All you’re interested in is this weekend’s big election in Finland. How will the nationalist True Finns party do? Will they get enough votes to kill the Portugal bailout?
Barclays weighs in:
Should Finland decide to abstain from participating in a further upsizing of the EFSF/ESM and or vote against an EFSF loan to Portugal, this would cause serious political ramifications in the euro area. It would set a precedent in that the principle of solidarity would have failed and the overall financial support regime of the EU, which is based on unanimous voting, would probably need to be revamped, which could have severe legal implications. At a minimum, and abstracting from all the political noise and volatility this would create, the whole framework agreement of the EFSF would possibly be up for change because the principle of unanimous voting would need to be changed towards qualified majority voting principles, and/or Finland would need to be excluded as a stakeholder and, thus, as a creditor country to the periphery. Both scenarios are highly unlikely at the moment, as the principle of unanimous voting is enshrined not only in the EFSF framework agreement but also in the EU Treaty.
Hypothetically, should Finland abstain from supporting Portugal and should the EFSF framework agreement be changed to allow for non-unanimous voting, the remaining five AAA-rated euro area countries would need to take on Finland’s share in any such rescue package. Various press reports in Bloomberg and Reuters argue that this would account for up to EUR1.4bn (1.8% of an envisaged EUR80bn rescue package for Portugal), which we believe is incorrect because the EFSF share in the overall rescue package for Portugal would be lower than 100% due to the fact the IMF would at least partially co-finance such a programme. Finally, it could also be considered that, should Finland veto an EFSF programme for Portugal, the first disbursements of the programme would be financed through the EFSM with a view to gaining time to address the procedural and legal problems created by a Finnish objection. Any such political outcome in Finland would possibly sow doubts in other politicians’ and investors’ minds, as well as among the broad public, as to whether the overall political commitment of Europeans to provide financing for the ailing periphery is at stake. Such a scenario would thus throw a spanner in the works of the relatively freshly common political will shown earlier this year on account of the various EU summits. It should not come as a surprise in this context that the public opinion in Germany, Slovakia and the Netherlands is growing increasingly opposed to further financial support.
In a sidenote to the note:
In our worst-case scenario, Finland would actually be only the tip of the iceberg, with political support for financial rescues eroding also in other core countries
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