JOURNAL BANKING Volume 18 September 2010 7 NÁRODNÁ BANKASLOVENSKA

BIATEC BIATEC keynote lecture.keynote According finan- to Orphanides presentedAthanasios Orphanides aninspiring oftheCentralsion. Governor BankofCyprus Mr. Mr. Jozef whoalsochaired thefirstses- Makúch, tion developed inothernewmembercountries. andhowviewpointsontheeurocountries adop- introductioninfluencedseveral EUmember of financialregulation, andtheissueofhow euro area andseveral ofitsmembers, openissues for theimplicationsofcrisis the aftermath, cated andits to theissuesoffinancialcrisis As thenamesuggests, theconference wasdedi- The Euro Area andtheFinancial conference. Crisis the Comenius inBratislava University organized the Heriot-Watt from University Edinburgh and together with Slovenska event. Národná banka and theFinancial Crisis Conference The Euro Area sed present guests. universitiestogether withtwo – Heriot-Watt inEdinburgh University andComenius inBratislava University impres- thegreatest event ofeconomic researchHitherto inSlovakia –an international conference organized by theNBS the 6 witnessedfromEconomic research inSlovakia also analysedby Mr. ThomasF. from Great Britain(firstfrom left). Huertas devoted thekeynote andtotheissueofcrisisresolution. Thesameissuewas to regulation lecture andsupervision, who alsochaired thefirstsession.Governor ofthe Central BankofCyprus Mr. (inthemiddle) Athanasios Orphanides The Euro andtheFinancial Area Crisisconference was openedby NBSGovernor Mr. Jozef Makúch(firstfrom left), The conference wasopenedbyNBSGovernor th to 8 to th of September hitherto thegreatest ofSeptember hitherto crisis resolution. Even with the best supervision resolution.crisis Even withthebestsupervision defined rulesfor in thedivisionofresponsibility Europeto Orphanides needsclearandexante there are nosystemic solutionsyet. According On theotherhand, inthearea resolution ofcrisis legislation amongmemberstates hasintensified. national regulators, of andtheharmonisation tem ofcommunicationandcooperationamong the European Board, Systemic Risk there isasys- emphasis onmacrofinancial stability, settingup andregulation –increasingarea ofsupervision nificant progress wasmadeinrecent years inthe other handresolution ofamanifested crisis. Asig- onthe the onehandregulation andsupervision, on offinancialstability: to solve aspects two sary of centralbanks. AttheEuropean level itisneces- concern isundoubtedly animportant cial stability continued onpage 32 C ONTENTS

F INANCIAL MARKETS

Would the integration of financial markets help Europe? ...... 2 (JUDr. Martina Janstová) BIATEC Concept of financial market regulation according to the Lamfalussy framework ...... 5 Banking journal (Ing. Mária Petianová)

September 2010 L EGISLATION

Publisher: Legal mechanisms of introduction and use of euro outside National Bank of the euro area ...... 9 (JUDr. Peter Pénzeš, LL.M., PhD.) Editorial Board: doc. Ing. Jozef Makúch, PhD. (Chairman) Ing. Viliam Ostrožlík, MBA F INANCIAL ASSISTANCE Mgr. Júlia Čillíková FOR GREECE Ing. Juraj Jánošík Ing. Renáta Konečná Greek Rescue Package and European Financial Stabilisation PhDr. Jana Kováčová Mechanism ...... 11 Mgr. Martin Šuster, PhD. (Ing. Katarína Jevočinová, Mgr. Lucia Országhová)

Editorial staff: C OMMEMORATIVE AND Ing. Alica Polónyiová COLLECTOR COINS tel.: +421/2/5787 2153 [email protected] Silver Collector Coin: Protection of Nature and Landscape PhDr. Dagmar Krištofičová tel.: +421/2/5787 2150 – Poloniny National Park ...... 17 dagmar.kristofi[email protected] (Ing. Dagmar Flaché)

Address: D EPOSIT PROTECTION NBS, Editorial Office BIATEC Imricha Karvaša 1, 813 25 Bratislava Deposit protection after turbulence in the financial markets ...... 19 e-mail: [email protected] (Ing. Rudolf Šujan)

Graphic design: Bedrich Schreiber C OMPANY COMPETITIVENESS Typo&lito: AEPress, s.r.o. Printing: Dolis, s.r.o. Euro: Perpetrator or witness?Development and factors of company competitiveness after euro introduction ...... 22 (Ing. Tibor Lalinský, PhD.) All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is S ECURITIES acknowledged. Selected areas of evaluation and reporting on purchased Evidence number: EV 2817/08 securities in a commercial bank ...... 29

ISSN 1335 – 0900 (Ing. Mária Schwarzová) BIATEC

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Would the integration of financial markets help Europe? JUDr. Martina Janstová Národná banka Slovenska Since September 2008 the independent Committee of European Securities Regulators (CESR) has been considering the idea of integrating financial markets – those of EU member states and of third countries. The potential integration of financial markets should concern the so-called trading venues, i.e. regulated markets and publicly organized markets (EU’s MTF systems or similar third countries’ systems). As for products, this potential integration should concern all securities accepted in respective markets for trading, as well as products connected with collective investment schemes (CIS).

1 http://www.cesr-eu.org/data/docu- A Working Group was created within CESR to deal (MRAs) among the respective regulators of an -ment/09_406b.pdf with this issue. Its aim is to identify the positive EU member state and a third country seem to be 2 http://www.asic.gov.au/asic/pdflib. nsf/LookupByFileName/rg190. and negative sides of financial market integration, suitable for the purposes of the financial market pdf/$file/rg190.pdf – 166k – [ pdf ] and to define potential conditions and criteria for integration of EU and third countries. such integration if financial market integration is supported by the . INSPIRATION The start of the financial crisis in the second CESR can draw some inspiration from interna- half of 2008 blocked the Working Group’s activity tional agreements concluded in order to release for a short time; then in 2009 CESR renewed the the rules of financial market regulation. Australia activity of the group with the aim to use financial was very active in this area, partly integrating its market integration as an economic stimulus for financial market with the financial markets of activating the economy that stagnated as a result New Zealand, Hong Kong, Singapore, and finally of the crisis. the USA on the basis of agreements. Currently it is Financial market integration should bring ben- making an effort to conclude a similar agreement efit for financial market participants; this is why with EU member states. the attitude of the EU’s financial market is most Regulators of Australia and New Zealand con- important for CESR, stressing strong and medium- cluded an agreement on loosening financial strong “players”. The Working Group elaborated market regulations in 2008. Subsequently in Jan- the call for evidence,1 the aim of which was to ob- uary 2009, the Australian Securities and Invest- tain market participants’ feedback regarding this ments Commission (ASIC) disclosed on its web- issue. On 8 June 2009, CESR disclosed this on its site Regulatory Guide No. 190 – a joint guideline website, and financial-market participants could of ASIC and (two) relevant New Zealand’s respond from 8 June 2009 to 1 September 2009. regulators2. This guideline was made for the is- The aim of this activity was to find out if they con- suers of securities, and those who are interested sidered financial market integration as benefit on in doing business in the area of collective invest- the economic level, and if yes, they should specify ment in both jurisdictions. It lays down obliga- the expected economic benefit in more detail. tions of respective financial market participants In the determined period, CESR received 21 in view of the trans-Tasman mutual recognition open and 5 confidential responses; the Working scheme of regulation regarding offers of securi- Group held bilateral talks with the authors of the ties (trading). The agreement applies to securi- interesting responses. It resulted from the activi- ties, debt securities, and collective investment. ties stated in the responses that the EU financial It lays down minimum requirements that have market would like to have a uniform license – with to be met, and enforceable in both respective selected countries in connection with selected fi- jurisdictions. Each participant of such integrated nancial products – similar to the one which brings market is supervised by its home regulator, while profit to participants in the financial markets in EU financial market participants are obliged to fulfil member states on the basis of the Directive of the selected information obligations towards their European Parliament and of Council No. 2004/39/ host regulator. ES (MiFID). On 7 July 2008 ASIC also concluded an agree- The approximation of legislation of the EU and ment on mutual recognition with the Hong Kong third countries in a similar way as in EU member regulator (Hong Kong Securities and Futures states is highly unlikely from the political point of Commission) which applies to collective invest-

BIATEC view. Therefore Mutual Recognition Agreements ment. In the area of regulated markets, ASX (ASIC)

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concluded an agreement with the Singapore that it would not be necessary to register with 3 http://edgar.sec.gov/news/digest/ Stock Exchange. two regulators; it would be enough to receive 2008/dig082508.htm On 25 August 2008 an MRA was concluded a registration in the home country. This would among the SEC – the U.S. Securities and Exchange facilitate international trading with securities ac- Commission, the Australian Government, and the cepted in the regulated market, MTF system, or ASIC which provides a framework for granting ex- business platform of a country similar to the MTF ceptions from the obligatory regulation to regu- system. The Internet could be an example of an lators from the USA and Australia. On the other access channel for such international trading. hand, it allows regulated market and securities Respondents showed their interest in MRAs traders to provide their services in both jurisdic- with the USA, Canada, Israel, Dubai, Australia, tions without being liable to regulation in both Switzerland, China, Japan, Hong Kong, Singapore, respective legislations3. India, Russia, and South Africa. As a result of the concluded MRAs, Australia’s They saw a further advantage in extending financial market participants have seen cost sav- the offer of securities, as all securities which have ings, connected with the fact that issuers can ac- been accepted for trading in respective markets cumulate financial means from the public without would be available to the participants of such in- an obligation to meet the legislative requirements tegrated markets. of the host regulator – on the condition that they In the area of collective investment, cost saving have met or are meeting such requirements in is expected with MRAs in relation to fees charged line with their home legislator’s legislative. from investors by asset management companies. Based on the majority of responses to the call These fees are higher if collective investment for evidence, it seems that the need for financial funds are distributed in more countries; this also market integration in the EU is equal in its content means that a lot of different legislative and regu- with the need of the Australian financial market latory requirements of the respective countries which was reflected in the above specified agree- have to be met. Respondents specified that fees ments (MRAs). However, some respondents are are significantly lower when the collective invest- rather sceptical about mutual recognition be- ment fund distribution is made in countries with tween the EU and third countries in the financial strong investors’ protection. market, and they have mentioned a few potential As for products, apart from securities and debt risks. securities, respondents were also interested in derivatives, harmonized and non-harmonized EXPECTED ADVANTAGES OF MRAS FOR collective investment funds, hedge funds and THE EU FINANCIAL MARKET real-estate funds. Respondents consider that the main advantage would be cost-saving, due to the liberalization of EXPECTED RISKS AND OBSTACLES access to regulated and publicly organized mar- OF MRAS kets in the EU and third countries. These issues are Financial market participants also answered ques- regulated for EU member states in Articles 31 and tions regarding risks which could arise if MRAs 42 of the MiFID Directive. were concluded. The responses contained, for For example, currently if a member of any Euro- example, competitiveness risk resulting from dif- pean stock exchange would like to trade at a stock ferences in the competitive environments of two exchange in the USA, he have to register himself at non-harmonized legislations which the subjects the US regulator (SEC) and meet all requirements liable to the rules of the particular legislation are of American legislation. The SEC would also check used to; and in this way they have an advantage securities which the European stock exchange against those who would be authorized to par- member would like to trade at any American ticipate in the respective markets by MRAs, but as stock exchange. Similar steps would also be taken a result of their lack of orientation in rules would if an American stock exchange member would suffer from a competitive disadvantage. Accord- like to trade at a European stock exchange. ing to responses, an equivalent and harmonized For subjects active in European regulated mar- approach at the international level in the area kets and MTF systems, access to regulated and of financial product regulation and regulation publicly organized non-EU markets is mainly con- standards would decrease this risk. The question nected with the cost of overcoming the obstacles still is, however, how real such international har- of the third country’s regulations, i.e. the costs of monization is; a more realistic option would be to legal consultancy and the costs of meeting the set principles for assessing legislation with a need obligations and requirements of an unknown leg- for its mutual recognition in EU member states. islation, while they have met most such in their Differences may appear in methods used by EU home country, pursuing their activities in reg- supervisory authorities in relation to capital re- ulated and publicly organized markets. quirements, liquidity, investors’ protection, and These requirements are often equal in their guarantee-scheme requirements. According to content in EU and third countries. respondents, a protectionist approach cannot be The MRAs’ benefit in relation to the liberalization excluded either when assessing the “equivalence” of the access of European market participants to of a third country’s legislation. This is the reason

the markets of third countries would lie in the fact why they asked for assessing third countries’ legis- BIATEC

