“…HOW ABOUT IT, TOM…CAN YOU GET ME OUT OF THIS…FOR OLD TIME’S SAKE?”

8/29/11

The big sub-story on the Greek bailout (at least until this morning’s announcement of the merger of Alpha Bank SA and EFG Eurobank Egrasias SA) was the insistence on the part of Finland that the Greek government put up cash collateral for Finland’s portion of the new debt being extended as part of the latest iteration of the Greek bailout.

This call for collateral by the Finns is causing consternation among the countries contributing to the financial package that is supposed to save Greece, though no one really believes that end will be achieved. If Finland gets cash collateral, the thinking goes, why shouldn’t everyone get collateral? And if everyone gets cash collateral, so much more financing will be needed that the overall deal will fall apart.

So how will this issue be resolved? Some are speculating that physical, as opposed to cash, collateral will be offered for the bailout lending; real estate, gold, state owned industries, etc. would be put up to secure the loans Greece will receive from its EU brethren. But the problems involved in offering physical collateral are myriad. Will the Greeks be amenable to such a deal? Aren’t some of those assets to be put up to secure the loan supposed to be sold as part of the overall restructuring of the Greek fisc? (I don’t think the latter objection is a worthy one for reasons that could be grist for another post.) What exactly will the lenders do to seize collateral should the Greek government default? What consequences would ensue from such efforts? And on and on and on.

I can’t get inside the heads of the Finns who are asking for collateral. But if I were to guess, what the Finns are really after is to be excused from the whole deal. One of the lessons one can derive from restructuring negotiations is that creditors can get more than they are legally entitled to if they make themselves a sufficiently large nuisance. While the analogy is not perfect, it looks to me like the Finns are making themselves a nuisance in order to get out of the Greek bailout deal. While Finland is among the most financially responsible countries in the Eurozone, the EU, and the world, for that matter (See my 4/14/11 post, “…’CAUSE I DON’T HAVE A WOODEN HEART…”), it is a small country that, due to its diminutive size, is expected to contribute only a miniscule portion of the lending facilities necessary, supposedly, to keep Greece afloat. Finland’s portion could easily be covered by, say, Germany or France. So the big countries in Europe may see it in their interest to just excuse Finland from any obligation to help bail out Greece rather than accommodate Finnish demands for cash collateral. Such an excusal, if that is a word, I am guessing, is exactly what Finland is seeking.

Sure, a move by Germany or France to pick up Finland’s tab for the Greek bailout would set a very bad precedent, but what action that the European Union has taken in response to the problems in Ireland, Greece, Portugal, et. al. hasn’t set a very bad precedent?