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Finland Blocks Eurozone Bonds For Banks

(c) Sky News 2012

Finland will block the eurozone's permanent bailout fund from buying government bonds in the open market, in a move supported by the Netherlands, which risks harming a united approach to the debt crisis.

The determined stance comes after the eurozone leaders' agreement at a summit last week to take steps to shore up their monetary union and bring down Spanish and Italian borrowing costs.

The leaders gave few details on how they might use the temporary funds from the European Financial Stability Facility (EFSF) and permanent European Stability Mechanism (ESM) rescue funds to buy bonds.

Supporting Finland, a Dutch finance ministry spokesman said his government did not like the bond-buying idea but did not explicitly say the Netherlands would block the plan, saying only that it would evaluate purchases on a case-by-case basis.

"The Prime Minister said on June 29 he is not in favour of buying up bonds," Dutch finance ministry spokesman Niels Redeker said.

"Using the existing instruments to buy up bonds will be expensive and can only be done if there is unanimity (between member states). That means the Netherlands would need to vote in favour."

On the insistence of Spain and Italy, now in the eye of the euro debt storm, eurozone leaders decided last week to soften slightly the terms on which countries that observe EU rules and recommendations can get eurozone help to lower market premiums.

But the more cautious states fear the process may prompt a worsening of sovereign debt in the eurozone as a result.

The euro fell against the dollar, European stocks pared gains and German Bunds reversed losses after Finland said it would block the ESM rescue fund from buying the debt in secondary markets.

The agreement after last week's summit said interventions on bonds markets by the ESM and EFSF rescue funds would be carried out by the European Central Bank, acting as an agent for the funds.

But ESM bond buying on the open market would require unanimous approval from the 17 euro countries and that seems unlikely because Finland and the Netherlands are against it.

"Finland finds it an inefficient way to stabilise markets," a senior Finnish government official said in a report to an influential parliamentary committee.

"Due to intervention of Finland and, among others, the Netherlands, the possibility of ESM operations in the secondary markets was blocked."