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lation at the EU level with the aim to provide equal EU financial sector (in regulated and publicly or- rules for all jurisdictions of third countries at least ganized markets, in investment companies, and by defining common assessment criteria. They supervisory bodies). also required checking legislation equivalence af- Respondents identified the draft of the new ter concluding an MRA; plus they required the EU directive of the European Parliament and of the to repeatedly review the approved jurisdictions of Council on Alternative Investment Fund Manag- third countries. ers (AIFM) as an obstacle in MRAs in the area of Most respondents think that the MRAs should collective investment; in their opinion it will dis- not be applied to retail clients due to a potential able MRAs in relation to collective investment. risk impact. There was a proposal to limit MRAs’ Respondents saw a further risk in insufficient application to professional or institutional inves- cooperation of relevant supervisory bodies. It is tors and clients. However, none of the respond- questionable if a third country regulator is able to ents specified this group of investors in more de- supervise alone in the EU in reality, and how ex- tail, nor did they suggest borders between a retail act the authorizations and competencies of host and professional (institutional) investor and client countries’ supervisory bodies should be. MRAs in relation to products contained in the MRAs in might also be made on the basis of an exception the future. In connection with this risk, there is a from home legislation, be it fully or partially. In requirement to define key terms at the European such case, the host-state supervisory body would level. be competent to decide about granting or not The tax risk was mainly mentioned in relation granting an exception from its legislation, and to to collective investment funds where, in the re- what extent. In such case, the responsibility for spondents’ opinion, foreign collective investment assessing the legislation’s equivalence would be funds are often taxed higher than home funds. transferred to a supervisory body of an EU mem- Well-established purchase channels of third ber state. Supervisory bodies of EU member states countries – which might be difficult for a financial are mainly interested in the impact of potential market participant with an EU-domicile to pen- MRAs on the financial markets that they regulate. etrate – were seen by respondents as a business One of the aims of financial market supervision risk. As a result of this risk, it might happen that is the protection of investors, which is also in line the EU will open its financial markets without prof- with Slovak legislation. Ultimately, investor pro- iting from its access to non-European markets, as tection is regulated by national legislation. With such access may only remain at a theoretic level a typical MRA model (not model of an exception), and would not be efficient in real business. Unbal- investor protection would be regulated by third anced MRAs’ gain might represent a further busi- countries’ legislation with the assistance of their ness risk. For one EU-domiciled market partici- supervisory bodies. pant, MRA can mean extending business activities beyond EU borders, for another it may represent CONCLUSION a loss for the reason that they will not vindicate In their answers, respondents did not sufficiently their current market position against competitors specify the estimated favourable economic con- from third countries following the MRA. sequence of the potential MRAs. This is why it The legal risk and risk of being exposed to law- now seems that there are more risks than advan- suits are risks which will be borne by investors in tages resulting from potential MRAs with third case of trouble. The question is who will assume countries for EU member states’ supervisory bod- responsibility for declaring a third country’s leg- ies and CESR (mainly in the legal area). islation as equivalent to the EU-legislation, or to In order to outweigh the above mentioned risks, the EU-member-state legislation. CESR has asked it is not enough when (a majority of) respondents member state regulators to provide personal and say that they expect an economic benefit from financial sources in order to map the legislations MRAs. It is necessary for the EU financial sector to and economies of third countries. However, these submit evidence to the EU regulators and CESR are money-consuming projects with expenses based on real economic analyses which will clear- which the supervisory bodies of EU member ly show that the EU financial market needs MRAs states are not willing to bear, especially if they with third countries (and to what extent), in spite have not obtained relevant evidence from the EU of their potential risks. financial market about the economic profitability This is the reason why the CESR Working Group of MRAs with third countries. is preparing a Consultation Paper with details of The impact on employment, as a result of los- respondents’ answers, details from bilateral talks ing control of a part of the financial sector, also held in early 2010 within CESR with some re- has to be considered as risk. In the case of MRAs, spondents, and new questions for the EU finan- highly-qualified professionals may lose their job cial market participants. CESR is expecting quali- opportunities in the EU labour market. If there is fied responses from new respondents (those who freedom in providing services agreed in an MRA, are interested in MRAs), focused on expected without the need to settle down, a reduction in economic profit. This material is expected to be job opportunities may be considered too with re- disclosed on the CESR webpage as early as this spect to administrative workers of the supervised year. BIATEC

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Concept of financial market regulation according to the Lamfalussy framework Ing. Mária Petianová Národná banka Slovenska In the EU, a contemporary system of supervision is based on regulation standards, on the principle of supervision by the home country, where the mother company of the financial institution has its domicile, and on the principle of mutual recognition between supervisory authorities. Banks and other financial institutions are thus licensed and supervised in their home country and can without additional supervision expand within the framework of EU by offering services on a cross-border basis in other countries or by creating branches in these states. In such cases, the host organ of the supervision1 is obliged to recognize supervision carried out by the authority of the home country in most of the supervised items.

In certain cases, though EU law provides a guar- regulation currently prepared according to the 1 Host supervisor is a supervisor of antee to the supervisory authorities of the host so-called Model De Larosière. so-called host country, in which there is domicile of a branch or subsidiary country, for example through the option of inter- The Lamfalussy framework is, in substance, a of financial institution (mother vention in situations of crisis with the aim of pro- four-level legislature process of management. It company). The mother company has tection of depositors (article 33 CRD2). It generally divides legislature to high level framework rules its seat in another (home) country at holds that the area of liquidity control of foreign and to implementing measures. Within the Lam- the same time. 2 Directive of the European Parliament banks branches remain within the field of activity falussy regime the European Commission propos- and of the Council No. 2006/48/EC of a host organ of supervision, which must be in- es basic legislature, and this is passed in co-deci- on starting of activities of credit insti- formed of all relevant matters of fact concerning sion procedure by Council and Parliament (Level tutions (CRD – Capital Requirements the group (Article 42 CRD). L1). This legislature is supplemented on the Level Directive). In practice, companies may also choose the L2 with more detailed implementing measures, option of acting in other member countries by which are prepared by the Commission on the means of independent legal units – subsidiaries. basis of recommendations of the national super- Subsidiaries are subject to local legislature and visory authorities acting through committees of are autonomously licensed and supervised by the the third Lamfalussy level (L3: CEBS, CEIOPS and authorities of a host country, in certain areas in CESR). Committees of level L3 also have it as their cooperation with the home supervisory author- aim to strengthen supervision convergence and ity. The controlling framework of such subsidiar- so-called best practice, mainly through the crea- ies through the supervision of the host country tion of legally non-binding standards. Lastly, what in practice is limited, as main decisions are often the Commission does at level L4, is securing that made by the mother company in the home coun- the legislature of member states is in accordance try, and the financial health of the daughter com- with valid EU legal regulations and makes use of pany is thus narrowly connected with the good enforcement measures for complying with Euro- functioning of the whole financial group. Primary pean norms in the case of need. effective control of the big financial groups as a whole is thus basically in the hands of consoli- CREATING LAFMALUSSY FRAMEWORK dated supervision in the home country. This can AND ITS COMMITTEES cause tension, as the decisions made by the au- On 15 February 2001 the Final report of the Com- thorities of the home country for the protection mittee of wise men was published for the sector of the stability of their national financial system of trading with securities. The Chairman of the may influence the results in a host country. That Committee was baron Alexandre Lamfalussy, after is why the cross-border character of activities of whom the process referred-to in the report was many financial companies requires close coop- named as the “Lamfalussy Process”. This report eration among national supervisory authorities. suggested a new approach towards the regula- Framework conditions for such cooperation are tion of the EU sector of securities. provided by the concept of financial market reg- The agreement on draft resolution on function- ulation according to the Lamfalussy framework, ing of a new legislature process in the field of

from which start also changes of supervision and securities on the markets of was BIATEC

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3 Announcement of the Commission achieved at the level of EU Commission ECOFIN in and application of EU framework legislature and from 11 May 1999 named “Intro- Stockholm on 22 March 2001, and it was passed implementing measures thereto in the area of duction of framework for financial markets: action plan” stipulated a at the session of the on 23 and financial services. Concrete steps of the Lamfalu- series of steps being necessary for the 24 March 2001. The processes stipulated in the ssy reform were stipulated in the second part of finalization of unified financial servi- draft resolution on more effective regulation of the Final Report of the Committee of Wise Men, ces market. According to the session of European Council in Lisbon on 23 the security market embodied implementation and European Commission, European Parliament, and 24 March 2000, the European of the ideas presented in the Lamfalussy Report. Council of Ministers, , Eco- Council called upon implementation This was a result of the mandate conferred in July nomic and Financial Committee, member states, of this action plan up to 2005. 2000 and it claimed that the change is necessary European regulators and national central banks 4 The decision 2001/527/EC, through which the Committee of European if there is supposed to be an integrated EU finan- were charged with their implementation. Securities Regulators is grounded and cial market by 2005.3 the Decision 2001/528/EC through After these steps, on 6 July 2001 the Commis- L1 – FRAMEWORK PRINCIPLES which European Securities Commit- 4 tee is established. sion adopted decisions , which set up the Com- European framework legislation of the first Lamfa- 5 Decisions of the Commission from mittee of European Securities Regulators (CESR) lussy level is drafted by the European Commission 5 November 2003 set up CEBS and European Securities Committee (ESC). after thorough consultations with all interested committee (No. 2004/5/EC), CEIOPS Through resolution from 5 February 2002, the Eu- parties, and in the end it is adopted in co-decision committee (No. 2004/6/EC), CESR committee (No. 2004/7/EC), ESC ropean Parliament passed a four-level Lamfalussy process of the Council of Ministers and European committee (No. 2004/8/EC), EIOPC approach towards securities, and in the resolution Parliament. committee (No. 2004/9/ EC), EBC from 21 November 2002 it requested the enlarg- First level legislature acts – directives and regu- committee (No. 2004/10/EC). 6 Banking Advisory Committee was ing of part of this approach also to the banking lations – are focused on basic principles, whereas set up through Directive of the Euro- sector and the sector of insurance. Subsequently, for each L1 level proposal the Council and the Par- pean Parliament and of the Council on 3 December 2002 the Council requested from liament also decide on the character and scope 2000/12/ES from 20 March 2000 on commencement and carrying out the European Commission to adopt such a system of technical implementing measures, which are of activities of credit institutions. also in the area of banking and insurance and to finally adopted at level L2. They also decide on Its task was giving counsel to the set up advisory committees also in these areas. limits, within which it is possible to adopt and Commission by the creation of The Lamfalussy system was introduced into these amend implementing stipulations of implement- legal regulations and assisting it by fulfilment of its implementing powers sectors in 2004 when further committees for regu- ing measures without the necessity of changing in the area of banking. lation and supervision5 also started functioning: framework legislation. The difference between L1 European Banking Committee (EBC) and Europe- principles and L2 measures is determined from an Insurance and Occupational Pensions Commit- case to case. For the purposes of accelerating the tee (EIOPC) replaced the existing Banking Advisory legislature process, the Committee of wise men Committee6 (BAC) and Insurance Committee (IC) proposed to use to a greater extent the form of and they aimed to function as a ESC committee for regulations as compared to directives, as regula- securities, so helping the Commission by adopting tions accelerate the implementation, in that they implementing measures to the EU directives. As are directly applicable in member states. committees of the third Lamfalussy level, Commit- tee of European Banking Supervisors (CEBS) and L2 – IMPLEMENTING MEASURES Committee of European insurance and occupa- Legislation of the first Lamfalussy level is supple- tional pension supervisors (CEIOPS) were created. mented at the L2 level with more detailed tech- According to the creators of the Lamfalussy nical implementing measures, which are formally model, the basic reason for the change in the su- adopted by the Commission after the voting of pervision arrangement was the necessity to carry the concerned committee for regulation (EBC, out changes in the manner of regulation of EU ESC and EIOPC), and after taking the standpoint of markets so that the supervision would be effec- the European Parliament into account. According tive, flexible and capable of reacting to the fast to inter-institutional agreements, the European growth of integrated financial markets, because Parliament must be thoroughly informed of the the existing regulatory system was considered to whole process. In the phase of the preparation be too slow, rigid and inadaptable to the needs of expert implementing measures, consulting is of modern financial markets. They pointed out provided to the Commission by the representa- the creation of ambiguous texts in legislation, tives of national supervisory authorities, acting and the reluctance towards transposing it con- through the committees of the third Lamfalussy sequently into national norms or to enforce its level (CEBS, CEIOPS and CESR). fulfilment. The ambition was to secure a conver- Original organization of second Lamfalussy gence of practices of the financial supervision, level included only European Securities Commit- accelerate decision making process, to ensure tee (ESC) with predominantly regulatory function, competitiveness of the EU, to keep to the terms and counselling function towards the Commis- of legal certainty and institutional balance, and sion was done by the European Securities Regu- also to achieve more flexible, more effective, and lators Committee (ESRC). Their task was to define, more transparent regulatory process for the legal propose and decide on details of implementation regulations of the community. of the first level framework, so as to secure that the rules will keep pace with market develop- LEVELS OF THE LAMFALUSSY PROCESS ment. The process stipulated that the Commission As a basis for the Lamfalussy process are four should ask the ESRC committee to begin work on

