June 28, 2012 / 10:41 AM / 7 years ago

Finnish PM says vulnerable euro zone states should issue covered bonds

BRUSSELS (Reuters) - Euro zone countries under market pressure could issue covered bonds, which are backed by government assets or concrete tax revenue streams, to help calm markets, Finland’s Prime Minister Jyrki Katainen said in a statement on Thursday.

Katainen’s proposal comes as European Union leaders gather in Brussels to discuss long-term deeper future integration of the single currency area and, possibly, more short-term steps to address the escalating sovereign debt crisis.

“As one practical step, vulnerable member states could issue covered bonds to access markets with lower interest rates,” Katainen said in the statement.

“Covered bonds are backed by government assets or by tax revenue earmarked to service the bonds. This is what Finland did in a difficult economic situation in the 1990s and it is standard practice for banks today,” Katainen said.

Greece, Ireland and Portugal have already been cut off from market financing and Spain and possibly Italy could be facing the same fate as investors worry about their ability to repay their large public debt.

Rome and Madrid have called for the euro zone’s bailout funds, the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), to intervene on the market to lower their borrowing costs.

“The EFSF or ESM could stand ready to intervene in the primary market to facilitate successful issuance of the covered bonds,” Katainen said.

“This, together with strong policies by the member states concerned, would be important to ensure the stability of the euro area,” he said.

Reporting By Luke Baker, writing by Jan Strupczewski; editing by Rex Merrifield

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