EU financial crisis: Finnish loan guarantees could double

[Tiriol]

The loan guarantee responsibility of eurozone crisis countries taken by Finland may double from what was originally proposed by the government, as reported by Helsingin Sanomat.

Finnish loan guarantee liability could double

The responsibility taken on by Finland for guaranteeing the loans of crisis countries of the eurozone could end up being considerably higher than the EUR 14 billion put forward by the government.
In legislation passed by Parliament in late September, the maximum guarantees were set at EUR 14 billion of the nominal value of the loan – that is, the principle of the loan without interest.
“The decision on responsibility for guaranteeing the loans was made with reference to the nominal value, but the guarantee also covers the costs of the funding of the European Financial Stability Facility (EFSF) – that is, the interest as well. The maximum amount of the guarantees is ultimately a political decision for the member states to make. In Finland, the guarantees are decided by Parliament”, says Martti Hetemäki, Undersecretary of State at the Ministry of Finance.

Hetemäki admits that the content of the liability for the guarantees was written somewhat inadequately in the preamble of government’s proposal.
He emphasises, however, that the matter was rectified in the law passed by Parliament.
In the preamble to the proposed legislation it was claimed that the new framework agreement for the EFSF excludes interest from the guarantees.

The amount of guarantees on interest costs depends on the interest rate level that prevails at the time.
Assuming an interest rate of 3.5 per cent for EFSF financing, Finland’s responsibility for the guarantees of the 30-year loans would be EUR 28.7 billion.
If the loan period were 15 years, the guarantee liability at the same interest rate level would be EUR 21.4 billion.

According to Klaus Tuori of the research unit of European Law at the University of Helsinki, the framework agreement is unreasonably vague, considering the significance of the issue. He also sees contradictions in the text itself.
“On the one hand, it is said that a member state’s guarantee liability on the part of Finland can be no more than EUR 14 billion. Elsewhere it is said that the EFSF’s fund-raising costs will be added to the liability for the guarantees.”
“The Finance Ministry’s interpretation of the framework agreement is problematic from a constitutional point of view. If the liability for guarantees is seen to be higher than EUR 14 billion, when interest is included, the maximum liability should be mentioned in the law. In addition, the concept of nominal value does not emerge in the framework agreement, so it is difficult, if not impossible, to visualise that the liability would be greater”, Tuori says.

The eurozone countries are not lending money to the countries in crisis. Instead, they are guaranteeing loans taken by the EFSF from the financial markets. The EFSF, for its part, directs the loans into the emergency funding of the countries in crisis.
The guarantees would come into play if one of the eurozone countries financed by the EFSF defaults on its debt.

So here we are: thanks to unclear legislation proposal the Parliament may have vote about a new set of legislation, something which every MP of the sitting government's parties dread. Why? Because if such new proposed legislation would go through, the True Finns Party would get a magical boost to its already immense support and many MPs would be fighting for their political survival in any upcoming election. Finnish people are not that pleased that the government keeps shoveling money to crisis countries while at the same time calling for budget cuts and "tightening of belts" back home. I don't envy the current Prime Minister or the Minister of Finance. They must be sweating like pigs on their way to the slaughterhouse.