Finland and the Netherlands, the eurozone's most hardline creditor states, cast the first doubts on Monday on a European summit deal designed to save Spain and Italy from being engulfed by the currency bloc's debt crisis.
The Finnish government told parliament that Helsinki and its Dutch allies would block the eurozone's permanent bailout fund buying bonds in secondary markets.
Eurozone leaders agreed last Friday (29 June) that rescue funds could be used in a "flexible and efficient manner" to lower government borrowing costs. Their statement gave no further detail.
The euro fell and safe-haven German Bunds reversed losses on news of the Finnish statement, which raised fears that the latest deal which drew a positive initial market reaction could be fraying.
Several previous market rallies after eurozone crisis agreements have fizzled within a day or two as investors have fretted about the lack of detail, the risk of delay and national vetoes, or the inadequate size of the rescue funds available.
The 17 eurozone leaders agreed in Brussels on steps to shore up their monetary union and bring down borrowing costs for Spain and Italy, regarded as too big to fail but also too expensive to rescue if they are shut out of markets. They gave few details on the use of the temporary EFSF and permanent ESM rescue funds.
ESM bond buying in secondary markets would require unanimity among eurozone members and that seems unlikely because Finland and the Netherlands are against it, the Finnish government said in a report to a parliamentary committee.
That is essentially true but there is a get-out clause in the ESM's rules which states that if the European Central Bank and European Commission feel the eurozone was under threat, then the rescue fund could act on the basis of an 85% majority vote to do so.
A Finnish proposal that Spain and Italy should issued covered bonds, backed by state assets or future revenues, to avoid Helsinki having to demand collateral for any bailout loans, failed to find agreement last week.
Prime Minister Jyrki Katainen's spokesman said the ESM stance had nothing to do with others blocking Finland's proposal. Helsinki simply did not consider secondary market purchases an effective way to counter the crisis, he said.
Dutch Prime Minister Mark Rutte said last Friday he was not in favour of using limited rescue fund resources, which run to a maximum of €500 billion, to try and turn the bond market.
"The chance of that is very small because I don't see the point at all of buying on the markets because you need a lot of money to do so," Rutte said. "The instrument exists but it can only be applied with unanimous support."
The ECB spent some €210 billion in the last two years to buy Greek, Irish, Portuguese, Spanish and Italian bonds without achieving any lasting improvement.
No treaty change
EU officials said the leaders had agreed in principle that the rescue funds would be empowered to buy bonds both at auction when they are first issued, and on the open market, if a government makes a request and signs a memorandum of understanding on macroeconomic conditions.
A European Commission spokesman also insisted that no changes to the treaty governing the ESM were required to enable the fund to recapitalise banks directly.
He was responding to doubts raised in the Netherlands by legal experts who said the treaty would have to be amended and ratified again.
The Commission's spokesman on economic and monetary affairs said articles 14-18 of the treaty set out the instruments the European Stability Mechanism has at its disposal to maintain financial stability in the euro area, and stated that its board of governors may decide changes to that list.
"That is our understanding of where we stand on that, that it would not require a change to the treaty," spokesman Simon O'Connor told a regular news briefing.
Dutch newspaper daily Het Financieele Dagblad quoted legal scholars as saying the Dutch parliament and other national parliaments in Europe would have to ratify the eurozone's ESM rescue fund again after EU leaders decided to directly capitalise banks from the fund.
Sources close to European Council President Herman Van Rompuy, who chaired last week's summit, said the leaders had taken great care to avoid any decision that would require ratification because of bitter past experience.
A deal to expand the scope and effective lending capacity of the temporary European Financial Stability Facility (EFSF) last July exacerbated bond market turmoil after a brief rally when it became clear it would take months to ratify.
Finland threw a spanner in the works by demanding collateral on its share of EFSF loans to Greece, requiring months of tricky negotiation, and Slovakia's coalition government fell apart over the EFSF deal, delaying ratification until mid-October.
Other factors that have spooked investors include the risk of Germany's powerful constitutional court delaying the entry into force of the ESM and possibly placing restrictions on its scope of action, and the fact that the Brussels summit did not increase the overall size of the rescue funds.
Some investors may calculate that the sums available to support Spain and Italy in the bond market are too small to bring their borrowing costs down in a sustained way.
In Athens, ECB executive board member Joerg Asmussen ruled out another widely canvassed solution to the debt crisis, backed by France, which would involve giving the ESM a banking licence and allowing it to borrow from the central bank.
"There is no silver bullet," he said in a speech. "Those who advocate 'once and for all solutions' – be that a banking licence for the ESM, a European transfer system, or the like – are contenting themselves with a superficial analysis."
Asmussen also urged Greece to focus on implementing economic reforms rather than losing time trying to renegotiate its EU/IMF bailout.