Finland’s bid to block bond buying pushes up premium

Finland will try to block Europe from using its bailout fund to buy government bonds from struggling member states, the Finnish government said in a report to parliament on Monday.

This option is one of the key items of the agreement reached last week at the European Council summit, where Finland spoke out against any easing of conditions for heavily indebted countries such as Spain and Italy who face high borrowing costs despite their austerity efforts.

Now, the administration of Jyrki Katainen says that the Netherlands also opposes the bond-buying solution. Dutch government sources said that they do not like the idea but are not planning to veto it.

The government of Finland is under pressure from a populist party known as “authentic Finns”

The future European Stability Mechanism, which will replace the current bailout fund, establishes that in emergency situations the money may be used to buy debt from struggling members, as long as the move has the support of 85 percent of member states. Finland would never reach this percentage, even if it teamed up with the Netherlands and Austria, the third country that has generally opposed sharing risks with imperiled peripheral states, even when the future of the euro is at stake.

Finland claims that bond-buying operations require unanimous support from all member states. The Netherlands says it is willing to study the possibility on a case-by-case basis.

Germany had also been consistently opposed the idea, although late last Thursday night Chancellor Angela Merkel relented and agreed to ease the conditions by which rescue funds may be used to aid countries frozen out by the markets despite having done their homework in terms of reforms and budget adjustment measures.

The government of Finland is under pressure from a populist party known as “authentic Finns,” which is demanding that their country play a leading role in the crisis. So far it has done so by trying to throw a spanner in the works of EU agreements subscribed by a majority of member states. In that vein, Finland also threatened to block the second Greek rescue package and did not offer its support until the last moment.

Finland’s announcement had a negative effect on Spanish sovereign debt; the risk premium overtook Ireland’s once again on Monday to reach 481 basis points or 4.8 percentage points, the excess return that investors demand to buy Spanish bonds over the benchmark German bund. The yield on Spanish 10-year bonds rose to 6.37 percent, while Ireland’s fell for the second day in a row to end at 6.344 percent.

It was a different story in the stock market, which closed up a shade to reach 7,100 points despite bad manufacturing news out of the United States.