Dazed and confused? Read on for a deconstruction of the latest act in the euro crisis drama, the Spanish bank bailout. The main characters are Finland and Spain, with eurozone and European Union members cast as supporting players.

The Spanish problem: On June 25 the Spanish government turned to the EU for financial assistance with restructuring and recapitalization of its banks. The banking sector collapse was caused by a domestic credit boom that helped inflate a real estate and related construction bubble. When the wider euro economic crisis caused a recession and widespread job losses, huge defaults caused some banks to stumble. Flagging investor confidence also increased the cost of borrowing for banks, forcing the government to step in.

The European bailout proposal: European Union leaders meeting in Brussels at the end of June agreed to earmark up to 100 billion euros to help prop up the foundering Spanish banking sector. The precise sum to be loaned – to the Spanish government for the bank restructuring program – would be specified once due diligence tests had been conducted on the affected banks. The Spanish government would also have to agree to rescue only those banks deemed to be financially viable. Since the permanent EU bailout fund – the European Stability Mechanism or ESM – is still to come online, EU heads agreed to bankroll the Spanish bank bailout from the temporary European Financial Stability Facility, the EFSF.

Finland’s collateral deal

Finland’s government policy specifically requires the government to ask for collateral if the temporary bailout fund, the EFSF, is used for rescue packages. This is because loans from the EFSF do not enjoy seniority status, meaning, borrower states do not have to repay EFSF loans first, but can service other financial commitments, such as public and private sector debt.

The collateral requirement therefore ensures that Finland recovers some of its loan funds in the event that other loan commitments take precedence over EFSF repayments. Since both the Greek and Spanish bailouts were funded by the EFSF, Finland asked for – and received – collateral guarantees in both cases. The Spanish bailout was modeled on the Greek case one year earlier.

The Finnish bailout contribution: 1.925 billion euros

The Finnish collateral request: 40 percent of the Finnish loan contribution of 1.9 billion euros, or 769.92 million euros. The average duration of the loan is 12.5 years, not to exceed 15 years.

What Finland surrendered: The collateral deal came at a cost to Finland. Specifically, unlike other states that can pay their contributions in five installments, Finland will make its contribution in one payment. Finland also agreed to surrender its right to any interest earned on loans granted to Spain as part of the bailout.

How the collateral will be paid: The collateral will be paid into Finland’s collateral account once Finland’s contribution to the EFSF fund for the Spanish rescue package is paid to Spain. Finland will hold the collateral until Spain has repaid the loan. The cash will be paid out from Spain’s deposit guarantee fund, which essentially affords Finland the same level of protection as Spanish depositors.

Ratings agency vindicates Finnish collateral deal

In July the ratings agency Moody’s announced that it was downgrading the outlook for three of Europe’s strongest triple-A rated economies from stable to negative. At the same time, it affirmed the stable outlook for Finland’s triple-A economy, in the process knighting the small Nordic economy as the strongest in the European Union and the eurozone, in its view.

One of the reasons cited by Moody’s for maintaining Finland as “the sole exception among the Aaa-rated euro area sovereigns”, was the controversial collateral deals it negotiated in exchange for supporting an EU-led bailout of Greece last year, and the more recent rescue package for struggling Spanish banks.

The collateral guarantee brokered with Spain came under heavy criticism locally in Finland, with opposition parties protesting the rescue of private banks by Finnish taxpayers. Further afield in Europe, tiny Finland’s insistence on receiving collateral for its minute contribution of just under 2 billion euros of the weighty rescue package was seen as obstructionist by other European states.

Some analysts are now speculating however, that following Moody’s seemingly implicit endorsement of the Finnish collateral position, other European states may now be reconsidering the pros and cons of a similar arrangement in the event of future bailouts.