Investors Don't Make Much of Slovakia

NEW YORK ( TheStreet) -- When Slovakia held up expansion of Europe's bailout fund on Tuesday, investors decided not to make too much of it. Turns out, not panicking over the political squabbling of Europe's second-poorest country was prudent.

According to the Wall Street Journal, the chairman of Smer, the largest opposition party in Slovakia's parliament has said that the government will endorse the amended euro stability fund by Friday.

The breakdown in the coalition administration of Slovak Prime Minister Iveta Radicova is just one instance where the intensifying debt crisis has strained domestic politics. However, Fred Dickson, market strategist at D.A. Davidson, describes Slovakia as only a "momentary clog in the process."
Will we remember that the capital of Slovakia is Bratislava?

Eurozone leaders agreed in July to expand the powers of the $1 trillion bailout fund, the European Financial Stability Fund. Slovakia remains the only country that has not voted yes to the reform. It's not the first time that a small player has put the brakes on plans that seem close to fruition. Finland, for example, caused some jitters in September when it demanded collateral for supporting a second Greek bailout.

As many grow weary of following the euro soap opera, there's growing consensus that what Germany and France say is worth following while the rest is all noise in the short term. Stocks gave much more weight to comments that came out of German Chancellor Angela Merkel and French President Nicolas Sarkozy's weekend meeting. The Dow surged 330 points on Monday, on an agreement between the two leaders to unveil a recapitalization plan for eurozone banks by early November.

On Tuesday, stocks posted a mixed finish amid uncertainty regarding Slovakia's ultimate stance on the capacity of the bailout facility. The Dow lost 17 points but the S&P 500 and Nasdaq both managed to eke out gains. During the trading session, many investors were already anticipating that Slovakia would turn down the expansionary measures. Even so, there were strong doubts that the second-poorest nation in the eurozone could hold up plans to help stem the region's debt crisis when Germany and France had already approved the measures.

Slovakia is slated to increase its contribution to the bailout fund from $4.3 billion euros to 7.7 billion euros ($5.7 billion to $10 billion), small in comparison to $590 billion stability fund, so there is considerable chance that the Europe could move forward on expanding the fund's capacity without Slovakia.

The eurozone could launch its "safety net" for struggling countries without Slovakia, said Austrian Foreign Minister Michael Spindelegger, according to CNBC.

Hope, however, remains that Slovakia's parliament will pass the bailout fund reform. Slovakia already faces pressure from the European Union to overcome its stalemate. "We call upon all parties in the Slovak Parliament to rise above the positioning of short term politics to ensure a swift adoption of the new agreement," said a statement from the European Commission and European Council.

By the looks of the U.S. market on Wednesday, investors have shrugged off the latest snag in reforming the eurozone bailout fund. Stocks were following gains in Europe and some investors are factoring potential upsides from the American earnings season. Much of the exuberance is also still pinned to hopes that leaders will protect eurozone banks from a potential default contagion.

If Slovakia does end up giving the green light, it's likely that investors will quickly forget about its role given much larger eurozone problems at hand. After a bigger rescue fund is up and running, leaders are likely to focus on another plan for helping Greece meet its debt obligations as well as stemming the systemic risk that banks face. Carl Weinberg, economist with High Frequency Economics, injects a bit of cynicism into the whole Slovak hold up: "We are sorry, but that is just ridiculous."

-- Written by Chao Deng in New York.

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