BIATEC procedural levels for adopting, implementation the technical details and that their time schedule

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should be agreed upon. Subsequently the ESRC L3 – COOPERATION committee moved the technical proposals for- National supervisory organs are grouped at the ward to the Commission and submitted them to EU level in three committees of financial services the ESC committee for approval by voting. sectors (known as committees of third Lamfalussy Contemporary second level committees have level, or 3L3 committees), which play important their basic role in the process of adopting new role within the European legislative framework of legislation. The following committees are con- financial services: cerned: • CEBS – Committee of European Banking Super- • European Banking Committee (EBC) visors • European Securities Committee (ESC) • CEIOPS – Committee of European Insurance • European Insurance and Occupational Pen- and Occupational Pension Supervisors, sions Committee (EIOPC) • CESR – Committee of European Securities Reg- ulators. Lamfalussy framework

Commission prepares a formal draft of the directive after finishing of consultation process

European Parliament Council of Ministers

L1 Agreement on framework principles and implementing powers for L2

Commission after consultations with the EBC/ESC/EIOPC committee asks CEBS/CESR/CEIOPS committee for consultancy on the implementing measures

CEBS/CESR/CEIOPS committee prepares recommendations on the basis of discussions European with market participants and submits them Parliament is to the Commission. informed on the whole process and it can interfere Commission takes into account the into the process, recommendations and submits the draft to  if it considers that EBC/ESC/EIOPC committee. L2 implementing powers stipulated at the L1 level Committee EBC/ESC/EIOPC votes on the draft were exceeded.

After voting of the EBC/ESC/EIOPC committee and after statement of European Parliament, the Commission adopts implementing measures.

CEBS/CESR/CEIOPS committee works on interpreting recommendations, regulations and standards (in the area not covered by EU legislature) for the securing of consistent L3 implementation of EU rules

Commission checks conformity of member states legislature with EU legislature L4 Commission uses enforcement measures for observing European norms

Source: Lamfalussy, A. (2001) with update and modification from the author. BIATEC

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Supervision on financial conglomerates is done created, in view of the demand of the legislative by these committees jointly within the framework programme of the Commission. Positive assess- of Joint Committee on Financial Conglomerates ment of the Lamfalussy process as a whole is to (JCFC). a considerable extent caused and supported by 3L3 committees are institutionally one part of this precious consulting activity of the commit- the European Commission. They are composed of tees of third level. high level representatives from individual super- Besides consulting function, the committees visory organs of EU member states and they do of the supervisors were also set up with the aim not have legal subjectivity at the European level. of securing convergence of national supervisory For the purposes of contracts conclusion with practices within the Community, more effective third parties and facilitating of operations and cooperation, and exchange of information. The administration committees, though, members third task is to contribute to the mutual applica- of each of the committees in the states, where tion of EU rules, for example by issuing regulations there are such committees (France, , the of non-binding character and also to strengthen United Kingdom) created support structures with greater mutual confidence. legal subjectivity. Three committees of the third Lamfalussy level aggregate more than 80 national L4 – ENFORCEMENT OF ADHERENCE TO supervisory authorities in the EU, which supervise THE NORMS markets with approximately 40 big cross-border Important role in this area is played by all partici- groups. 3L3 committees will be replaced after fin- pating parties, but the greatest responsibility lies ishing the process if the De Larosière Model is in- with the European Commission, which has the troduced by European authorities of supervision right to act as a guarantor of European agree- with modified powers. ments. At the forth level, the Commission secures Primary responsibility of Lamfalussy commit- conformity of the legislature of member states tees of the third level is to make use of experience with valid legal regulations and in case of need and expert knowledge to provide consultancy to it makes use of enforcement measures for com- the European Commission in the phase of draft plying with European norms. Also supportive is of measures at the level L2 or draft of legislature utilizing cooperation among member countries, References: 1. Åkerholm, J. et al: Final Report of the level L1. This is a task, which was concep- their regulators, and the private sector. Thus it Monitoring the Lamfalussy Pro- tually worked out mostly by the Committee of controls the timely and correct transposition of cess. Brussels: Interinstitutional Wise Men and which forms most of the work EU law into national legislatures and enforces the Monitoring Group. 15 October 2007. being done by 3L3 committee since they were law of the Community more consistently. 2. Lamfalussy, A.: Final Report Of The Committee Of Wise Men On The Regulation Of European Securities Markets. Brussels, The Committee Of Wise Men. 15 February 2001 3. European Commission 2009a. Commission Staff Working Docu- ment, Accompanying document to the Communication from the Commission European financial supervision, Impact Assessment. May 2009 4. European Commission 2009b. Ex- -Ante Evaluation for establishing a Community programme to support specific activities in the field of financial services, financial reporting and auditing. Commission Staff Working Document. Brussels: European Commission.23 January 2009, No. COM(2009)14. 5. Directive of the European Parliament and of the Council 2005/1/EC, through which are amended and supplemented the Directives of the Council 73/239/ EHS, 85/611/EHS, 91/675/EHS, 92/49/EHS and 93/6/EHS and Di- rectives of European Parliament and of the Council 94/19/EC,98/ 78/EC, 2000/12/EC, 2001/34/EC, 2002/83/EC and 2002/87/EC with the aim to create new organisati- onal structure of the committees for financial services. 9 March 2005 6. Press release of the European Commission from 23 March 2001

No. MEMO/01/105. BIATEC

8 volume 18, 7/2010 L EGISLATION

Legal mechanisms of introduction and use of euro outside the euro area JUDr. Peter Pénzeš, LL.M., PhD. Národná banka Slovenska Adopting the common European is a demanding process that is open to EU countries that prove a high degree of sustainable real and nominal convergence. In practice, however, we can see some examples of countries using the euro without having met any criteria of its adoption. This is so-called euroisation.

EUROISATION BASED ON MONETARY gal regulations transposing EU legal provisions on AGREEMENTS euro notes and , and to co-operate with The legally and politically approved form of eu- the EU against money counterfeiting. However, roisation is to use the euro on the basis of a the EU has no sanctioning powers against the monetary agreement. Under this arrangement a third state if it omits its liabilities arising from the third state does not formally become a euro area monetary agreement. In 2009 these agreements member and does not become a member of the were reviewed as the European Commission pro- euro group. Nevertheless the country is given a posed to implement such sanctioning mecha- righ to use euro as a legal tender on its territory. nism in the form of acknowledging the power These agreements are made with small countries to decide about a temporary suspension of the that had not used their own currency even prior right to issue euro coins in the case of continued to euro introduction in EU, or their currency had (e.g. 2 years) and serious violation of the liabilities been linked to the or , and stipulated by the monetary agreements. Based their economies had been closely linked to the on such review, a new agreement was negotiated economies of a state that had entered the euro with the Vatican that came into effect on 1 Janu- area. Such monetary agreements only ensure the ary 2010. This does not include the sanctioning legal continuity of the regime that had pre-exist- mechanism proposed by the Commission, but ed the introduction of euro in the euro area. the contracting parties established the jurisdic- One such state is Monaco, where French francs tion of the Court of Justice of the European Union had been the legal tender since 1925. Other states in respect to disputes arising from the monetary with a monetary agreement are San Marino and agreement. If any of the parties fails to respect the Vatican City State, Holy See (Vatican). Based the judgement, the other party has the right to on bilateral covenants with Italy from 1939 and renounce the monetary agreement. At the time 1929, they could issue lira coins with the legal of writing this contribution, the new contracts tender status. Following the introduction of euro with the two remaining states have not yet been in France and Italy, the , the former agreements published. were replaced with the agreement concluded between Monaco, San Marino, Holy See and USING THE EURO ON DEPENDENT EU Member States . These are no longer bilat- TERRITORIES eral agreements but rather agreements between Another instance of legally and politically certi- third countries and the EU made according to the fied euroisation is the use of the common Euro- Article 111 of the Treaty on the European Union pean currency in some territories outside Europe (now Article 219 of the Treaty on the Functioning that are dependent on EU Member States. In this of the European Union). instance it is necessary to differentiate between The monetary agreements entitle Monaco, San two groups of countries. The first group includes Marino, and the Vatican to use the euro as their of- the dependent territories of Euro Area Member ficial tender, to issue euro coins displaying on the States (France, and Spain) that are con- national side the artistic motives of these coun- sidered as part of the EU although geographically tries, and such coins are acknowledged as the they are positioned outside Europe, in accordance statute of the legal tender across the Euro Area. with Article 355 of the Treaty on the Functioning The volume of coins that these states may mint of the European Union. In this way, in 2002 the is limited by the agreement.. At the same time, euro was introduced into the currency circula- by monetary agreements, the above mentioned tion of Guadeloupe, French Guyana, Martinique,

three states committed themselves to adopt le- Réunion, Saint Bartholomew, Saint Martin, Azores, BIATEC

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Madeira, and the Canary Islands. This is euroisa- As for the negatives of unilateral euroisation, tion in the economic but not legal sense. The sec- first of all the central bank of the country loses ond group are the so-called off-shore states and the possibility to influence the exchange rate of territories that are not considered part of the EU. the currency as the currency and political tools In terms of economy and politics, they are linked are in the hands of the ECB, and such countries to France and the Netherlands, but have quite have no influence over its decisions. When mak- extensive autonomy. Such are Saint Pierre and ing use of its tools, the ECB does not take the Miquelon, Mayotte (using the euro as their cur- economic development of the states using the rency), New Caledonia, French Polynesia, Wallis euro unilaterally or based on agreement into ac- and Futuna Islands (using a currency linked to the count. Secondly, another drawback of unilateral euro), the Dutch Antilles and Aruba (using their euroisation is the loss of yield from money issuing own currency). (co-called “seigniorage”, the difference between the value of notes or coins issued and the costs UNILATERAL EUROISATION of minting, printing and distribution). Finally, for On the other hand, some states use the euro the central bank of a state that has unilaterally im- unilaterally (so-called unilateral euroisation). This plemented euroisation, it is much more difficult means using the common European currency to act as a lender of last resort in respect to the without entering into an agreement with the EU. banking industry. This duty is very important in The euro was implemented unilaterally in Kosovo, the case of a massive increase of requirements on Montenegro and Andorra. These countries do not the payment of deposits on the side of clients as a have the right to mint their own coins. Some (e.g. result of panic on the market, i.e. a so-called “run” Andorra) are making efforts to reach an agree- on the bank. If exceeding a certain critical limit of ment with the EU that would enable them to liquidity demand, the bank may reach a crisis that issue their own euro coins. Euroisation is used can only be resolved by asking the central bank especially by smaller states, for which it is easier for a temporary loan. In the case of euroisation, to accept the loss of one of the attributes of their such loan cannot be provided by issuing money sovereignty - own currency. in circulation but only from foreign-exchange re- In 2008, Iceland was also interested in the uni- serves that may be very limited in smaller and less lateral use of the euro in relation to the alleviation developed states. of the consequences of the financial crisis, but the The European Union expressed its negative at- ECB´s attitude was negative. titude to the unilateral use of the euro when in The benefit of euroisation (either by agreement 2000 the ECOFIN Council accepted a formal con- or implemented unilaterally) is the improvement clusion that unilateral euro use is not compatible of macroeconomic stability as the result of imple- with the economic substance of the economic menting a stable and more credible currency, with and monetary union. Euro introduction shall the ECB being the guarantor of a low inflation rate. only represent the completion of the conver- A more stable currency also has a positive impact gence process. Unilateral euroisation should not on domestic financial sector development. A fa- be a tool to circumvent the process required for vourable result is also represented by the partial adopting the common European currency. Even economic integration with the economy of the clearer is the conclusion formulated in this case in Euro Area as the result of deepened commercial the joint standpoint on the question of acceding relations based on the decrease of transaction countries and ERM 2 from an informal meeting costs, and the elimination of risk arising from for- of the ECOFIN Council in Athens on 5 April 2003. eign exchange rate fluctuations. Some of these Paragraph 6 of the document states that unilat- benefits are fully reflected only if the unilateral eral euroisation is contrary to the Treaty on the euroisation is accompanied by performance to- Functioning of the European Union. wards a more responsible economic policy. BIATEC

