Slovakia's parliament backed a plan to bolster the euro zone's EFSF rescue fund on Thursday (13 October) after political parties agreed to hold an early election, concluding the ratification process in all euro zone countries.
The decision to hold the polls meets the key demand of the leftist Smer party of former Prime Minister Robert Fico in exchange for its support for the expansion of the European Financial Stability Facility (EFSF).
The EFSF will now gain more powers to fight the debt crisis in the 17-member club as it will be able to act preventively on the market by buying back sovereign bonds of troubled countries and recapitalise banks.
The early election will be held on March 10. By law, Radicova's administration stays in power after resignation until a new government is formed.
The presidents of the European Commission and European Council said the ratification had bolstered the single currency.
"The EFSF provides us with a stronger, more flexible tool to defend the financial stability of the euro area. This is in the clear interest of every one of the 17 member states directly concerned, as well as for the wider European Union," José Manuel Barroso and Herman Van Rompuy said in a statement.
Short-term relief
However, the sense of relief in the euro zone is likely to be short lived.
On the heels of the Slovak vote, Standard & Poor's announced a decision to lower Spain's long-term credit rating by one notch to "AA-" from "AA" with a negative outlook due to slowing growth and a fragile banking sector.
“Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain’s growth prospects,” S&P said. “The financial profile of the Spanish banking system will, in our opinion, weaken further, with the stock of problematic assets rising further.”
Austerity programmes, which have been rolled out across euro zone countries to tackle the debt crisis, "are now the main driver of the crisis," wrote Eurointelligence, an independent online service for commentary and analysis of the euro area.
Meanwhile, the European Central Bank (ECB) warned about plans to force more losses on holders of Greek sovereign debt, up to 50% from the current 21%, saying it could damage the reputation of the euro, hurt the bloc's banks and encourage volatility on foreign exchange markets.
EU summit to agree global plan
The news came ahead of a European summit on 23 October at which euro zone leaders are expected to agree a comprehensive plan to tackle the crisis.
The summit will seek to address divergences between France and Germany on how to recapitalise the banking sector, with France pushing to turn the €440 billion EFSF rescue fund into a bank to leverage its firepower.
European Commission President José Manuel Barroso presented a five-point roadmap on Wednesday to address the crisis, proposing to "maximise" the EFSF's capacity among other steps.
Many analysts agree the most effective way to give the EFSF more muscle would be to treat it as a bank, making it eligible to borrow at the European Central Bank's regular funding operations.
But both the ECB and Germany have strongly opposed the central bank's involvement.
"We need to see recognition that France and Germany are on the same page, and the recognition that officials are looking for a pan-European solution, rather than national ones. Also, the rescue fund has to be large enough to be able to cope with the scale of the problem," said Jeremy Stretch, currency strategist at CIBC.
