," said a second person familiar with the matter.
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