Want to see where the euro is headed next week? Watch the Finnish elections on Sunday

04/15/2011 6:01 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

He said the R-word and look what happened.

On April 14 German Finance Minister Wolfgang Schaeuble told a German newspaper that Greece may need to restructure (that’s the R-word) its debt if a June audit questions the country’s ability to pay bondholders.

And what did yields on Greek and Portuguese debt do? They soared to euro-era records for the countries’ 10-year bonds. The yield on the Greek 10-year note climbed to 13.27% in London trading and the yield on the Portuguese 10-year note climbed to 8.89%.

Those yields actually strike me as low. In the case of a Greek restructuring bondholders could take losses of 50% or more. But bondholders almost certainly have laid off some of that risk (or at least think they have) in the credit default swaps market.  In that market the cost of insuring against a Greek default on government debt climbed to a record to price in a 60% chance that the country will default within five years.

European Union Economic and Monetary Affairs Commissioner Olli Rehn tried to talk down the odds of restructuring in an interview on April 14 on Bloomberg Television. He’s confidant that an aid package will be negotiated for Portugal within a matter of weeks that would “ring fence” the debt crisis.

Again.

Well, okay, but a rescue package for Portugal wouldn’t do anything to reduce the Greek debt load or make it easier for that country to pay its bondholders.

And after listening to Martti Salmi, a policy adviser in the Finnish finance ministry, I wouldn’t be so sure about a quick deal for Portugal either. Finns go to the polls on Sunday to elect a new national government and at the moment pre-election opinion surveys show 47.3% of votes going to parties that oppose a bailout for Portugal. The European Union shouldn’t assume Finnish support for any rescue package, Salmi told reporters after a tour of the country.

And Finland counts. The country is one of just six members of the European monetary union with an AAA credit rating—absolutely necessary to underpin the financing for any bailout mechanism--and the country would be required to contribute a more than average share of any guarantees for Portugal.

The price for Finnish participation at the moment looks likely to include budget cuts that go beyond those rejected by the Portuguese parliament last week. That position will either make it impossible to negotiate a deal or result in a deal so onerous that Portugal, like Greece, will be forced to restructure its debt somewhere down the road.

Should make next week very interesting.

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