THE ARGUMENTS of Slovakia and other smaller eurozone members got a hearing – and achieved something of breakthrough – during a meeting of eurozone finance ministers on March 21 that agreed financing arrangements for a new, permanent bailout fund for the zone, the European Stability Mechanism (ESM). As a result of a compromise proposed by Estonia, smaller countries like Slovakia, Slovenia and Estonia itself will contribute around 17 percent less in contributions than they currently do to the existing, temporary bailout fund, the European Financial Stabilisation Facility (EFSF). The compromise should mean that Slovakia has to stump up about €1.17 billion less.
“We have achieved a significant reduction of our contribution to solving the financial crisis in the eurozone,” Slovak Finance Minister Ivan Mikloš said, as quoted by the SITA newswire. “This is clear evidence that [former prime minister] Robert Fico and [former finance minister] Ján Počiatek could have negotiated much better conditions for Slovakia last spring,” he said, referring to the agreement that set the contribution terms for the EFSF.
The ESM, which will be launched in June 2013, will be backed by €80 billion in cash, paid in directly by member states, plus €620 billion in capital that can be called on when a lending requirement emerges. Its effective lending capacity will be €500 billion; the extra €200 billion is being raised in order to provide the fund with a premium credit rating.
Based on the new rules Slovakia’s share should amount to 0.824 percent of the total fund, as opposed to the 0.99 percent which is Slovakia’s contribution to the existing EFSF. The original scheme of contributions was based on countries’ share of capital in the European Central Bank, half of which is calculated based on a country’s gross national product and half on its number of inhabitants. In the new scheme gross national income will have a 75-percent weighting and only 25 percent of the contribution will hinge on the country’s basic capital in the European Central Bank, SITA wrote.
Mikloš, who raised the issue some time ago, said that the compromise achieved showed that Slovakia’s arguments had weight.
“The negotiated change of the model is positive news for Slovakia,” Juraj Karpiš of the economic think tank INESS told The Slovak Spectator. “Before the entry of Estonia, [now] the poorest country in the eurozone, Slovakia’s contribution per inhabitant was the highest, despite the fact that our banks were not being rescued.”
The finance minister explained that he is not 100-percent satisfied with the agreed solution.
“Population numbers shouldn't be included in the distribution key at all, so a certain amount of illogic remains,” Mikloš said, as quoted by the TASR newswire. “We respect the fact that we can't achieve everything. The most important thing is to come to an agreement, which is why we were forthcoming and made partial concessions.”
In order to pay its basic cash contribution to the ESM, of €659 million, Slovakia will have to borrow money on the financial markets. The amount will be paid in instalments.
“It will increase our deficit, but it’s still manageable,” said Mikloš.
On March 23, Prime Minister Iveta Radičová received a mandate from the cabinet to vote for the ESM at an EU summit in Brussels which began on March 24. The country’s participation will still be subject to ratification by parliament.
The opposition Smer party criticised the commitment to pay €659 million in cash to the ESM.
Despite welcoming the change in the contribution calculation, Karpiš said he considers the European Stability Mechanism to be a bad solution overall.
“Paradoxically, we already know how the cases will be solved after the summer of 2013 through the ESM but we still do not know how the EFSF will be financed in case additional countries fall into it in the upcoming period,” he said.
According to Karpiš, the last year and the continuously growing risk premiums show what a bad solution the EFSF has been.
“It has been constructed as a tool against a liquidity crisis, but this is an insolvency crisis,” Karpiš said. “The EFSF solves only the symptoms and not the causes of the current problems and thus neither its institutionalisation nor its increase will lead to the final stabilisation of the eurozone.”
It is a tool by which, indirectly, the European banking sector is being saved, he added.
“I do not think that that re-routing the existing losses of banks through the EFSF to taxpayers is sustainable in the long term,” said Karpiš.
As for alternatives to the EFSF, Karpiš said that instead of pushing the problem into the future and dealing with excessively high debt by means of further indebtedness, restructuring the debts of affected countries should be made possible. This would result in a reduction in the real burden on the affected countries and, by realising losses to creditors, also lead to dissolution of part of the banking sector, he added.
“Systemically important banks could be saved using public funds,” Karpiš told The Slovak Spectator. “Non-systemic banks, which have failed to handle their risk management, would be liquidated and depositors partly refunded using the banks [liquidated] property while the rest, considering the system of deposit protection, could be paid from public sources.”