10 volume 18, 7/2010 F INANCIAL ASSISTANCE FOR GREECE

Greek Rescue Package and European Financial Stabilisation Mechanism Katarína Jevočinová, Lucia Országhová1 Národná banka Slovenska The turbulent evolution in Greece and the following instability in euro-area financial markets in early 2010 have become the most discussed economic topic. In view of the threat of Greece’s potential bankruptcy and its serious consequences for the whole European Union (EU), the European institutions, in cooperation with the International Monetary Fund (IMF), have been looking for the most suitable mechanism. In this article, we will deal with the process of financial assistance to Greece provided by the euro area member states in cooperation with the IMF, describe the recovery programme, and briefly outline the new mechanism aimed at supporting the euro area’s stability.

The world economic crisis has revealed Greece’s to Greece amounts to EUR 110 billion, with euro 1 The authors wish to thank A. vulnerability as caused by long-term external and area Member States contributing EUR 80 bil- Šťavinová who participated at EWG Task Force meetings on behalf of the fiscal imbalances, high debt, and low competi- lion, and the IMF EUR 30 billion. On 3 May 2010, Ministry of Finance of the Slovak Re- tiveness. The Greek general government deficit Greece also signed the Memorandum of Economic public (MF SR), as well as M. Jakoby, a for 2009 was gradually revised to 13.6% GDP, and and Financial Policies, the Memorandum of Under- representative of the Slovak Republic at the IMF and a senior advisor to gross government debt was as high as 115% GDP standing on Specific Economic Policy Conditionality the Executive Director of the Belgian for the stated period. As a result, increased market and the Technical Memorandum of Understanding. Constituency in the IMF for their nervousness regarding the fiscal sustainability and By signing the Memoranda, the Greek govern- valuable comments. creditworthiness of Greece increased in early 2010. ment has pledged itself to implement the eco- 2 is an informal gathering of Finance Ministers of the euro area The measures announced by Greece in order to nomic adjustment package for the recovery of its Member States. gradually decrease its expenses have still failed to economy. The Memoranda were also signed by 3 Loan Facility Agreement between calm the markets. Confidence in the euro has also the EC and the IMF. On 8 May 2010, the EC and Member States whose currency 3 is euro as Lenders and Greece as deteriorated and the euro area as a whole has also Greece signed a Loan Facility Agreement , which Borrower, and the Bank of Greece as been under threat. Faced with this situation and for contains the necessary provisions on the drawing Agent to the Borrower. the first time in its history, the euro area decided to and repayment of loans. provide financial support to one of its members. On 18 May 2010, the euro area countries re- The first discussions about providing financial leased the first instalment amounting to EUR 14.5 support to Greece started on 25 March 2010 at a billion, enabling Greece to fully cover EUR 8.5 bil- meeting of euro-area heads of state and govern- lion of bonds payable the next day. At the same ment. On 11 April 2010, the Eurogroup2 released time, the IMF also released the first instalment a statement outlining the conditions for financial amounting to EUR 5.5 billion. help with the aim of safeguarding the financial stability of the whole euro area. Euro-area Mem- 1. COORDINATION WITHIN THE EURO AREA ber States decided to provide financial assistance The Treaty on the functioning of the EU does to Greece via bilateral loans supplemented by not exclude mutual assistance among euro area IMF resources. They also agreed that the financial countries via loans, but does not allow Member assistance of the euro area should reach EUR 30 States to be made liable for or made to assume billion in the first year and would be conditioned the commitments of other member states. How- to a 3-year economic adjustment programme. ever, loans among Member States or loans from Greece officially requested financial support on the EC requested by one Member State are al- 23 April 2010. On the basis of Greece’s request lowed in the EU. and after the end of the mission of the Europe- In spite of this, the euro area lacked a rescue an Commission (EC), the European Central Bank mechanism in the event its members were to (ECB) and the IMF in Greece, the euro area Min- face financial difficulties. It became therefore nec- isters unanimously approved on 2 May 2010 a essary to agree rapidly on the mutual relations stability support package via bilateral loans from and on a form of cooperation between (lender) euro area Member States for a period of 3 years. countries, as well as to determine the role that the On 9 May 2010, the IMF approved a 3-year Stand- European institutions, in particular the ECB and

By Arrangement (SBA). The joint financial support the EC, were to play. BIATEC

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Table 1 Chronology of events related to the financial support of the euro area and IMF to Greece 21 October 2009 Greece sends revised notification on the government deficit and debt statistics – the foreseen 2009 general government deficit is revised from 3.7% GDP (April) to 12.7% GDP (re-revised in April 2010 to 13.6% GDP). 22 October 2009 The Fitch Ratings downgrades Greece’s credit rating to A- from A (further down- grades to BBB+ in December 2009 and BBB- in April 2010 with negative outlook). 23 December 2009 The Greek Parliament approves the 2010 budget with planned general govern- ment deficit of 9.1% GDP. 15 January 2010 Greece updates its Stability Programme, proposing to bring the general govern- ment deficit below 3% in 2012 and decreasing the planned 2010 government deficit to 8.7% GDP. (Greece announces further measures in February 2010.) 11 February 2010 Statement by heads of state and government of the EU about the readiness of euro area Member States to take coordinate action (if necessary) to safeguard financial stability in the euro area as a whole. 16 February 2010 Proposed by the EC and recommended by the European Council, Ecofin6 adopts the decision in view of the excessive deficit correction in Greece. 3 March 2010 The Greek government announces another package of fiscal measures (in con- nection with the Stability Programme measures from January 2010 and measures from February 2010). 25 March 2010 Statement by heads of state and government of the euro area reaffirming their readiness to help Greece via bilateral loans under strong conditionality and in cooperation with the IMF. 11 April 2010 Eurogroup statement on the support to Greece aiming to safeguard financial stability in the euro area as a whole – closer defined technical details of the assistance. The IMF states its readiness to help Greece through a multi-year SBA. 21 April – 3 May 2010 Joint EC, ECB and IMF mission in Greece. 22 April 2010 Moody’s downgrades Greece’s credit rating to A3 from A2 with negative outlook (the A1 rating was downgraded in December 2009). 23 April 2010 Official request by Greece for financial assistance from the euro area countries and the IMF. 27 April 2010 Standard and Poor’s downgrades Greece’s credit rating to BB+ from BBB+ with negative outlook; Greece’s rating is getting into speculative grade. 2 May 2010 Staff-Level Agreement among Greece, EC, ECB and IMF on the programme of economic policies amounting to EUR 110 billion and unanimous approval by the Eurogroup. 3 May 2010 Greece sends the Letter of Intent and signs the Memoranda. ECB decision to accept Greece’s debt instruments issued or guaranteed by the Greek government independently from the assigned rating. 5 May 2010 The EC is delegated to coordinate bilateral loans of the euro area countries for Greece. 6 May 2010 The Greek Parliament approves the programme defined in the memoranda. 7 May 2010 The gap between German and Greek 2-year bonds reaches 1739 basis points (1 February 2010: 347 basis points). 8 May 2010 Meeting of heads of state and government of the euro area – conclusion of the procedure of financial support to Greece and proposal of a European Financial Stabilisation Mechanism in order to safeguard the financial stability of the euro area. 9-10 May 2010 The IMF approves the SBA. Special Ecofin5 decision to create the European Financial Stabilisation Mechanism. 18 May 2010 First instalment from the euro area (EUR 14.5 billion); first instalment from the IMF EUR 5.5 billion also provided in May 2010. 14–18 June 2010 EC, ECB and IMF interim review mission under the IMF Emergency Financing Mechanism. 26 July – 5 August First review mission by EC, ECB and IMF to Greece as part of the quarterly asses- 2010 sments of Greece’s economic programme. 6 August 2010 Greece sends updated memoranda to the EC, ECB and IMF. September 2010 Scheduled negotiations of the IMF Executive Board and the Eurogroup – decision

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The euro area Member States decided to for processing all payments from lenders and 4 Intercreditor Agreement between take coordinated action for financial support to the borrower. Together with the ECB, the EC is to the Kingdom of Belgium, the Federal 4 Republic of Germany, the Republic Greece in view of the Intercreditor Agreement . provide assessments of Greece’s compliance with of Ireland, the Kingdom of Spain, the The Intercreditor Agreement was signed on 8 the conditions of the memoranda. On the basis of French Republic, the Italian Republic, May 2010 and came into force with the written these reports, the lender countries are to decide the Republic of Cyprus, the Grand commitment confirmation of at least five euro unanimously on the release of other instalments Duchy of Luxembourg, the Republic of Malta, the Kingdom of the Nether- area lender countries representing at least 2/3 of of the loan. lands, the Republic of Austria, the the total commitment (critical mass of member Each participating country has pledged itself to Republic of Portugal, the Republic of states). In Slovakia, the ratification process6 was provide for the following 3 years a bilateral loan , the Slovak Republic and the Republic of Finland. not successfully completed and the Intercreditor in within the limit of the maximum amount 5 Ecofin (or Economic and Financial Agreement has therefore not become binding for determined on the basis of a contribution key9. Affairs Council) is composed of the this country. At the same time, the EC pledges itself to obtain EU Economic and Finance (Budget) 7 Ministers. The lenders are to take their decisions at meet- from all participating euro area countries that 6 The Intercreditor Agreement was ings within the framework of the Eurogroup with they share the burden equally (according the signed for the Slovak Republic by the a majority of lender countries holding no less than contribution key). Minister of Finance on the basis of the 2/3 of principal loan outstanding at the time of Not all euro area countries participated in the decree No. 287 of 8 May 2010 of the Government of the Slovak Republic. voting, except in the case of decisions requiring first disbursement, as the national approval pro- The provision of the loan from the unanimity (e.g. modifications of the agreements cedures had not been completed in some of Slovak Republic was conditioned to and memoranda, prolongation of the availability them. The Intercreditor Agreement stipulates that the ratification of the Intercreditor Agreement, as required by the period or decision on disbursement). The lenders a country cannot be required to participate in the Constitution of the Slovak Republic. are to communicate their decisions to the EC via instalment in case its funding costs were to be In its decree No. 40 of 11 August the chairman of the higher than the interests paid by the borrower, 2010, the National Council of the SR (EWG)8. and provided that other lenders were not able or expressed its disagreement with the Intercreditor Agreement. The euro area Member States also authorized willing to settle these costs. 7 Lenders are the euro area countries the EC to represent them and act on their behalf except Greece and the Slovak in their dealings with Greece, to negotiate and 2. IMF PARTICIPATION Republic. Germany is represented in its function of lender by KfW sign the Loan Facility Agreement and memo- In contrast to the euro area, providing loans to (German National Bank) acting in randa with Greece as well as to coordinate and member states with balance of payment diffi- the public interest, subject to German manage pooled bilateral loans of the euro area culties is one of the basic tasks of the IMF. Sev- instructions and with a guarantee of Germany. (There is a principle laid countries. The EC opened an account with the eral lending facilities have been created for this down in the Intercreditor Agreement ECB on behalf of the lender countries to serve purpose, as well as different mechanisms which that other member states may also authorize other legal subject to function as lender.) Scheme 1 Mechanism of EU and IMF assistance to Greece 8 The EWG is a special group created under the Economic and Financial Council (EFC). Among other things, this group was responsible for drafting the Loan Facility Agreement ECB with Greece and the Intercreditor Ag- European (platobnýEuropean orgán) Central International reement among the member states. Commission Bank Monetary Fund 9 This contribution key is derived from

