Will Portugal Hit the 'Finnish' Line?

Talks to form a new government in Finland, due to start later this month, will add to tensions in the peripheral euro zone debt markets and will act as a reminder to EU-friendly political parties elsewhere in Europe of a growing eurosceptic constituency, Richard McGuire Senior Fixed Income Strategist at Rabobank said.

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Finland’s True Finns, whocame third in Finland’s elections last month, will attempt to form a coalition government with other key political parties.

But the party staunchly opposes bailouts of euro zone debt and deficit offenders and a bailout of Portugal in particular.

Late on Tuesday, Portugal became the third euro zone member to get a bailout from the European Union and the International Monetary Fund. It will receive 78 billion euros ($115.4 billion) over three years.

Unlike parliaments in other euro zone countries, Finland’s parliament can vote on EU requests for bailout funds.

“Near term then, the probability of renewed peripheral tensions, irrespective of the ongoing speculation over Greek restructuring, remains high,” McGuire said in a note released before the Portugal bailout was agreed.

“While carrying some intellectual weight, this strategy does, however, further complicate the task of selling the EFSF (European Financial Stability Fund) to an increasingly weary core electorate (core politicians so far having underlined the 'strict conditionality' of the mechanism) while no doubt increasing pressure from Dublin for a re-negotiation of Ireland’s original terms,” he said.

“Crucially, any hint of a ‘free lunch’ also raises the likelihood of Portugal’s package being voted down by a newly formed Finnish government,” McGuire said.

Amid these tensions in the euro zone periphery, Rabobank continued to see scope for gains for a trade going long 10-year Dutch versus French bonds, McGuire said.