Slovakia's Recession Link

Slovak vote on European bailout fund
Slovak vote on European bailout fund

Slovakia, the Central European country that didn't exist before 1993, looked set on Tuesday to reject the expanded eurozone bailout upon which global investors were pinning their hopes for world financial stability.

Slovakia is the final country in the 17-member euro area to vote on the retooled bailout, known as the European Financial Stability Facility. Every member must ratify the bailout in order for it to be approved, which means that this nation of 5.5 million people has veto power over the Continent's plan for economic salvation. The bailout is intended to prevent Europe's sovereign debt crisis -- largely confined right now to the Mediterranean nations of Greece and Spain -- from spreading and causing a general downtown, the effects of which could ripple across the Atlantic and lead to a U.S. recession.

Europe's economic fate became entangled with the domestic politics of Slovakia when Prime Minister Iveta Radicova tied a vote on the bailout to a confidence vote in her own shaky government, trying to encourage members of her four-party coalition to support the €440 billion ($600 billion) bailout fund. One member, the Freedom of Solidarity Party, remains opposed.

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The country's largest opposition party has said it would support the bailout in a second vote if Tuesday's session resulted in the collapse of the government. If that comes to pass, the enhanced bailout fund would have majority support in the Slovak parliament, meaning the measure would in fact be approved.

Stocks were mixed Tuesday on anxiety over the Slovak vote after the largest four-day rally in worldwide equities. Two Greek banks fell to record lows.

Germany and France, the economic powerhouses of the eurozone, have been leading the effort to shore up Greece, which is teetering on the edge of default, and to recapitalize European banks that have significant exposure to Greek debt. Slovakia, however -- "with average salaries still below those in Greece," according to Bloomberg -- has been less enthusiastic about extending further financial support to previously profligate eurozone members.

The news that the EFSF is likely to be approved in Bratislava one way or another should calm investors' nerves somewhat, though uncertainty will linger, given the lack of a set date for a second vote, should it be needed. Some political wrangling over cabinet positions will have to occur first.