Slovakia rejects Euro stability fund expansion -- for now

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EFSF, fail:

Tuesday, October 11, 2011 4:12:18 PM RTRS – SLOVAK PARLIAMENT REJECTS PLAN TO EXPAND EFSF, GOVERNMENT LOSES CONFIDENCE VOTE

But, wait, they’ll have another pop at it. (Known in Panglossian Brussellian as the Irish Lisbon manoeveure.)

Tuesday, October 11, 2011 4:12:24 PM RTRS – SLOVAK OUTGOING GOVERNMENT EXPECTS EFSF TO BE APPROVED IN REPEATED VOTE, LIKELY THIS WEEK

Since we’re not part of the legion of New York-based experts on Slovakian politics we’ll refer to you to a helpful note published on Monday (and therefore before the vote, obviously) by the Eurasia Group. It agrees with the outgoing Slovakian government that approval is likely second-time around. But it also discusses a worst case scenario where Slovakia is somehow exempted from contributing to the fund. Thin edges and wedges spring to mind.

*Likely outcome and process

The most likely outcome remains that a yes vote will be forthcoming, if not from the current coalition tomorrow, then with the support of the opposition SMER party in a second vote later in the week. Indeed, in the event that agreement cannot be reached among the current coalition and SaS do vote No, the ruling coalition (without Sulik’s party) can initiate talks with Fico’s SMER immediately on the new agreement necessary for SMER to support the bill. In this scenario, a second vote would likely be scheduled in the same week, probably Friday, which Fico would support, so that Radicova can go to the European Council with a domestic agreement in hand. Elections would be held after (Fico has said he would be willing to support the package prior to early elections so that the PM can go to Brussels with the necessary mandate).

*Worst case scenario: implications for revamped EFSF of a No vote

However, even in the worst case scenario-meaning agreement can’t be reached, even with support of the opposition-this will not prevent the EFSF’s new powers coming on-line. Rather, in this context, Slovakia would likely be given a right to opt out of participating in the new Greek package, and in a more extreme scenario, opting out of the EFSF altogether.

Indeed, the former option is permitted under the vehicles current legal framework, providing that all of the other countries consent to allowing Slovakia to cease issuing further guarantees (Slovakia’s guarantee exposure to the 109 billion EUR package is 1.1%). If Slovakia were to remove its wholesale participation in the vehicle, the Slovak guarantees (7.7 billion EUR in the new EFSF with the 440 headline) could either be covered by the other member states, or more likely, the ceiling of the EFSF would need to fall by the equivalent amount.

While the financial impact would be negligible on both the Greek and EFSF dimensions, the real risk is that both would set an unhelpful precedent, as countries experiencing domestic difficulties could then seek to replicate the Slovak example, undermining confidence that the necessary solidarity needed to support the periphery through its current adjustment remains. But Slovakia will also be hurt by such an outcome, as there was already consternation in Eurozone decision-making circles of its first opt-out of Greece’s original EUR 110 billion package. Given the EU budget financing envelope (2013-20) is currently being negotiated, and Slovakia has historically been a net recipient of structural funds, it is unlikely that Slovakia will come off well in these negotiations

(In case you were wondering, Ty kokos means?”Wow!”, “Man!”, “Jeez!”, or “Gosh!”, according to this fun article on Slovak slang.)

Related links:
Eurozone hopes hinge on Slovakia – FT

This entry was posted by John McDermott on Tuesday, October 11th, 2011 at 21:30 and is filed under Capital markets. Tagged with EFSF, slovakia. Edit this entry.

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