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State bonds to harvest a shady market yield

Premier Vladimír Mečiar's flair for the controversial was once again in evidence on April 17 in the town of Ovčiarsko near Žilina. Discussing the Finance Ministry's decision to allow private citizens to buy state bonds, Mečiar declared that "these state bonds could be bought by anyone, even people who have hidden 'black money' and do not pay taxes on it. This is our way of giving them a chance."
Mečiar's statement was immediately attacked by opposition politicians as an open invitation to money laundering by organized crime. The accusations were repeatedly denied by government figures, who said the Prime Minister had only been appealing to citizens that were leery of banks to buy government bonds and thereby put their money to work for the state.

Premier Vladimír Mečiar's flair for the controversial was once again in evidence on April 17 in the town of Ovčiarsko near Žilina. Discussing the Finance Ministry's decision to allow private citizens to buy state bonds, Mečiar declared that "these state bonds could be bought by anyone, even people who have hidden 'black money' and do not pay taxes on it. This is our way of giving them a chance."

Mečiar's statement was immediately attacked by opposition politicians as an open invitation to money laundering by organized crime. The accusations were repeatedly denied by government figures, who said the Prime Minister had only been appealing to citizens that were leery of banks to buy government bonds and thereby put their money to work for the state.

Economic analysts, meanwhile, said that Mečiar's blunder only underlined the worsening plight of Slovakia's cash-strapped economy.

Making sense

The reaction of Ľudovít Černák, Vice-Chairman of the Democratic Union, was typical of the responses of opposition deputies. "The Slovak economy is probably much worse than statistics reveal, if Mečiar is calling on embezzlers and the Mafia to come and save it," he said. "Such a statement would mean the end of the career for any constitutional official in a democratic country."

Finance Minister Miroslav Maxon, meanwhile, backpedalled furiously from suggestions of corruption. "I do not think the Premier intended tax evasion in his statement," he explained. "Maybe his choice of words wasn't so clearÉin my opinion, the Premier did not mean money that physical and legal entities had gained in whatever way, or untaxed resources, but he meant money stuck in people's homes and not working for the Slovak economy's benefit."

Maxon continued that any sale of state bonds to private citizens would be carried out with the utmost rectitude. "I, as the Finance Minister, am not offering anything to anyone who would have untaxed resources," he declared. "I am making an offer to those who have money at home because they feel unsure about the situation in banking. They will have these bonds guaranteed by the state."

Foreign banking analysts, meanwhile, said that Mečiar's statement had not been a mere slip of the tongue but a deliberate statement of the Slovak government's current fiscal policy. Slovakia had a sizeable 'grey market', they claimed, consisting of everything from untaxed labor and barter exchanges to cigarette smuggling. The size of this shady market, and the state's well-publicized cash flow problems, had determined the government to tap even ill-gotten financial sources.

One analyst with a foreign bank, who requested anonymity, pointed out that Mečiar's economic circle had been toying with the idea of luring black money into the state budget for quite some time. "Last year, Mečiar's economic advisor, Peter Staněk [currently Finance Ministry State Secretary], wrote an article advocating attracting some resources from the black or grey economy to the normal economy," the source said.

Staněk's 'article', actually an interview published last May in the Media Kurier monthly, introduced the idea of extending a "general pardon" to the grey economy.

Estimating Slovakia's grey economy to be worth 15 to 20% of GDP, or 30 to 40 billion Sk ($0.9 to 1.1 billion), Staněk proposed to tap these shady resources by "selling state bills of credit to people without asking them where they got the money for the bills." Organized crime was a slippery opponent, he concluded, and the Ministry would be better off arranging a truce than beginning a crusade. "We could try to strike sharply against the grey economy, but it would move to another place, just like fog over the water, and we would only grab a little part of it," Staněk claimed.

In an October 1997 interview with The Slovak Spectator, Staněk returned to the theme of tapping Slovakia's grey market. "What about this shadow economy?" he asked. "It is worth some 40 to 50 billion Sk. If we could tax it, we would bring in an additional 10 to 15 billion Sk to the state treasury, and we would have no further budget problems. But no one in the government is talking about this probĺem, which is basically one of criminals and shady entrepreneurs."

Mutual benefits

As the foreign banking analyst explained, Staněk's vision had finally taken shape with the Ministry's plan to begin issuing state bonds to citizens this month. "I think Mečiar was discussing this issue with Staněk and this [statement] was the result of these debates," the analyst said. "I think it was a deliberate [statement], just one that he hadn't planned. But it was not an accident. There are some rumors and facts that mafia structures are connected to some sectors of the economy and state, and this could be some kind of policy."

The government is currently in dire financial straits. Its highway construction program will cost a scheduled 16.5 billion Sk (470 million) this year, while over 75 billion Sk (2.14 billion) in state paper matures in 1998. Meanwhile, an April 28 auction of two-year Treasury bonds brought an average yield of 27.19%, an exorbitant figure which the Ministry had no choice but to accept given its financial commitments. On foreign markets the situation is no rosier, with the government's $1 billion Eurobond issue, to be launched in the first week of May, bearing an interest rate of LIBOR+300 to 350 bps (3 to 3.5% above the London interbank rate).

The outrageous cost of money, the analyst said, was forcing the Finance Ministry to take desperate measures, such as offering state bonds to all comers. "The black market will provide the government with much-needed funds, and the government will provide the Mafia with much-needed laundering," the analyst said. "It is a mutually beneficial situation."

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