Finland Agrees to Back Portugal Aid Provided Conditions Met

May 12 (Bloomberg) — Finland will back a bailout for Portugal provided the third euro member to require aid in 12 months agrees to conditions including state asset sales.

Portugal, which needs backing from all 17 euro nations to tap Europe’s stability facility for cash, must also start talks with private investors to ensure their funds stay in the country before a bailout can be paid out, Finance Minister Jyrki Katainen told reporters in Helsinki late yesterday. In addition, Finland wants a guarantee that bailout donors will get their loans repaid before private investors, he said.

“We have reached a common understanding,” said Katainen, who leads parliament’s biggest party after April 17 elections. He made the announcement following talks with the Social Democrats, Finland’s second-largest group since the vote.

The accord ends months of uncertainty over whether the northernmost euro member would try to block rescue measures for Europe’s latest fiscal casualty. Voters in Finland have rewarded parties critical of bailouts, with the euro-skeptic True Finns winning record backing to become parliament’s third-biggest group. Katainen has struggled to secure Finnish support for Portugal’s rescue before a May 16 meeting of his European counterparts and ahead of next week’s coalition talks.

“The crisis is not over and Finland cannot be a country that would shake the fragile situation by keeping things open or hinting that we are not involved in all the mechanisms,” Katainen said after yesterday’s briefing.

True Finns Exit

True Finns leader Timo Soini said today he won’t join coalition talks, after Katainen made a pro-bailout stance a condition for negotiations.

“It was a hard decision, we made it ourselves,” Soini said at a press conference. “We will now do opposition politics.”

Finland will also require collateral from any countries seeking assistance from the European Financial Stability Facility after Portugal, Katainen said in a joint press release with Social Democrat leader Jutta Urpilainen.

“The collateralization issue makes a lot of sense politically and for sovereign creditors, but this is shadow burden-sharing for some bondholders, who will fall further down the credit food chain,” Sassan Ghahramani, president and chief executive officer of SGH Macro Advisors in New York, said by phone yesterday.

Coalition Strings

Any coalition formed after May 18 talks will be obliged to back a Portuguese bailout with the conditions presented yesterday, according to the statement. The next government must also support the EFSF and the permanent European Stability Mechanism, due to come into effect in 2013. Finally, Finland’s next coalition will strive to “change the rules of the game” in financial markets, with measures including bank taxes, according to the joint statement.

The Social Democrats, who earlier this week said they would seek to make burden sharing a condition of any bailout, will back a rescue if Finland’s conditions are met, Urpilainen said at the press conference.

Efforts to make burden sharing a condition of future bailouts “could have an unintended side effect and put a chill on private sector involvement in Portugal,” Ghahramani said. “It may not be so relevant now that Portugal is effectively taken out of the markets, but it could have an impact one or two years from now when Portugal returns to the market. It will depend on whether markets get their confidence back in the meantime.”

Debt Markets

The difference between Portuguese and German two-year government yields narrowed 30 basis points yesterday to 988. Five-year spreads shrank by the same amount to 902 basis points. Finland’s two-year notes yielded 18 basis points less than same-maturity German debt, the lowest borrowing cost in the euro area, according to Bloomberg data.

Lawmakers in Europe’s AAA rated countries want tougher terms for bailouts amid speculation that Greece may be forced to restructure its debts just over a year after it agreed its 110 billion-euro ($158 billion) rescue. Standard & Poor’s on May 9 lowered Greece’s debt rating by two steps to B, five levels below investment grade.

German Chancellor Angela Merkel said this week Greece needs to meet strict terms to deserve an extension to its loan. Lawmakers in Berlin will approve Portugal’s rescue, a document from the ruling parties prepared for a Budget Committee meeting and handed to reporters showed yesterday.

Burden Sharing

Burden sharing will be incorporated into Europe’s permanent stability mechanism. The EFSF doesn’t include provisions for investor losses.

Portugal will pay between 5.5 percent and 6 percent interest on the European portion of a 78 billion-euro bailout, comparable to the rate currently paid by Ireland, European Union Monetary Affairs Commissioner Olli Rehn said on May 10.

The package calls for Portugal to implement the austerity measures that the Lisbon-based government proposed and parliament rejected in March. Spending reductions for 2012 and 2013, including cuts to pensions, will amount to 3.4 percent of gross domestic product, while revenue increases will represent 1.7 percent of economic output, Finance Minister Fernando Teixeira dos Santos said May 5. The plan also earmarks 12 billion euros for Portugal’s banks.