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Understanding the EFSF, Part 2: Slovakia Votes Down Expanded Measures

Understanding the EFSF, Part 2: Slovakia Votes Down Expanded Measures

2011-10-11 21:05:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Heading into today, there were two tiny nations, whose contributions to the European Financial Stability Fund (EFSF) are currently marginal at best, that stood in the way of expanding the bailout fund. Earlier in the day, Malta’s government and opposition reached an agreement that cleared the way for the EFSF’s expanded measures. The last remaining country in the 17-member Euro-zone to vote on the measures was Slovakia, whose government publicly supported a larger bailout fund.

Over the past few days, however, dissent had grown between the ruling party and the government, clearing way for today’s tense negotiations. Indeed, while Richard Sulik of the SaS minority party received headlines the past few days for his party’s decision to vote down the bill – he called the measures “the greatest threat to the Euro is the bailout itself” – it was Smer, the largest opposition party that potentially changed the landscape of the financial markets for the next few days.

A total of 55 lawmakers backed the proposed bill, well-short of the 76 required to have it pass (124 parliamentarians were present). The vote has two key ramifications: Slovakia is now the only country not to ratify the expanded measures; and the current government is now out of power.

EUR/USD 1-minute Chart: October 11, 2011

Understanding_the_EFSF_Part_2_Slovakia_Votes_Down_Expanded_Measures_body_Picture_1.png, Understanding the EFSF, Part 2: Slovakia Votes Down Expanded Measures

Charts created using Strategy Trader– Prepared by Christopher Vecchio

In response to the news, risk-correlated assets, and in particular the Euro, were lower against the safe havens, at the time this report was written. The EUR/USD has fallen approximately 40-pips in the hour since the vote started and was rejected, a clear sign that even in illiquid markets – there are no major markets currently open – participants find the results distressing at best.

It should be clear that the move to vote down the EFSF bill looks little more than political bargaining. The outgoing government noted that it fully expects the measures to pass when voted upon again either later this week or next. Similarly, Smer party leader Robert Fico told reporters following the rejection that it will support the changes during a second vote.

For a complete understanding of why the EFSF is so crucial to the health of the Euro, please find the preceding report on the EFSF as a reference point.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com.

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com.

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