Missions the valid key for subscription to the in Greece memoranda) pliance with the of Greece’s com- of Greece’s (quarterly checks ECB capital. According to the key, Slovakia’s share was supposed to be 1.02% of the total amount; i.e. EUR 817.85 million, of which EUR 306 million of the loan programme in the first year. IMF Executive Eurogroup Board of Greece’s of Greece’s assessment Approval Approval (based on the compliance with the memoranda) of instalment

European ECB International Commission – payment agent Monetary Fund – coordinator Release of instalment

Countries involved in Participating euro the FTP and bilateral area member states agreements Greece The Central Bank of Greece – payment agent

Source: diagram by the authors. BIATEC

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10 Exceptional Access Policy defines allow the IMF to respond promptly to an arising 300% of quota, a surcharge of 200 bp is calculated four criteria: the country has to face situation. in the first 3 years, and of 300 bp later. In both cas- exceptional pressure on the balance of payment, have a sustainable The IMF is to provide financial support to Greece es, the borrower is to pay a service charge of 50 debt in the medium-term period, through a 3-year Stand-By Arrangement (SBA). The bp from the resources drawn, which will be used good prospects for renewing its SBA was created in 1952 and can be granted to for settling operating costs. Apart from that, the access to capital markets, and a any IMF member state with short-term problems IMF also charges a commitment fee which is fully convincing programme of reforms. 11 More information on IMF’s resour- in its balance of payments (An SBA is provided refunded if the resources are drawn. ces can be found in: International for a maximum of 3 years). The SBA provision is initiative to bolster the lending conditioned to the adoption of an adjustment 4. GREECE’S RECOVERY PROGRAMME capacity of the IMF, Biatec, January 2010. programme aiming at solving the problems in Greece’s recovery programme was drafted in the 12 In the case of a loan period shorter the balance of payment in a sustainable way. The triple presence of the ECB, the EC and the IMF. This than 1 week, rate will be normal access limit represents 200% of the IMF is the reason why a common framework of mac- used. 13 For the 2011 financial year. quota for a 12-month period, and the cumulative roeconomic and structural reforms was agreed access limit amounts to 600% of the total credit for both resources (euro area and IMF); these are outstanding. summarised in the Memorandum of Economic and In the case of Greece, the exceptional access Financial Policies and the Technical Memorandum was approved with a loan of SDR 26.4 billion of Understanding. Additionally, the EC and Greece (equal to EUR 30 billion), corresponding to about also signed the Memorandum of Understanding 3.212% of Greece’s quota10. At the same time, on Specific Economic Conditions defining more Greece used the option of a front-loaded access detailed structural reforms and a timetable for and applied for an exceptionally high first dis- their implementation. The performance criteria bursement of EUR 5.5 billion. Like in a few other and other indicators and obligations defined in cases during the current crisis, an Emergency these documents form the basis for regular quar- Financing Mechanism was applied to Greece as terly assessments carried out jointly by all three this exceptional situation required an accelerated institutions. approval process. The objectives of the 3-year programme are To finance its lending, the IMF currently uses to restore the confidence of investors and regain quota resources from IMF member states par- market access, to secure debt sustainability, to re- ticipating in the Financial Transaction Plan (FTP) cover competitiveness, and to provide stability for and resources provided to the IMF through bilat- the Greek financial sector. A combination of fiscal, eral borrowing and note purchase agreements11. financial sector and structural policies is neces- All euro area Member States, with the exception sary to reach these goals. of Greece, now participate in the FTP and most The basis of the programme is formed by fis- of them have also signed a bilateral borrowing cal measures aimed at reducing general govern- agreement with the IMF, including the Slovak Re- ment deficit to below 3% of GDP by 2014, and at public. reducing the debt-GDP ratio from 2013 onwards. The bulk of those fiscal measures (amounting to 3. CONDITIONS FOR PROVIDING THE LOAN around 8% GDP) should be implemented in 2010 The conditions for providing the loan to Greece (including the already accepted obligations from are laid down in the Loan Facility Agreement and February and March 2010), followed by fiscal in the agreement on SBA, as well as related mem- measures of similar range in 2011 – 2013. oranda. The adjustment programme was created The frontloaded measures are aimed mainly at in close cooperation with the IMF and European a fast reduction of government expenditures (e.g. partners, and for this reason both facilities have by lowering pensions and wages in the public identical conditionality. sector or reducing subsidies to state enterprises) Greece will draw on IMF and European facilities and an increase of government revenues (e.g. by at a fixed ratio of 3:8 throughout the programme increasing the VAT rate or excise taxes). They are period. The condition for providing financial re- to be followed by several reforms (particularly tax sources (the release of the first instalment was an reform, health system reform, pension reform) exception) is to meet quantitative performance which should help to consolidate the public fi- criteria and structural benchmarks of the recovery nances. Greece has also pledged itself to adopt programme defined in individual memoranda. measures to secure better tax collection, more ef- During the programme, the IMF, ECB and EC will ficient budget control, and better statistical pres- make 12 joint quarterly assessments. entation. The significant technical help of the IMF, The loans from the IMF and the euro area have EC and Eurostat will be used in these areas. the same term which cannot exceed 5 years, In the financial sector, the supervision provid- starting on the date when the loan was paid out. ed by the Bank of Greece will be intensified and The interest rate for the loans from the euro area an independent Financial Stability Fund will be is derived from the Euribor12 rate increased by 300 established. It will provide an additional safety net basis points (bp). If the term of repayment ex- by supporting banks with temporary problems of ceeds 3 years, the interest rate is to be increased capital adequacy. The ECB took an important deci- by another 100 bp. The interest rate of IMF loans sion in May 2010 to continue accepting debt in- is derived from the SDR interest rate increased struments issued or guaranteed by the Greek gov- 13

BIATEC by 100 bp . With credit outstanding higher than ernment as collateral, regardless of their rating.

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Box 1 Summary of measures in selected areas Pension system measures self to introduce a progressive tax scale for all The first measures in the area of pensions were income sources and to reduce exceptions and to decrease the highest pensions and cancel- deductible items. Further measures were to be ling Easter, summer and Christmas bonuses added by September 2010, such as temporary paid out to pensioners, while protecting the crisis extra payments for high-profit companies, lower pensions. A complex pension reform higher taxes on luxury goods, and the gradual

aimed at reaching the fiscal sustainability of the introduction of “green taxes” on CO2 emissions. pension system was approved in June 2010 (the Additionally, the tax base was to be extended, as date was September 2010) by means of two well as 30% of goods and services to be moved acts coming into force in early 2011. The reform from the lower to basic VAT rate. A tax on non- introduced a minimum pension, decreased ac- alcoholic beverages, among other things, is to crual yearly coefficients and introduced the fact be introduced as of September 2011. that lifelong contributions will be decisive for pension calculation. The reform laid down a re- Financial Stability Fund(FFS) tirement age of 65 and a minimum retirement The FFS was set up by the Bank of Greece in age of 60. At the same time, the minimum peri- July 2010 for a period of seven years in order od of contributing to the system was increased to safeguard the financial stability of the Greek to 40 years; as of 2013, the retirement age for banking system by providing capital in the men and women is to be unified in both sec- form of preference shares (which are convert- tors and, as of 2021, the retirement age will be ible into ordinary shares). The participation of adjusted automatically following the increase banks in the FFS will be compulsory. If, in the of life expectancy. The list of hard and physically course of time, a bank were to be unable to in- demanding professions is also to be shortened. crease its capital (and repay the FFS), the FFS The reform also includes a clause on possible would require its restructuring. The FFS capital adjustments in the case of unfavourable pro- of EUR 10 billion will be provided by the Greek jections of pension system costs. government from the euro area/IMF loan pro- gramme. The FFS Board of Directors consists Tax measures of seven members including representatives Greece was obliged to introduce VAT as well as of the Central Bank of Greece and the Greek Fi- excise taxes on alcohol, fuels and tobacco by nance Ministry. The EC and ECB each have an the end of 2010. The country also pledged it- observer status without voting rights.

Structural reforms are necessary to restore the have taken place in Greece14. In August 2010, an 14 The first mission took place within competitiveness of the Greek economy. Reforms expert team stated that Greece was meeting all the IMF’s Emergency Funding Me- chanism in June 2010, the following will be aimed at reorganizing and modernizing performance criteria and important reforms, in- mission from July/August 2010 public administration (e.g. strengthening the role cluding pension reform, and was ahead of sched- was the first one of the series of 12 of public procurement) and strengthening the la- ule. The conclusions from the first revision of the quarterly missions. bour market (e.g. a legislative adjustment of the programme are expected to be approved in early minimum wage, more efficient use of part-time September 2010 by the EC, the Eurogroup as well work, or a reduction of redundancy payouts). The as the IMF Executive Board, which should allow business environment needs to be rehabilitated the release of the second instalment of EUR 9 bil- by accelerating the founding process for new lion (EUR 6.5 billion from the euro area and EUR companies, by implementing the EU Services Di- 2.5 billion from the IMF). rective and removing obstacles in some profes- sions (e.g. architects). Another important meas- 5. NEW PLAN FOR MAINTAINING THE EU’S ure is the improvement of the operation of state FINANCIAL STABILITY companies in order to reduce state participation. Following the events in Greece, which have shak- And, last but not least, the capacity for absorp- en the stability of the euro area’s financial markets, tion of structural and cohesion EU funds (e.g. by the EC submitted on 9 May 2010, at an extraor- creating a special blocked account to co-finance dinary Ecofin meeting, a Stabilisation Mechanism them) should also be improved. draft for maintaining financial stability in Europe, The programme also contains measures to pro- resulting in the approval of the European Finan- tect the most socially vulnerable groups. During cial Stabilisation Mechanism for as much as EUR the 3-year programme, Greece will be required to 500 billion. The mechanism is based on Article regularly send various reports and statistics to the 122 of the Treaty on the functioning of the EU and ECB, EC and IMF. intergovernmental agreements of the euro area Since the approval of the economic adjustment Member States, with financial assistance from the

programme, two missions of the IMF, ECB and EC EU budget amounting to EUR 60 billion and from BIATEC

