Slovakia puts euro zone rescue fund on hold

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In a hostage taking, the power normally lies with the hostage takers – the big, mean guys with the firepower. In the euro zone, the opposite can be true, as Tuesday night's peculiar vote in the Slovakian parliament showed.

Slovakia held the entire euro zone hostage by rejecting the expansion of the €440-billion ($617-billion) bailout package, known as the European Financial Stability Facility (EFSF). It was able to do so even though the country, whose economy is worth only 7 per cent of the euro zone's, is tiny.

Blame the euro zone's design. Its voting structure gives equal weight to member countries, regardless of their size, on some matters. While the voting is democratic, it is also slow and cumbersome. The lag times in obtaining the legislative approvals for the rescue package have no doubt added fuel to the debt crisis fires.

The new EFSF had already been approved by 16 euro zone countries, from Finland in the north to Malta in the south. Slovakia's "No" vote means it is the only holdout. If it does not approve the EFSF in a second vote – date to be determined – the euro zone could, in the most extreme case, disintegrate as funds needed for sovereign bailouts and bank recapitalizations go lacking. (Smer, the largest of the opposition parties, said it would support the new EFSF in the second vote.)

As it stands, Slovakia has at minimum delayed the EFSF's implementation just as the health of the euro zone reaches a critical stage. World leaders outside the euro zone have been pleading for a resolution to the two-year-old debt crisis before it triggers a global recession.

"If Slovakia does not ratify EFSF enhancements, then it is feasible that the whole deal will collapse, which would most likely lead to a sharp correction in risk sentiment," Marc Chandler, head of currency strategy at New York's Brown Brothers Harriman, said in a report ahead of the vote.

Slovakia's vote was tied up in domestic politics and the perpetual balancing act of the coalition government. In the morning, one of the four coalition members said it would abstain from the EFSF vote, forcing the government of Prime Minister Iveta Radicova to try to find allies among the opposition parties. Ms. Radicova tied the vote to a confidence motion, meaning a "No" vote could blow up her coalition government, which in fact happened.

The abstaining coalition member was the Freedom and Solidarity party (SaS), which argued that Slovakia, the euro zone's second-poorest country, lacks the financial strength to cover the debts of profligate countries such as Greece and Portugal. "Slovakia is not responsible for saving the world," SaS leader Richard Sulik said earlier in the day.

Slovakia, like several other euro zone countries, has always had extreme views on the euro. Since the breakup of Czechoslovakia in 1993, forming the Czech Republic and Slovakia, it has worked hard to shed its image as the "black hole in the heart of Europe," to use former U.S. secretary of state Madeleine Albright's description. It joined the euro zone in 2009, just before the debt crisis exploded. Now it finds itself being recruited to endorse an expensive bailout of countries that did not work as hard as it did to keep its fiscal house in order.

While polls show that almost half of Slovaks support the enhanced EFSF, a significant minority oppose it. Still, Ms. Radicova was keen to approve the EFSF, for fear that failure to do so would intensify the debt crisis, vilifying her country.

In spite of the voting holdup in Slovakia, the euro zone did take a step forward on Tuesday, when the European Union, the International Monetary Fund and the European Central Bank indicated that Greece will get the next instalment, worth €8-billion, of its bailout package. The Greek government had warned that it faced imminent shutdown unless the loan was extended.

While welcome, Greek Finance Minister Evangelos Venizelos said the tranche won't be enough to spare the country from potential oblivion. "It's only the completion and activation of the new €109-billion program agreed on July 21 that will give a definite and convincing answer to the major issue of the long-term viability of the public debt," he said.