Monday, April 18, 2011

Finnish election results may spark euro jitters

Early results Sunday from Finland’s parliamentary elections suggest the anti-EU bailout True Finns party will hold the second-most number of seats and could even be part of a coalition government.

Such an outcome may mean the EU’s planned bailout of Portugal is vetoed by Finland, a move that would roil the euro-zone markets.

With half the votes counted the True Finns were on 19% support, and on course for 41 seats, tied with the Social Democrats and one seat less than National Coalition Party’s predicted 42-seat haul, the BBC reported.

Finland is the only euro-zone country that requires bailouts to be approved by its parliament. Strong gains by the True Finns could derail a planned rescue for Portugal.

A stronger-than-expected showing by the True Finns, “or if some members from other parties take a similar line, could make things very touch and go,” said Steven Barrow, currency and fixed-income strategist at Standard Bank. “And clearly if there’s any possibility at all that Portugal might not get its money, it could hit bonds and the euro hard.”

Strategists note that the main opposition Social Democrats have hinted they may also oppose a bailout. The center-left Social Democrats opposed bailouts for Greece and Ireland.

The Portuguese bailout remains unlikely to be derailed, “but caution seems to be the watchword here until we can be sure that Finland can’t upset the party,” Barrow said.

European Union officials hope to finalize negotiations by mid-May on a Portuguese bailout expected to total around 80 billion euros ($115.7 billion).

A charismatic leader?


Reuters
Timo Soini, head of the True Finns Party.

At the least, True Finn’s ability to tap into anger over euro-zone bailouts may mean the next government draws an ever harder line in negotiations over Finland’s role in future rescues.

Much of the True Finns party’s recent success has been attributed to its leader, Timo Soini. The 48-year-old politician is often described as folksy and charismatic, with a reputation for witty speeches and vivid metaphors.

“How come they can’t see the euro doesn’t work?” Soini told Bloomberg earlier this year. “If a melon and an apple each wear the same size baseball cap, everyone can see that just doesn’t work.”

Soini is a “very charismatic” leader, who has skillfully employed populist slogans to denigrate opposing parties, said Ilkka Ruostetsaari, a professor of politics at Finland’s Tampere University.

The True Finns have “features that are common to all populist parties in Europe,” including a hostility to immigrants, Ruostetsaari said. A successor to Finland’s Rural Party, the True Finns have broadened their base of support from the countryside to suburban and urban areas, he said.

Soini contends Finland shouldn’t have participated in bailouts for Greece and Ireland. The True Finns oppose providing additional funding guarantees for the European Financial Stability Facility and the European Stability Mechanism, which will replace the EFSF in 2013.

Finland so far has agreed to guarantees on around €8 billion of funding for the EFSF. As one of the euro zone’s six AAA-rated country’s, the nation of 5.4 million people is set to provide crucial backing for the region’s bailout programs.

Tough talk on bailouts

Pasi Kuoppamaki, chief economist at Sampo Bank in Helsinki, said negotiations to form a new government could take some time. And if the True Finns become the third- or second-largest party in parliament, there could be reverberations in the financial markets, he said, speaking before the polls opened.

But like many observers, Kuoppamaki is not convinced that the True Finns would be in a position to block bailouts or increased rescue funding even if they were able to secure a junior role in a new government.

Finnish officials, however, reacted to the True Finns’ rise by offering tough talk on bailouts.

Finance Minister Jyrki Katainen, leader of the pro-EU National Coalition Party, warned at last week’s meeting of EU finance ministers that Portugal must implement additional austerity measures that go beyond the proposals rejected by the nation’s parliament in March.

And Finland last month balked at committing to a previously-outlined plan for the euro-zone’s AAA-rated nations to boost guarantees to the EFSF. Prime Minister Mari Kiviniemi, who heads the Center Party, said the decision should be made by the nation’s next parliament. EU leaders agreed to finalize the plan in June.

The BBC reported Sunday that while Katainen’s NCP will remain the largest party, Kiviniemi’s Center Party’s number of seats may fall to around 36. Even before the election, Katainen was seen as a strong possibility to lead the next government as prime minister.

Finland was hit hard by the global downturn in 2008, but has since bounced back strongly along with other northern European countries. The International Monetary Fund expects Finland’s economy to grow 3.1% in 2011 and 2.5% in 2012. The unemployment rate is seen at 8% this year, falling to 7.8% in 2012.

Finland’s deficit (equal to 2.5% of gross domestic product in 2010) and debt load (48.4% of GDP) are among the lowest in the euro zone and sit comfortably below the EU limits of 3% on deficits and 60% on debt.

The apparent appeal of the True Finns’ insular message runs in contradiction to the Finnish economy’s reliance on globalization, said Jan Randolph, head of sovereign-risk analysis at IHS Global Insight.

Finland is a major exporter of electronic goods. Mobile phone giant Nokia Corp. (NYSE:NOK) (OMX:FI:NOK1V) , the nation’s dominant corporation, accounted for 1.6% of GDP in 2009, according to Danske Bank.

But if Finnish politics rarely dominate headlines across Europe, European issues are rarely at the heart of Finland’s election campaigns, observers noted.

“This is out of the ordinary,” Sampo Bank’s Kuoppamaki said. It reflects “a feeling that Finland has been taking care of its own affairs,” while others in the euro zone have shirked their responsibilities — a feeling that the True Finns have successfully tapped.

Randolph sees little chance Finland will turn away from the euro zone in the wake of the elections.

“More worrying is the general spread of populist and nationalist politics in the EU,” Randolph said.

French President Nicolas Sarkozy’s UMP party suffered big losses in regional elections in March, with the far-right National Front making large inroads, he noted.

The tone makes it more difficult to sell austerity in debtor nations and to make the case for backing the euro and the EU in creditor countries, Randolph said.

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