volume 18, 7/2010 15 F INANCIAL ASSISTANCE FOR GREECE

Box 2

References: 1. The Economic Adjustment Programme The European Financial Stability Facility, the Guarantee for Greece, Occasional Papers No. 61, European Commission, http://ec.eu- Scheme and the participation of the Slovak Republic ropa.eu, May 2010. 2. Greece: Request for Stand-By Arrange- ment, IMF Country Report No. 10/111, The EFSF is a special purpose vehicle enabling borrower’s economic policy and on checks be- International Monetary Fund, www. the provision of a stabilisation loan to a euro ing performed by the EC. imf.org, May 2010. area member state in trouble. The EFSF works The EFSF may provide stabilisation assistance 3. Greece: Staff Report on Request for Stand-By Arrangement, IMF Country as a public limited company set up in accord- to a euro area country in difficulty and asking Report No. 10/110, IMF, www.imf.org, ance with the legal system of Luxembourg for financial assistance on the basis of the loan May 2010. 4. Greece: Stand-By Arrangement – Re- on 7 June 2010, while the original subscribed and credit agreement. The financial assistance view Under the Emergency Financing capital of EFSF was EUR 31,000. All euro area will be funded by the EFSF through the issue of Mechanism, IMF Country Report No. member states are to become shareholders bonds in the market which will be covered by 10/217, IMF, www.imf.org, July 2010. 5. The Economic Adjustment Programme of the EFSF. The Board of Directors of the EFSF guarantees of participating euro area members for Greece: First review– summer 2010, (last changed on 14 July 2010) determines the (guarantors) in order to achieve the best rating Occasional Papers No. 68, European amount of EFSF share capital, while the current possible (EUR 440 billion with a guarantee of Commission, http://ec.europa.eu, August 2010. EFSF statutes allow a share capital of maximum 100%). The guarantee scheme for the euro area 6. Draft of a Guideline for the Euro area EUR 30 million. countries (like financial assistance to Greece) is Member States to provide assistance to the Hellenic Republic, material for Euro area countries are to conclude a EFSF derived from the distribution key in the ECB’s the Government of the SR No. UV- Framework Agreement. Its binding charac- repaid capital. If the best possible rating for the 20714/2010, www.vlada.gov.sk, May ter for single member states is conditioned to EFSF is reached, there is a maximum guarantee 2010. 7. Proposal of approval of capital its compliance with their national legislation. determined for each member state of 120% participation of the Slovak Republic in The Agreement contains rules and conditions of their share in the emission guarantees. The the European Financial Stabilization regulating the provision of loans to euro area financial means for providing a recoverable Facility and a proposal of concluding the EFSF Framework Agreement, member states from the EFSF, as well as rules loan for a particular country will be obtained material for the Government of the and conditions for guarantors regarding fund- through emission. There is also a service charge SR No. UV-25680/2010, www.vlada. gov.sk, July 2010. ing guarantees by means of issuing bonds. and a margin for providing the loan, like with 8. http://www.imf.org The EFSF Framework Agreement will come the financial assistance to Greece. 9. Council decision of 16 February into force once the obligations are confirmed At its session on 11 August 2010, the National 2010 giving notice to Greece to take measures for the deficit reduction by at least five member states representing Council of the Slovak Republic approved this judged necessary in order to remedy at least 2/3 of the total volume of guarantees. General Contract. In order to finalize the proc- the situation of excessive deficit Additionally, the provision of financial help is ess of the Slovak involvement in the EFSF, the (2010/182/EU). 10. Council decision of 4 May 2010 conditioned to the confirmation of the obliga- Framework Agreement still needs to be ratified asking Greece to strengthen and tions by countries representing 90% of the total by the President of the Slovak Republic and a deepen fiscal supervision and suggesting that it adopts deficit- assistance volume. As for financial assistance to new legislative framework should be adopted. -decreasing measures considered to Greece, the provision of loans to member states The Slovak share in the share capital of the be essential for eliminating excessive in difficulty will depend on their following the EFSF represents 0.99%. According to the EFSF deficit (2010/SEK(2010)560. 11. http://ec.europa.eu Memorandum of Understanding regarding the Framework Agreement, Slovakia will participate 12. EU Council Regulation No. 407/2010 with EUR 4.37 billion with a guarantee of 100%. of 11 May 2010 establishing the European Financial Stabilisation Mechanism. 13. http://www.minfin.gr 14. Proposal for the National Council of the SR to agree with EFSF Framework euro area member states to EUR 440 billion. As will also participate in implementing the assist- Agreement between the Kingdom part of the mechanism, euro area Member States ance from the Stabilisation Mechanism. of Belgium, the Federal Republic of will set up a European Financial Stability Facility On the basis of the adopted mechanism, coun- Germany, the Republic of Ireland, the Kingdom of Spain, the French (EFSF) and will guarantee resources in the amount tries with difficulties will be allowed to ask for fi- Republic, the Italian Republic, the Re- of EUR 440 billion. The involvement rate of Mem- nancial assistance in the form of a loan. Financial public of Cyprus, the Grand Duchy of ber States is derived from the key for subscribing support will be conditioned by meeting obliga- Luxembourg, the Republic of Malta, the Kingdom of the Netherlands, the ECB capital. The participation of the countries in tions and it will be strictly supervised by the EC, Republic of Austria, the Republic of the EFSF has to be in line with their national re- ECB and IMF. In this way the EU will be ready to re- Portugal, the Republic of Slovenia, the Slovak Republic, the Republic quirements. According to the provisions of the spond efficiently, promptly, and in a coordinated of Finland, the Hellenic Republic, EFSF, it should provide financial assistance until way to serious events which may affect the EU’s and the European Financial Stability June 2013. As for the support to Greece, the IMF financial stability. Facility, http://www.nrsr.sk/, August, 2010. 15. http://www.ecb.eu 16. Amendment proposal of the section B.1.in the decree of the Government of the SR No. 486 of 15. July 2010 to the Proposal of approval of capital participation of the Slovak republic in the European Financial Stability Facility e and to the Proposal of concluding the EFSF Framework Agreement, material for the Government of the SR No. UV-34242/2010, http://www.vlada. gov.sk, August 2010. BIATEC

16 volume 18, 7/2010 C OMMEMORATIVE AND COLLECTOR COINS

Silver Collector Coin Protection of Nature and Landscape - Poloniny National Park Ing. Dagmar Flaché Národná banka Slovenska The latest collector coin issued by the Národná banka Slovenska in September 2010 features the Poloniny National Park. It is the ninth and last coin, thus completing the series featuring Slovak national parks, as since 1994 the Národná banka Slovenska has issued coins featuring all nine contemporary Slovak national parks.

Coin realization based on the design by Karol Ličko

Poloniny National Park is located in the East of lynx, the wildcat and the Gray wolf. The national Slovakia in the area where the borders of three park is the only area in Slovakia where the free- countries − Slovakia, Poland, and Ukraine − meet. living European bison can be found. In terms of Its name derives from the alpine pastures above the phytogeographical division of Slovakia, the the upper border of forest on the central crest of area of Poloniny National Park is the only one that the Bukovina Mountains, which are called ‘polon- belongs to the East Carpathian floral region repre- iny’. It was established on 1 October 1997 and has sented by Ranunculus carpaticus (Carpathian but- an area of 29,805 ha; the protected area amounts tercup), Viola dacica (Dacian violet), Campanula to 10,973 ha. abietina (Fir-tree bellflower), Dianthus barbatus Eighty percent of its area is comprised of for- L. subsp. Compactus (Sweet William), Helleborus est ecosystems, especially beech and fir-beech purpurascens (purple Hellebore), etc. forests. The largest complex of primeval forests The whole region possesses excellent precon- in Slovakia can be found here. Primeval forests ditions for the development of tourism. Poloniny in Stužica, Rožok, and Havešová national natural can offer countless interesting hiking and bicycle reserves were added to UNESCO’s World Heritage trails of the Carpathian arterial road. The cultural List in 2007 as ‘The Primeval Beech Forest of the and historical attractions of the region are repre- Carpathians’. Apart from these, one more Slovak sented by Greek Catholic churches with unique area – Vihorlat – is registered in the list, as well as wooden architecture in Topoľa, Uličské Krivé, another six areas in the Ukraine. Ruský Potok, and Jalová. The national park is home to many rare species Ten authors entered the public anonymous of plants and animals. The endangered species of competition for the art design of the coin, sub- Poloniny’s nesting avifauna include the Red kite, mitting a total of fifteen art works. The NBS Gov- the Peregrine falcon, the Short-toed eagle, and ernor’s Commission for the Assessment of Art the Golden eagle. Beasts of prey which inhabit Designs of recommended the

the area include the Brown bear, the Eurasian art design by academic sculptor Ivan Řehák for re- BIATEC

volume 18, 7/2010 17 C OMMEMORATIVE AND COLLECTOR COINS

Second prize academic sculptor Ivan Řehák

Third prize PhDr. Kliment Mitura

Reduced third prize Karol Ličko

alization, which was awarded second prize in the perfections in the depiction of fauna, the author competition. His design impressed and captured adjusted the image of the wolf at the bottom. the interest of the commission with its unconven- First prize was not awarded in the competition. tional modern solution and interesting dynamic Third prize was awarded to PhDr. Kliment Mitura. composition. The obverse of the design depicts As regards his design, the commission particularly the European bison; the reverse shows a typical praised the harmonious and faithful rendition of the beech growth motif supplemented with purple obverse depicting beech trunks and purple helle- hellebore. Professional advisors to the commis- bore. On the reverse, the author created a composi- sion commented on the design, observing that tion of a landscape motif, a bison’s head, Dianthus the bison is rendered in an unnatural posture. barbatus, and a traditional architectonic element of Although the commission recommended this Poloniny ‘oboroh’ (a type of simple barn). Reduced design for realization, the NBS governor exercised third prize was awarded to another design by Karol his right arising from the terms of the public com- Ličko. On the obverse of the design, the artist depict- petition, which allows him to decide contrary to ed a bison; on the reverse, an ‘oboroh’ supplemented the commission’s recommendation. Thus on the with characteristic species of Poloniny flora. basis of the authorization from the Bank Board of The collector coin in nominal value of 20 euro, the NBS, he approved for realization the design diameter of 40mm and weight of 33.63g, is mint- by Karol Ličko, which received the reduced third ed of silver of 925/1000 purity at the Kremnica prize. For the obverse, the artist chose a charac- mint. 8,150 pieces of BU quality and 10,350 pieces teristic Poloniny landscape motif with purple hel- of proof quality were minted. The inscription on lebore in the foreground. The reverse of his design the edge of the coin reads “OCHRANA PRÍRODY depicts two wolves in a setting with a fallen tree A KRAJINY” (THE PROTECTION OF NATURE AND trunk and branches of beech growth. With regard LANDSCAPE), before which there is a dividing

Photo: Ing. Štefan Fröhlich BIATEC to the commission’s assertions about certain im- mark in the shape of a flower.

18 volume 18, 7/2010 D EPOSIT PROTECTION

Deposit protection after turbulence in the financial markets Ing. Rudolf Šujan, Presidium Chairman Deposit Protection Fund Deposit protection has been going through dynamic evolution and changes, especially after turbulence in the world financial markets in the autumn of 2008, and this trend has not finished by far. The aim of this contribution is to summarize the most significant changes which have appeared since 2008 in the area of deposit protection in the EU and beyond.

