Peter Spiegel Finland and Italy: Enemies, a love story?

Monti, left, and Katainen at last week's meeting between the two prime ministers in Helsinki

It is axiomatic that politics make strange bedfellows, but it would be hard to find stranger bedfellows than Finland, the orneriest of the eurozone’s austere north, and Italy, the biggest debtor in its troubled south.

Even before the eurozone debt crisis put the two countries on a collision course, Helsinki and Rome had their run-ins, particularly after Parma beat out a Finnish competitor to host the European Food Safety Authority – and then-prime minister Silvio Berlusconi poured salt in the wound by suggesting EU officials would prefer Parma’s famous ham to Finnish smoked reindeer.

But are there suddenly signs of a thaw – or even an alliance? First, Berlusconi’s successor, Mario Monti, last week decided to visit Helsinki for meetings with Jyrki Katainen, Finland’s prime minister. Now, top officials from Berlusconi’s centre-right party appear to be adopting a Finnish plan to help lower Italian borrowing costs.

Renato Brunetta, a former minister in Berlusconi’s government and respected economist, has told our man in Rome, Guy Dinmore, that he will today present Monti with a plan to slash Italian borrowing costs by setting up basket of non-strategic state assets to serve as collateral for future debt issuance. To quote Guy’s story:

Speaking to the FT, he declined to reveal details but confirmed it centred on setting up a Triple A-rated private fund that would use non-strategic public assets allocated by the government as backing to issue bonds. “We can do it on our own; Italy is a rich country, with a high savings propensity,” Mr Brunetta said.

The plan sounds suspiciously like one backed by Katainen and his team at last month’s high-stakes EU summit, where Finnish officials circulated a proposal for so-called “covered bonds” – bonds that are able to generate more confidence in the private markets by “covering” them with state-owned assets as collateral.

According to a leaked copy of the Finnish plan (which can be read here), struggling eurozone countries would earmark tax revenue to service the new bonds or provide tangible assets as “credit enhancements”. The Finns said that once the assets are committed, the eurozone’s rescue funds could then provide a further backstop by committing to buy them at auction.

Finland certainly has its own interest at stake here. Because of rising anti-bailout sentiment at home, Katainen could only cobble together a governing coalition last year by agreeing to secure collateral in any future eurozone bailout, something that has irked other EU leaders.

Still, Finnish officials see covered bonds as beneficial both to their own political difficulties at home as well as to Italian and Spanish borrowers, noting that during the Finnish banking crisis of the 1990s, Helsinki was able to raise a huge amount of money to shore up its finances by issuing their own covered bonds under foreign law.

“The key challenge currently is to attract international investors back to buying the vulnerable Member States’ bonds,” the Finnish non-paper states. “Issuing covered bonds under international [law] with the readiness of the [eurozone rescue funds] to participate in such an issuance should ensure market access with lower bond yields than in normal issuance.”

Perhaps Italians will learn to like to eat smoked reindeer after all.