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Summary

Changes to the EU’s bailout fund, the European Financial Stability Facility (EFSF), have been tied to a second bailout for Greece — something five eurozone states, led by Finland, are reluctant to do. Finland is demanding collateral from Greece, in the form of cash, before it approves the bailout, and thus the EFSF changes. This leaves Germany with three unpalatable choices: Let the bailout of Greece fail, cover the difference itself and hope that no other state opts out or give in and allow a collateral deal to go through.

Analysis

A new obstacle has arisen in the eurozone’s efforts to avoid a financial meltdown. Changes to the EU’s bailout fund, the European Financial Stability Facility (EFSF), were agreed to at the eurozone’s July 21 summit but are still pending approval by the 17 eurozone governments. While these changes could end the concern of country defaults, they are wrapped up in the same package as a second, approximately 160 billion-euro bailout program for Greece — something several eurozone states, seeing this as just one in a long line of Greek bailouts, are reluctant to do

One of these states, Finland, has a government broadly opposed to the bailouts on principle. The Finnish government has recently negotiated a deal with Greece that would give it collateral for any new loans, and it has linked approval of this deal to its ratification of the EFSF changes. In the past few days Austria, Slovenia, Slovakia and the Netherlands have followed; demanding that any deal made available to Finland should be made available to all eurozone bailout participants. Helsinki has indicated a willingness to coordinate efforts.

Germany, which is trying to hold the eurozone and European Union together, has until now been able to override individual objectors. After all, Germany is the dominant economy and polity of the European Union in general and the eurozone specifically, and pressuring a small state like Slovakia or Finland into compliance is not a major challenge. However, the five objecting states combined comprise 12.63 percent of total contributions to the EFSF funding mechanism. Individual states’ weight in the vote over any changes is equivalent to their contributions to the fund — and changes require 90 percent approval. That presents Germany with three unappetizing choices:

1.Let the bailout of Greece fail
2.Cover the difference itself and hope that no other state opts out
3.Give in and allow a collateral deal to go through

The problem is that Greece is for all intents and purposes a defunct economy. It was only able to develop because the euro granted it access to unlimited amounts of cheap credit. Without that credit the economy is imploding — at an annualized rate of 6.9 percent as of Aug. 19. The question of what to use as collateral turned into an argument between the Finns, who wanted something of value, and the Greeks who didn’t want to surrender any plum assets. The compromise is that they would use cash.

The idea of demanding cash as collateral for a loan is a bit of an oxymoron; if Greece had the cash it would not need the loans. As STRATFOR currently understands the Finnish-Greek deal — as dubious as it sounds — the Greeks will have to deposit with the Finns a certain amount of money as collateral before the Finns will grant any loan monies to the Greeks. The Finns will then invest the Greek collateral in AAA-rated assets. If the Greeks default, they lose their collateral; if they do not, they get their collateral back.

The question becomes how much this collateral will be. For a full collateral deal, the Greeks would need to deposit the value of the loan — this would seem to obviate the need for the loan in the first place. Even smaller amounts will be difficult for cash-strapped Greece: Even if the collateral is only 20 percent of the loan value, as some reports indicate, the Greeks would have to come up with about 3 billion euros for just the first batch of bailout funds for the five states seeking collateral.

The end result is that any state that demands collateral will have far less participation in the bailout, if any. That leaves it up to the other eurozone states — most notably Germany — to pay out even larger volumes to make up the difference. This means that the next country to look to for domestic political obstacles to the EFSF solution to end the European debt crisis is not a rebellious Finland, an even-handed Netherlands or a mildly offended Slovakia, but instead Germany itself

Read more: Objections to Greek Bailout Create Problems for EFSF
STRATFOR