THE MOCHOVCE nuclear plant was backed by state guaranteed loans.photo. TASR
ALTHOUGH cuts are required in Slovakia's burden of state loan guarantees if the country is to join the European Monetary Union [EMU], such guarantees continue to rise, last year reaching record levels.
Government guarantees on loans were a record Sk57.34 billion ($1.22 billion) in 2001, up from Sk48.57 billion in 2000, bringing total guaranteed loans over the last 12 years to Sk261.7 billion ($5.6 billion), according to a Finance Ministry report.
The majority of loan guarantees, under which the state is obliged to cover the debt if the borrower cannot, have gone to state firms such as electricity utility Slovenské elektrárne, construction company Vodohospodárska výstavba and debt-laden railway operator ŽSR.
However, the Finance Ministry has warned that many of the firms holding state guarantees are either unable to pay their loans or are under bankruptcy protection, representing a major risk that state debt will mount as the guarantees are formally called in by creditors.
Over the last 12 years, the state has amassed debts from called loan guarantees exceeding Sk36 billion, Sk8 billion from last year alone, but has so far repaid only Sk2.6 billion of the money.
"Over the last year, the total amount of unpaid guaranteed loans exceeded 15 per cent of GDP. If this were added to current state debt, which is already 38 per cent of GDP, we would get close to the 60 per cent limit for countries aspiring to enter the EMU," said Istrobanka analyst Marek Senkovie.
The EMU, a European economic zone of countries which use the euro as a single currency, requires that member countries follow inflation, debt and fiscal deficit targets, among others. While joining the EMU is not an automatic requirement of nations aspiring to join the European Union, Slovakia has set itself the ambitious task of joining the EMU by 2007.
When Slovakia became independent in 1993 the new state began with a debt of Sk71.5 billion. The figure had grown to Sk224.2 billion by the beginning of 2001, and jumped by a record 63 per cent to Sk367.5 billion by year's end, largely as a result of the immense costs of restructuring state banks before their sale.
"We still have many years [before entry into the EMU] to solve this problem. But if we take into account the poor government budget policies we have seen up until now, we could theoretically cross the debt ceiling for entry," warned Senkovie.
The Finance Ministry has attributed the recent growth in called state guarantees to the previous and current government's policies of financing companies in bad economic situations to postpone bankruptcies and prevent growth in Slovakia's unemployment rate. Since the current government took over in 1998, unemployment has grown from under 14 per cent to around 20 per cent, while many propped-up firms have crashed and their debt guarantees been called.
According to Senkovie: "The biggest companies using this kind of government support would probably go bankrupt without it. But [providing guarantees] is only postponing their problems and uselessly prolonging the companies' lives.
"Government guarantees make loans riskless for banks, thus giving the advantage to companies that have them. But in a market economy, businesses should try to survive without help, not rely on someone else.
"As long as such 'pillows' exist, inefficient companies are not forced to restructure," said Senkovie.
"The state should stop providing guarantees, or provide them only for projects that are beneficial for the public and obviously not profitable, like infrastructure projects."
ING Bank senior analyst Ján Toth agreed, adding that "for the sake of the state budget deficit, it would be better not to provide any guarantees.
"The former government used guarantees instead of direct spending from the budget, trying to avoid an increase in the fiscal deficit, while knowing that the guarantees would have to be called."
While the Finance Ministry report urged that "the amount of guarantees has to be reduced to a minimum and they have to be focused only on development programmes and projects enabling the use of EU pre-accession funds," there is little indication that the government is listening.
The 2002 state budget stipulates that loan guarantees to businesses this year should not exceed 13 per cent (Sk28.6 billion) of planned budget income, although by the end of April, the government had already provided guarantees of Sk12.08 billion, or 42 per cent of the annual limit.
