New holders of a privately-placed Slovak sovereign bond shuddered as the populist Fico slate regained power with a clear party majority obviating coalition resort on a platform to abolish the flat tax regime and punish commercial and official corruption. The center-right government, which had initially withheld its EFSF contribution on philosophical grounds soon after joining the euro, had slid in opinion polls despite 3.5 percent GDP growth last year, as recession in the neighboring Czech Republic subsequently spilled over and a massive spying scandal was uncovered from the grouping’s previous time in charge. Its head, a former university professor with libertarian leanings, also alienated traditional politicians with unwillingness to compromise even though her core support was limited. The outgoing Finance Minister has warned of a return to fiscal laxity after the 3 percent of GDP deficit compact goal is met in the coming months. In Prague authorities have in turn shelved further pension reform and other adjustment plans to combat the flat economy now outpaced by 3.5 percent consumer inflation after VAT and energy cost hikes. The central bank has been on hold with the currency firm around 25 to the euro, while the current account deficit has improved slightly despite slowing exports as offsetting FDI will cover almost the entire gap.
Ex-Yugoslavia components Croatia and Serbia have recently been approved for longer-term EU membership after overcoming both debt and diplomatic hurdles. In the former in January two-thirds of voters approved entry on low turnout, with the single currency already dominating 80 percent of banking system activity. Output will contract this year on a slim trade base and slumping domestic demand, and the budget deficit will stay at 4 percent of GDP amid a struggle to retain ratings agencies’ bottom investment-grade mark. Italian banks dominate the sector and are in deleveraging mode. A new government was just voted in, with senior officials from the previous one facing prosecution for bribery and embezzlement. Unemployment is near 20 percent and donors have committed $2 billion in infrastructure funds in an attempt to provide jobs. Serbia’s entry timetable is likely more delayed until mid-decade after an impasse over Kosovo relations was temporarily resolved following the capture of accused war criminal Karadzic. GDP growth is an anemic 1.5 percent on inflation four times steeper, as the IMF precautionary program has been frozen on failure to meet fiscal targets heading into elections. The dinar has plunged to 115 to the euro, and 6-month T-bill yields are over 10 percent. Unlike in Croatia the stock market is up on privatization mandates which have been dashed in the past, but Brussels may now emphasize as an updated Belgrade sanction.