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UNCERTAINTY OVER EFFECT OF EUROZONE SLOWDOWN ON SLOVAK GROWTH PROSPECTS

Slovakia backs crisis action

SLOVAKIA supports the joint actions by eurozone countries to calm the financial crisis: this was the message that Prime Minister Robert Fico delivered to a special summit of eurozone leaders, who met on October 12 and 13 in Paris to ponder the best responses to the financial turmoil. Slovakia, which will join the eurozone on January 1, 2009 was invited for the first time to the group’s meeting, which offered some respite to edgy markets.

SLOVAKIA supports the joint actions by eurozone countries to calm the financial crisis: this was the message that Prime Minister Robert Fico delivered to a special summit of eurozone leaders, who met on October 12 and 13 in Paris to ponder the best responses to the financial turmoil. Slovakia, which will join the eurozone on January 1, 2009 was invited for the first time to the group’s meeting, which offered some respite to edgy markets.

“I am putting a huge emphasis on the joint action of the eurozone because I think that if these statements were to be carried out, the financial markets would be calmed and it would bring a return to trust,” Fico told public-service broadcaster Slovak Television on October 12.

Eurozone leaders agreed on a financial lifeline to ailing banks in order to prevent key financial institutions from failing.

Meanwhile, the prime minister, the governor of the central bank, analysts with commercial banks and market watchers have continued to declare that the banking sector in Slovakia is stable and solvent.

“Many of the measures that [eurozone leaders] propose are not yet necessary for Slovakia to carry out because Slovak banks are in good condition,” Fico said.

The Slovak cabinet has already amended the law on deposit guarantees so that the state will guarantee the full amount of customers’ cash deposited in Slovakia’s banks.

To ease some of the global monetary woes the European Central Bank has reduced the minimum bid rate on the main refinancing operations of the euro system by 50 basis points to 3.75 percent, with effect from the main refinancing operation to be settled on 15 October 2008.

The interest rate on the marginal lending facility has been reduced by 50 basis points to 4.75 percent and the interest rate on the deposit facility has been reduced by 50 basis points to 2.75 percent, the ECB said.

However, the market in Slovakia continues to ponder what the next steps of the National Bank of Slovakia (NBS) will be.

“We expect the NBS to cut interest rates at its next session by 50 [basis] points,” said Juraj Valachy, an analyst with Tatra Banka. “However, this cut will not have too great an impact since in three months Slovakia will become part of the eurozone and rates will then fall within the remit of the European Central Bank.”

According to Valachy, the problem is that even after the rate cut by the ECB, market rates have not come down on the money market and that neither companies nor citizens have therefore benefited from the cut in the form of lower interest rates.

“We expect that the ECB will continue to cut its key rates decisively, with the goal of supporting the economy,” said Valachy. “If the liquidity crisis calms, the cutting of interest rates should be significantly reflected in market rates.”

Silvia Čechovičová, a senior analyst with the ČSOB bank, said that cutting interest rates is a natural move that the NBS must do because of Slovakia’s entry to the eurozone.

“If the situation on the money markets was completely normal, cutting interests rates would also be reflected in lower interest rates for banking products,” Čechovičová told The Slovak Spectator. “However, the situation is not normal. Despite the cut to basic rates, rates in the money market in the eurozone remain extremely high and do not correspond to the basic rates.”



After Slovakia enters the eurozone these rates will also apply to Slovakia, she added.



Will forecasts change?



The market has also been waiting for the central bank’s word on how it will revise its forecast for economic growth in response to the impact of the crisis, since it is now clear that Slovakia will not be unaffected by a slowdown.

Recent developments have confirmed that the eurozone, which is Slovakia’s major trading partner, is anticipating a considerable slowdown in economic growth, according to Valachy. Since Slovakia’s economy is strongly intertwined with it, Slovakia will not avoid any slowdown, he added.

Čechovičová agreed and suggested that her bank would also revise its original estimate of GDP growth for 2009, which currently stands at 6.5 percent.

“A slowdown in the growth of the eurozone would naturally be reflected in Slovakia’s economy, which is a small, open, export-oriented economy,” Čechovičová said. “We will wait for the GDP numbers for the third quarter of 2008 and will then give a definite form to our estimate. However, it should move in the range of 5.5 percent to 6 percent.”

According to Valachy, the crisis has partially abated.

“However, a correction on the money market has still to take place and the liquidity crisis is continuing,” Valachy said. “It will take longer before financial markets return to normal.”

Čechovičová said that though the market is still nervous, the recent measures taken by European authorities have brought a certain dose of optimism.

“However, to say that we can see the beginning of a new era would be premature,” she said. “Coordinated action on the part of global central banks [cutting interest rates by 50 basis points] has not so far been reflected significantly in the money market.”

Čechovičová said that the volume of public guarantees, the buy-up of troubled assets, deposit guarantees, pouring capital into the system and, primarily, the necessary degree of international coordination give hope for the future.

Meanwhile, on October 15, thirty-eight European economic policy organisations and think-tanks released a joint statement about the financial crisis suggesting that the basic cause of the global problem was that governments engaged in excessive credit expansion and pressured banks to make loans, particularly home loans, to unqualified buyers.

Slovakia’s INESS – the Institute for Economic and Social Analyses, the Conservative Institute of M.R. Štefánik and the F.A. Hayek Foundation were signatories to the statement.


The organisations proposed a set of recommendations that, in their opinion, governments should follow in dealing with the crisis.

They suggest that governments should refrain from rescuing particular businesses or business projects since the “cost of saving businesses that have failed will fall on the shoulders of others, through increased taxes, inflation, or capital misallocation.”

The think-tanks also said that governments should facilitate, and not hinder, the process of the market determining prices that accurately reflect supply and demand. They also believe that governments should share the burden with businesses and consumers by cutting public spending and taxes.


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