FOLLOWING a deal between three of the governing parties and the opposition Smer party that has sent Slovakia heading for early elections in the spring, Slovakia on October 13 became the last country in the eurozone to ratify changes to the European Financial Stability Facility (EFSF) scheme. Unlike the previous vote on the EFSF on October 11, which resulted in the fall of the government of Iveta Radičová, the re-run vote was virtually stress-free for supporters of the bailout scheme. Smer leader Robert Fico pledged his party’s support for the package in return for a constitutional law triggering early elections in Slovakia that was passed earlier on October 13. The EFSF changes were then duly approved, with 114 MPs of the 147 present voting ‘yes’.
Under the rules now agreed by all 17 eurozone countries, the volume of guarantees that can be offered by the EFSF will increase from €440 billion to €779 billion and Slovakia’s share will increase from €4.37 billion to €7.72 billion. The EFSF will also be allowed to purchase government bonds on the secondary market, help in the recapitalisation of financial institutions, and issue precautionary credit to states if there is a possibility that they will be shut out of private credit markets.
The ruling Slovak Democratic and Christian Union (SDKÚ), Christian Democratic Movement (KDH) and Most-Híd parties plus the opposition Smer party voted for the changes, while all MPs from the Freedom and Solidarity (SaS) party – except Martin Fecko, who abstained – voted against them. Also voting against were the opposition Slovak National Party (SNS), three members of the Civic Conservative Party (a faction within the Most-Híd caucus), and independent deputy Igor Matovič. Along with Fecko, two other independents abstained from the vote.
A day after the first, failed vote, the presidents of the European Commission and the European Council, José Manuel Barroso and Herman Van Rompuy, called for a speedy resolution.
“We call upon all parties in the Slovak Parliament to rise above the positioning of short-term politics and seize the next occasion to ensure a swift adoption of the new agreement,” said Barroso and Van Rompuy in a statement quoted by the Reuters newswire on October 12. During the October 11 vote not just the future of the bailout mechanism was at stake but also the fate of the Slovak government, since after failing to strike a compromise with SaS Prime Iveta Radičová turned the bailout vote into a vote of confidence in her own government.
“We have to take prompt action,” Radičová said shortly before her government collapsed, as quoted by the Sme daily. “If we expect responsibility from our European partners, we have to behave responsibly as well.”
Finance Minister Ivan Mikloš argued that rejecting the bailout mechanism would have immense consequences, great economic and social costs, and could pose a threat to the European common currency. On several occasions he dismissed what he described as the myths surrounding the EFSF.
“The myths about the EFSF are just a tool of populist politics, which harms not only Slovakia, but causes problems all around the world,” Mikloš told MPs, adding that the good name of Slovakia had already been harmed and that parliament should prevent more damage from being done.
SaS boss Richard Sulík argued during the debate over the bailout that supporting it contradicts the programme statement of the government, and that it “generally contradicts common sense”.
“I’d rather be a pariah in Brussels than have to feel ashamed in front of my own children,” Sulík said.
The markets (don’t) react
The October 11 failure to pass the bailout did not have any dramatic effect on the financial markets since they already assumed – correctly, as it turned out – that Slovakia would ultimately produce a ‘yes’ vote, according to market watchers.
“In general it was assumed that the bailout fund will be approved by the end of the week, but with the support of Smer,” Mária Valachyová, senior analyst with Slovenská Sporiteľňa, Slovakia’s largest bank, told The Slovak Spectator. “The vote has much graver impacts on domestic politics rather than Europe.”
Vladimír Vaňo, chief analyst with Volksbank Slovensko, also expressed confidence on October 12 that Slovakia’s parliament would not break ranks with those of the 16 other eurozone member states.
“The immediate reaction of global financial markets is commensurate with the understanding that because of the linking of the EFSF vote and the confidence vote, the opposition party could not vote affirmatively, purely for political reasons,” Vaňo told The Slovak Spectator. “Financial markets at this point are waiting for agreement on another vote, which is expected to also win the support of the main opposition party, which has repeatedly demonstrated its support for the EFSF.”
According to Vaňo, all responsible politicians capable of reading the geographic and economic map of Europe, as well as understanding all the benefits that the euro has brought to Slovakia in just the first two years of its use, and being aware of all the risks that non-euro neighbours are facing even now, fully comprehend that it is absolutely not in the interests of the Slovak Republic to obstruct the unanimously approved conclusions of the July summit of EU leaders.
Economic risks from the fall of government
In terms of the economic risks stemming from the fall of the government, Vaňo said that the major one is the credibility of the deficit-reduction plan, which is of the utmost priority not only for the Slovak government, but also for the rating agencies and financial markets.
“One should keep in mind that the sovereign risk premium of Slovak state T-bonds of benchmark maturity 2019 has already notably exceeded the levels seen in the spring of 2009, during the culmination of the global turmoil in the financial markets. In the short-term, the most costly risk for Slovakia stems from a weakening of the credibility of its fiscal consolidation plan, which could feed into higher sovereign debt spreads, and possibly cast doubt on Slovakia’s rating,” Vaňo said.
Major medium-term risks are connected with the perception of political stability and predictability, which is one of the major elements of assessment for FDI investors. Especially after what is going on in Hungary, potential FDI investors would have increased their weighting on the political stability and predictability criterion, Vaňo explained.
Valachyová also sees the budget as the main risk, suggesting that willingness to save money and pass unpopular measures might weaken in the run-up to next March’s general election.
Arguments of the SaS
Earlier this year the SaS released a 16-page pamphlet to the public titled “Bailout Mechanism: A Road to Socialism” in which the coalition’s purportedly liberal party seeks to explain why it refuses to support the eurozone plan to deal with sovereign debt problems.
Sulík insists there has not yet been a truly professional debate about the issues surrounding the eurozone crisis and said the pamphlet released by SaS addresses this. The pamphlet states that the most widespread myth is that Slovakia’s failure to ratify the proposed changes would repel foreigners from investing in the country.
Sulík’s response is that there are two factors that attract or repel investors: whether a country is managing its economy responsibly, and the quality of the business environment. He wrote that approval of the bailout system would result in higher taxes in Slovakia and reduce the quality of its business environment.
Sulík also wrote that European politicians are using what he called senseless arguments such as “this is no longer about Greece, this is about the euro” to justify what he called continuation of “a moral hazard” and offered the analogy that “just as it is impossible to put out a fire with a fan, it is not possible to solve the crisis with new debts”.
Sulík has stated that Greece must go bankrupt, Italy must start saving money, and all members of the eurozone must start observing the rules.
“It will hurt, but it is the only solution,” Sulík wrote on the cover page of the pamphlet.
17. Oct 2011 at 0:00 | Beata Balogová