UPDATE 3-Collateral row drags in Berlin as Finns dig in heels

Tue Aug 23, 2011 11:40am EDT

* Senior German conservative backs collateral idea

* Berlin says stance doesn't reflect govt's position

* Finnish PM: could quit Greek aid if no guarantees

* Bank lobby says more demands could delay approval (Adds Finnish PM, German official, IIF and background)

By Stephen Brown and Terhi Kinnunen

BERLIN/TAMPERE, Aug 23 (Reuters) - A minister in Angela Merkel's conservative party propelled Germany into a euro zone debate about guarantees for Greek aid, backing a demand for collateral by Finland, which said it could quit the bailout programme if its request was turned down.

With Finnish Prime Minister Jyri Katainen telling Reuters his country could pull out of the Greek rescue scheme if guarantees are not put up, Germany's labour minister proposed using gold reserves and state industry stakes as security for aid.

"Several states are making big efforts to service their debt. This must be honoured. But to keep up those efforts in the long term, collateral is needed," Ursula von der Leyen, who is also a deputy leader of the German chancellor's Christian Democrats (CDU), said on television on Tuesday.

German officials said her comments were not the government's position and that the key issue was to link aid under the euro zone rescue fund, the European Financial Stability Facility (EFSF), to "strict conditions" regarding fiscal reforms.

"Von der Leyen is expressing a personal opinion and doesn't have authority as a minister on this issue," said one official.

Greece agreed last week to provide cash collateral for AAA-rated Finland's loans in a bilateral deal that sparked requests for similar treatment from Austria, the Netherlands and Slovakia. This prompted rating agency Moody's to warn that Greece's bailout payments could be delayed.

Similarly, the Institute of International Finance - the banking lobby helping to coordinate private sector involvement in the Greek rescue scheme - warned on Tuesday that more demands for collateral could hold up the approval process.

But the Finnish leader, asked by Reuters whether Helsinki could drop out of the Greek aid programme if its demands were rejected, answered: "Yes ... It is our parliament's decision that we demand it as a condition for us joining in."

Austria has been an outspoken critic of the bilateral deal and said on Tuesday it was one of "many" euro zone countries with concerns about unfair treatment.

The three latest countries to voice their demands and the Finns together account for around 11 percent of the euro zone contribution to the new 109 billion euro ($153.5 billion) Greek bailout.

Though its share of the package is tiny, Finland punches above its weight because of its top-notch credit rating -- which it shares with Austria and the Netherlands -- and the fact that its parliament is empowered to vote on funding issues.

RUMBLINGS OF DISCONTENT

Von der Leyen's bold comments on a central policy issue contradicted earlier unattributable remarks by Berlin officials that focused on concerns about potential copy-cat requests for collateral from other countries.

They also reflect growing discontent in Merkel's centre-right coalition, whose popularity is sinking in polls following a rash of state election setbacks this year.

As German unease at funding euro zone rescue schemes grows, polls are showing public dissatisfaction with her management of the euro crisis in particular.

The Bundesbank issued a sharp criticism of Europe's -- and by default Merkel's -- crisis management on Monday, saying there was a risk of the currency bloc becoming a "transfer union" in which Germany pays for its partners' fiscal indiscipline.

With some coalition lawmakers even threatening to break ranks on a vote next month on the EFSF, the CDU decided to put the euro crisis high on the agenda of its November congress.

While von der Leyen has little direct say in euro policy as a minister, she does sit on a new CDU committee that will debate euro zone policy ahead of that event.

She has in the past been mentioned as a possible successor to Merkel but was passed over by the chancellor in her selection of a candidate for the largely ceremonial post of German president last year.

Some conservative MPs, including financial policy expert Klaus-Peter Flosbach, have also mentioned the option of Greece putting up gold reserves as collateral in recent interviews.

Analysts say any new signs of discord in the euro zone could fuel market fears that leaders are incapable of keeping a lid on the crisis.

Moody's said seeking collateral showed a lack of will in some euro zone countries, putting more pressure on Germany and France to take stronger steps to support the euro project and driving Greece towards default.

Athens, which clinched a new rescue package at a euro zone summit in July covering its borrowing needs up to mid-2014, is scheduled to receive the next 8 billion euro tranche from its first bailout package in September. (Additional reporting by Michael Shields in Vienna, Gernot Heller and Annika Breidthardt in Berlin and Steve Slater in London; writing by Stephen Brown; editing by John Stonestreet)

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