How to save €1.17 billion (The Slovak Spectator)

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How to save €1.17 billion (The Slovak Spectator)

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.”

Beata Balogová

The
Slovak Spectator, 28.3. 2011

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