We are not living in a perfect world, neither from posits as amended. The mentioned act cancelled the economic point of view nor when considering the 10% participation of depositors and also in- the financial or banking system. This was clearly troduced unlimited deposit protection which shown in September 2008 when the US bank, means that if deposits are inaccessible in one of Lehman Brothers, went bankrupt and so became the banks, depositors are paid compensation in a victim of the mortgage and loan crisis. the full amount of their protected deposit by the Another event which triggered changes in Deposit Protection Fund. deposit protection was a massive withdrawal of Directive No. 94/19/EC of the European Par- deposits from the Northern Rock Bank in Eng- liament and of the Council of 30 May 1994 on land, whose clients withdrew £1 billion on Friday deposit-guarantee schemes did not escape 14 September 2008, while the withdrawing con- changes either; it was amended by Directive No. tinued on Monday, 17 September when the bank 2009/14/EC of 11 March 2009. The changes main- lost further deposits totalling GBP 2 billion. Sub- ly concern the level of deposit protection and sequently the British Government and the Bank the period of compensation payment, while the of England announced that deposits in this bank minimum deposit protection level was increased would be guaranteed at their full amount. to EUR 50,000, and until 31 December 2010 the It did not take long for the financial rescue re- deposit protection limit for all depositors should sponses to arrive as a result of these events. be EUR 100,000. At its meeting on 7 October 2008, the ECOFIN Based on the amended directive, the deposit- Council called on EU member states to adopt guarantee schemes in single countries have to be certain measures for deposit protection and to able to pay out duly verified claims of depositors increase debt protection in the extent of at least regarding their inaccessible deposits within 20 EUR 50,000. working days from the day the bank was declared Subsequently, in October 2008 governments unable to pay out deposits, while under special of the EU member states took various decisions. circumstances the deposit-guarantee scheme While some states in a declarative or legislative may ask respective authorities to prolong this pe- way secured a 100% guarantee of deposits (Den- riod by not more than 10 working days. mark, Greece, Ireland, Germany, Austria, Slovenia Not later than 16 March 2011, the Commission and Slovakia), deposit protection in the amount will submit to the European Parliament and to the of EUR 100,000 was approved by Belgium, Cy- Council a report on payment efficiency and dates, prus, Netherlands, Lithuania and Spain. Further reviewing if the period stated in the first subpara- countries, such as the , Bulgaria, graph could be shortened to 10 working days. Finland, Latvia, Poland, Hungary and Great Britain, approved deposit protection in the amount of DEPOSIT PROTECTION IN INDIVIDUAL EU EUR 50,000. COUNTRIES Some member states, such as Denmark, Neth- Since 2008 deposits have been protected up to erlands, Germany, Portugal, Spain, Italy and Great EUR 50,000 in Bulgaria, the Czech Republic, Esto- Britain also adopted further measures for their fi- nia, Finland, Latvia, Poland and Romania. Deposits nancial sectors to recover and to strengthen their in France are currently protected up to EUR 70,000; financial stability. while Cyprus, Lithuania, Luxembourg, Malta and All EU member states abolished the partici- Spain protect their deposits up to EUR 100,000. pation of depositors in deposit protection. Other EU countries have adopted measures In the Slovak Republic, Act No. 421/2008 Coll., regarding deposit protection itself or regarding in force from 1 November 2008, amended Act their financial and banking sectors, in addition to No. 118/1996 Coll. on the protection of bank de- increasing the deposit protection limit. BIATEC

volume 18, 7/2010 19 D EPOSIT PROTECTION

Belgium Austria On 9 October 2008 the Belgian Government an- In force from late October 2008 to 31 December nounced a state guarantee for all new bank loans 2009, deposits of all natural persons were protect- of systematically significant Belgian banks. The ed without limitation; since 1 January 2010 they guarantee was applicable to inter-bank deposits, have been protected up to EUR 100,000. bonds and institutional investments until 31 Oc- tober 2009. Currently deposits in Belgian banks Slovakia are protected up to EUR 100,000. Deposits of natural persons and selected cor- porate entities have been protected in their full Denmark amount, i.e. without limitation, since 1 November From 5 October 2008 to 30 September 2010, de- 2008. posits are guaranteed in their full amount. The Guarantee Fund is not involved in a further guar- Slovenia antee which is co-financed by the state and Dan- On 8 October 2008 the government and the ish banks - these will set up a specific fund of EUR National Bank of Slovenia jointly declared that 4.4 billion. deposits were protected without limitation until the end of the financial crisis. Unlimited deposit Greece protection until 31 December 2010 was also in- Since 7 November 2008 the deposits of natural troduced by amending the Act on Banks, in force persons have been protected up to EUR 100,000. since 5 December 2008. The government has bound itself to also protect deposits of corporate entities for 3 years. Sweden Since 30 June 2009 deposits of natural persons Netherlands and corporate entities have been protected up Deposits are protected up to EUR 100,000. On to EUR 50,000. The government also introduced 8 October 2008 the government also approved a measure regulating guarantees of deposits a reserve for the financial sector of EUR 20 billion made in branches of foreign banks active in Swe- with the aim to support liquidity or to strengthen den with the aim to prevent a potential violation the capital of those financial houses which may of the Swedish financial system. get into difficulties. Italy Ireland Deposits are protected up to EUR 103,291.38. On Deposits are protected up to EUR 100,000. On 8 October 2008 the government also approved 30 September 2008 the government also bound another system-protection and stability vehicle itself to protect all deposits in the six main Irish – government intervention in the form of recapi- banks for 2 years. talization – in the case that one of the commercial banks gets into difficulties. Hungary Since 15 October 2008 deposits have been pro- Great Britain tected up to HUF 13 million, i.e. about EUR 49,400. Since 7 October 2008 deposits have been pro- The government also guarantees full deposit pro- tected up to EUR 64,000. The government also tection, currently with no time limitation. declared a banking system rescue package of GBP 500 billion. This particular capital is prepared for Germany the eight biggest banks and co-operative banks The government made a political declaration in exchange for preferred shares of those financial that deposits in commercial banks were guar- institutions which the assistance is provided to. anteed in their full amount without limitation. Since 30 June 2009 deposits have been protected DEPOSIT PROTECTION IN NON-EU up to EUR 50,000; from 31 December 2010 they COUNTRIES will be protected up to EUR 100,000. It has to be Deposit protection in non-EU countries has also mentioned that deposits in German cooperative seen some changes since 2008, aimed mainly at banks are protected in their full amount, as their increasing its level. system protects these banks as institutions. Since autumn 2008 deposits in Albania, Mon- tenegro, Macedonia, and Russia have been pro- Portugal tected up to EUR 20,000; in Armenia up to EUR Since 3 November 2008 deposits have been pro- 4,850; in Bosnia and Herzegovina up to EUR tected up to EUR 100,000. Apart from that, the 10,000; in Turkey up to EUR 28,878; in Serbia and government declared a guarantee of EUR 20 bil- Switzerland up to EUR 50,000; in Croatia up to EUR lion for financing or refinancing operations of 56,000; and in Norway up to 2 million Norwegian banks according to particular market conditions, crowns, i.e. approximately EUR 240,000. until 31 December 2009. The Deposit Guarantee In the USA deposit protection was increased Fund does not participate in this guarantee. to USD 250,000 on 3 October 2008, while on 1 January 2010 it was supposed to return to USD BIATEC

20 volume 18, 7/2010 D EPOSIT PROTECTION

100,000. However, a decision was made on May guarantee schemes, this means an increase of Note: Information used in the article 2009 that deposits would be protected up to USD requirements for their functioning. There is no derives from the European Forum of Deposit Insurers (EFDI), of which the 250,000 until 31 December 2013. doubt that changes in the deposit-guarantee Deposit Protection Fund is a member schemes have not finished but will continue. The as well as from the EU and FDIC CONCLUSION deposit-protection scheme in Slovakia is fully (USA) web pages. The deposit-protection measures which single compatible with the European directive and the countries took after the “hot” autumn of 2008 in Deposit Protection Fund itself pursues its activity the financial markets were of great significance in line with the Act on Deposit Protection, and it is and they also contributed to strengthening the ready to respond to changes related to legislative trust and greater stability of bank sectors in indi- evolution in the EU and in Slovakia. vidual countries, including Slovakia. For deposit- BIATEC

volume 18, 7/2010 21 C OMPANY COMPETITIVENESS

Euro: Perpetrator or witness? Development and factors of company competitiveness after euro introduction Ing. Tibor Lalinský, PhD. Národná banka Slovenska It is not easy to assess the impact of euro introduction on company competitiveness. Competitiveness is rather a medium-term, even a long-term, phenomenon, and Slovakia has been a member of the euro area for only a year and a few months. Apart from that, strong negative effects of the global economic recession appeared in the Slovak economy in 2009. Therefore, we are going to focus mainly on a qualitative assessment of the company sector development and an analysis of potential factors of competitiveness, having in mind the readiness and response of businesses to the changes in the company and macroeconomic environment1.

1 The contribution presents updated 1. EXPECTATIONS PRIOR TO EURO of Euro Introduction in Slovakia’ (NBS and MF SR, conclusions of the study of “Cor- INTRODUCTION 2005) mentions that an increase in competition porate Competitiveness after Euro Introduction in Slovakia” (T. Lalinský, Neither professional studies nor public declara- in the area of goods and services may, in the long 2010). tions published in the period prior to euro in- run, contribute to the growth of competitiveness. 2 For more information see T. Lalinský troduction dealt with particular expectations The NBS Study (2006) draws attention to growing (2008). associated with the impact of euro introduction competition pressures related to price transpar- on the competitiveness of Slovakia and Slovak ency, while these pressures may increase mainly businesses. Only some general statements and in the agriculture, food and textile industries. recommendations regarding competition and Expectations of enterprises were generally competitiveness appeared. This also makes it im- positive. The largest companies located in Slo- possible to confront initial assumptions with the vakia felt a negative impact from real development and to make an in-depth ex (SKK) strengthening, and they understood the post comparison. euro introduction perspective as a positive factor The ‘Strategy of Euro Introduction in Slovakia’ for their competitiveness. An NBS survey2 which (NBS and MF SR, 2003) in relation to determin- was carried out before euro introduction showed ing central parity states that an overestimated that most large enterprises expected that the central parity would weaken the competitive- euro introduction would increase their competi- ness of the Slovak economy. The ‘National Plan tiveness. Outcomes of a different survey carried

Table 1 Expected impact of the euro introduction on turnover, export and profit (% of respondents) Turnover Vývoz Zisk Small and Small and Small and Respondent rate Large Large Large medium medium medium companies companies companies companies companies companies Increase by <5 % 16.0 4.0 8.8 7.0 16.2 9.0 Increase by 6 - 10 % 5.2 4.0 5.0 4.0 6.2 4.0 Increase by 11 - 20 % 2.2 0.0 1.6 0.0 2.3 0.0 Increase by >20 % 0.8 0.0 0.7 1.0 0.7 1.0 No change 44.5 87.0 63.5 81.0 42.0 76.0 Decrease 15.1 4.0 1.8 0.0 18.0 9.0 No opinion 16.2 0.0 18.7 6.0 14.6 0.0

Source: NBS (2006). BIATEC

22 volume 18, 6/2010 C OMPANY COMPETITIVENESS

out among large enterprises (NBS, 2006) suggest reasons can be insufficient wage flexibility and 3 In their later work, Flam that when assessing a potential impact on their strong national demand pressures connected and Nordstrom (2006) found an increase of 26% and a higher positive export, turnover and profit, large enterprises were with high debts. Several studies also indicate that impact on industries producing less optimistic. Some managers even expected the relation between export performance and semi-finished goods and finished their income and turnover to possibly go down price/cost competitiveness is different, depend- products. after euro introduction. ing on the particular country being assessed; Approximately one quarter of small and medi- factors of non-price competitiveness and relative um enterprises (SMEs) expected the euro to bring national demand are more important. them new euro area consumers, and their turno- Studies based on the New Trade Theory focus ver and profits to rise. Sixteen percent of SMEs attention on those euro advantages that are relat- counted with higher exports after euro transition. ed to lower prices, and higher productivity result- A newer survey (NARMSP, 2008) indicated that, in ing from a stronger and more transparent interna- comparison with older forecasts, SMEs could in- tional competition. Barrell et al. (2008) confirmed deed gain a lower number of new consumers and that the euro had increased labour productivity. new markets. The direct effect resulting from economic integra- Mainly enterprises from the transport, post and tion related to scale savings and higher competi- telecommunication sectors expected euro intro- tion pressures led to a productivity increase of 3%. duction to have a favourable impact. An unfavour- Indirect impact related to a fall of GDP volatility able impact on exports was expected mainly by and risk premium were calculated at 2%. trade companies. Cost increase after euro intro- The Ottavian, Maur and Taglioni (2009) paper duction was seen as the most significant negative shows that with competition increasing, resources point. The second most widely perceived disad- are allocated towards more efficient enterprises; vantage was an increase of competition pressure total productivity and foreign trade are increas- which was expected by the majority of SMEs after ing. Small and open countries (Finland, Belgium euro introduction. and Austria) benefited the most from euro in- troduction. It was in industrial areas with strong 2. EXPERIENCE OF OTHER EURO AREA competition and low barriers (in particular the COUNTRIES production of electrical devices, basic metals and Published ex post analyses assessing the impact metallic products, and vehicles) where competi- of euro introduction on the growth of foreign tiveness grew most. This might be good news for trade, inflow of direct foreign investment, and the Slovakia, as it is a small and very open economy related potential rise of competitiveness indicate with the aforementioned industrial areas playing that the expected benefits have not yet been evi- a major role. dent in such extent as foreseen. Since the euro ar- ea’s establishment until now, the euro is believed 3. COMPETITIVENESS OF SLOVAK to have had a positive impact on foreign trade of ENTERPRISES AFTER EURO INTRODUCTION 10 to 15% on average. The number of indicators which can reflect short- At the same time, several quantitative studies term trends in the corporate competitiveness de- confirm that the impact of the euro on foreign velopment is rather limited. Company success can trade shows great industry-related differences. be evaluated on the basis of the development of Flam and Nordstrom (2003) calculated a total in- production, revenues, export, and resulting mar- crease of trade among euro area countries of 15%, ket share. Short-term trends in the development while the impact on individual industries ranged of the financial competitiveness of companies between 7-50%3. Baldwin et al. (2005) identified may be observed on the basis of quarterly data a stronger effect and greater differences among regarding revenues, added value generated, or industries. De Nardis et al. (2008) stated that at the profit of non-financial corporations. We can also industrial level, the euro impact on foreign trade consider the development of cost and price com- could have even been negative for some coun- petitiveness, staff costs, the number of employ- tries. Industries using decreasing costs of scale ees, amount of investment, and changes in the had the greatest advantage from euro introduc- number of enterprises. Estimations of future pro- tion. Industry-related division and industry loca- duction, orders, etc. may help us to gain a view of tion, together with other factors (such as different near-future development. access to production resources and market liber- alization rate), could have played a decisive role in Production and export development euro introduction being a benefit for a particular In the euro transition period, Slovakia saw a dra- country and industry or not. matic decline in its export and industrial produc- There are only a few ex post analyses of euro tion. At first glance, we could put the blame for introduction impact on the competitiveness of such development on a too strong exchange countries and businesses. Foreign studies con- rate and a subsequent appreciation of the effec- centrate mainly on price and cost competitive- tive exchange rate caused by the depreciaton of ness. In its Quarterly Report on the Euro Area neighbouring . In this case, industrial (EC, 2009) the European Commission observes a production in Slovakia would have grown more divergence in the price competitiveness of coun- slowly in 2009 (or even would have decreased)

tries after euro introduction. Some of the main in comparison with the Czech Republic or other BIATEC

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4 In reality the situation in wholesale Chart 1 International comparison of industrial Polish tourists in particular. The level of decrease was much worse than in the retail production development (index 2005=100) of Czech tourists was comparable to the decrease sector. 5 Eurostat data shows that total 160 of tourists from other countries. exports from Slovakia and Poland Perhaps the most important indicator of cor- dropped by 17%. Exports from the 150 porate competitiveness is export performance. Czech Republic, Hungary and the EU Exports from EU countries between January - De- dropped by 19%. 140 6 Added value in industry dropped by cember 2009 were 19% lower in comparison with 15.4% in Slovakia and by 15.1% in the 130 the previous year. The drop in exports from all V4 EU. countries was almost identical5. In comparison 120 with other EU countries, Slovak companies saw a relatively lower drop in the exports of intermedi- 110 ate products and capital goods. The largest drop

100 was seen in the export value of waste; as for indus- trial production goods, it was the export value of 90 wood and wood products. Dynamic growth was 2005 20062007 2008 2009 only seen in oil and gas exports; the value of ex- SK V4 CZ ports of electronic and optical devices remained Source: Eurostat almost the same. The smallest decrease was seen Note: SK – Slovak Republic, V4 – V4 countries average, CZ – Czech in exports to Asia, the biggest to Australia and Republic Oceania. Apart from the general change from a growing to falling trend, it cannot be said that some unexpected sectors or regions stood out in neighbouring countries. However, as we can see 2009. in Chart 1, industrial production in Slovakia grew faster than in its neighbouring countries in 2009. Development of Revenues, Added Value In the course of the year, Slovakia even saw the and Profit largest industrial production index (IPI) growth of Although, the decrease of revenues slowed down all EU countries. in 2009; the revenues for selected major industries In 2009 a largely similar situation could also be continued to decrease at the end of the year. This seen in other economic areas, not only in indus- trend was closely connected to the development try. Retail turnover dropped more significantly in of domestic consumption. Revenues of internal Slovakia than in its neighbouring countries and trade were not so flexible in their response as the stayed low, which could in theory confirm a cer- revenues in industry. Lower exports, production, tain delayed impact of the appreciation of the ef- and revenues were also reflected in worse finan- fective Slovak exchange rate on this sector4. cial and economic results of Slovak enterprises. Data regarding the number of nights spents Added value development saw a year-on-year by tourists suggests that 2009 saw one of the decline mainly in the share of industrial produc- most notable standstills in the collective tourist tion and trade. The added value drop was ap- industry, mainly from the point of view of for- proximately at the EU average level, showing that eign tourists (Chart 2). The year-on-year drop of the competitiveness of Slovak enterprises did not interest of foreign tourists was the largest of EU change significantly within the EU6. countries in 2009. A large decrease in numbers of Lower formation of added value has been re- tourists wishing to visit Slovakia was seen among flected in the economic results of non-financial

Chart 2 Development of the number of nights spent in accommodation facilities since 2009 (year-on-year change in %) Number of overnights – Total Number of overnights – Residents Number of overnights – Non-residents BE BE BE BG BG BG CZ CZ CZ DK DK DK DE DE DE EE EE EE IE IE IE GR GR GR ES ES ES FR FR FR IT IT IT CY CY CY LV LV LV LT LT LT LU LU LU HU HU HU MT MT MT NL NL NL AT AT AT PL PL PL PT PT PT RO RO RO SI SI SI SK SK SK FI FI FI SE SE SE UK UK UK -30 -20-10 0 10 -50 -40 -30 -20-10 0 10 -30 -20-10 0 10 Source: Eurostat, own calculations. Note: The chart reflects data for all collective accommodation facilities. BIATEC

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Chart 3 Development of total and labour costs in Chart 4 Comparison of development of labour 7 Labour costs in the monitored period Slovakia (year-on-year change in %, 2009) costs and added value (year-on-year change in increased year-on-year in construc- %, 2009) tion, transport and IT. 5 8 A comparison with the development 15 of added value suggests that not Mining (B) IT (J) 10.8 all industries were able to respond 0 10 flexibly by adjusting their labour Transport (H) Accommodation and Food (I) 5 costs to market development. From -5 0.7 the point of view of labour market 0 indicators development, the least Construction (F) -5.5 flexible seem to be trade, transport -10 Networks (DE) -5 and construction. -8.9 -9.3 9 The financial and economic crisis -10 -15 had a significant impact on cross- -15 -boundary investment flows. The flow

Total costs change -17.8 Trade (G) -19.5 -20 of investment into Slovakia in the -20 -23.2 form of equity capital increased year- Agriculture (A) -on-year. However, a drop of other -25 -25 -43 capital was bigger than the increase -30 of equity capital; therefore the total Industrial Production (C) -30 A B C DE F G H I J inflow of foreign direct investment to -35 -30 -25 -20 -15 -10 -5 0 5 10 Slovakia was negative. Average wage Number of employed Labour costs change Labour costs Added value Source: ŠÚ SR, own calculations. Source: ŠÚ SR, own calculations. Note: Agriculture (A), Mining (B), Industrial Production (C), Networks (DE), Construction (F), Trade (G), Transport (H), Accom- enterprises. It was mainly profit in industrial pro- modation and Food (I), IT (J). duction, trade, and transport that decreased. The agriculture, accommodation, and food facility in- dustries all saw a loss. sector is mainly created by industrial companies. An international comparison shows that the At the beginning of 2009, the drop of industrial Slovak company sector has long been one of the production was slightly bigger than the average most profitable in the EU. According to the latest EU decrease, and the gross added value was de- available data for 2008, Slovak businesses showed creasing at the same rate as in EU countries on the third highest share of gross operating surplus average. In late 2009 the average year-on-year in added value. In 2009 the profitability of busi- drop of industrial production in Slovakia reached nesses went down. According to our estimates, approximately the same value as the EU. Slovak Slovak non-financial corporations are still one of enterprises decided to considerably cut back on the most profitable in the EU. prices and staff numbers; this enabled them to retain one of the lowest levels of investment re- Cost Adjustment duction in the EU. Companies hit by a global decrease in demand With a more detailed look at the differences in were forced to cut back on their production and the development of financial and economic re- to increase emphasis on cost minimization. The sults among particular sub-sectors in industrial main economic sectors (except for mining and production, we can see that other factors (such quarrying) saw a year-on-year drop of total cost as production and products’ life cycle) played a in 2009. Generally speaking, we can say that the growing efforts to cut costs were accompanied by a growing attempt to reduce labour costs.7 Chart 5 Summary of the main indicators Labour costs decreased more quickly than total of industrial production in Slovakia in 2009 costs only in accommodation and food services (year-on-year change in %) (Chart 3). Industries which responded to lower 30 demand by decreasing labour costs preferred mainly to lay-off their employees8. 20 In response to the global economy situation 10 worsening, enterprises were forced to cut not 0 only operational but also capital expenditures. In- vestment activity in Slovakia decreased by more -10 than 11%. The double-digit drop was seen partic- -20 ularly in the transport and storage industry. Even though Slovakia saw a rather big average invest- -30 ment drop, it is still one of the countries with the -40 highest investment rate9. -50 Production Prices Employment Hourly Investment Gross added Summary View on Enterprises labour cost value From the competitiveness point of view, we are mainly interested in the development in the trad- max EU min EU EU SK Source: Eurostat, own calculations. able sector. In Slovak conditions, the tradable BIATEC

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10 The variable is equal to 1 in the Chart 6 Correlation of the development of Chart 7 Factors limiting industrial production in period after euro introduction (or exchange rate and profit in non-financial enter- Slovakia (share in %) after fixing the exchange rate), and equal to 0 in all previous quarters. prises in SR (correlation coefficient)

Non-financial enterprises 100

90 Micro enterprises Small enterprises 80 Medium enterprises 70 Large enterprises 60

Mining 50 Industrial production 40 Networks Construction 30 Trade 20 Transport/Telecom Real estates 10 Other 0 -0.7 -0.5-0.3 -0.1 0.1 0.30.5 0.7 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2008 2009 Demand Equipment Other Labour Financial None Source: ŠÚ SR, own calculations. Note: based on yearly data for 2000 - 2008 Source: Eurostat, own calculations.

more crucial role than euro introduction and the as in medium-sized enterprises, slowed down related appreciation of the effective exchange (Chart 6). rate. The largest drop in profits was recorded in in- dustrial production in 2009, which was to a cer- Analysis of Potential Factors tain extent in line with the long-term trend from Coincidentally, during the euro introduction peri- the point of view of effective exchange rate de- od in Slovakia, neighbouring countries’ exchange velopment. A huge drop was also seen in trade rates weakened against the euro as a result of which was previously almost unaffected by the worsening economic development and growing strengthening of the original domestic currency. risk aversion. This caused a temporary drop in the In contrast, profit in construction dropped only price and cost competitiveness of Slovak enter- slightly, in spite of the fact that their long-term prises. When the situation in financial markets trend suggests a strong negative dependency on calmed down, the neighbouring exchange rates exchange rate development. These findings sug- started to appreciate again. Late 2009 saw almost gest that the main reasons for the 2009 negative the same situation in cost competitiveness as be- economic development of enterprises should be fore euro introduction. That is the reason why we looked for elsewhere. see the cost competitiveness decline of Slovak A simple regression analysis confirms that indus- enterprises as only a temporary phenomenon. trial production in Slovakia is mainly dependent The comparison of the strengthening develop- on foreign demand. An important finding is the ment of SKK and profit growth between 2000- fact that a dummy variable10, which can express 2008 suggests that the strengthening did not the potential impact of euro introduction but also have a substantial negative impact on the profit- the negative impact of the global economic crisis, ability of industrial enterprises. As SKK gradually increases the accuracy of estimations. strengthened, profit growth mainly in electricity, Based on the strong identified impact of the gas and water production & distribution, as well dummy variable, we could come to the prelimi-

Table 2 Results of a simple regression analysis Dependent variable Independent Foreign Domestic Dummy variable variables Adjusted R2 demand demand Q4 2008 Q1 2009 SK 0.41 (7.9) -8.1 (-2.4) 0.59 CZ 0.45 (9.86) -7.6 (-3.3) 0.73 HU 0.43 (12.8) 0.12 (2.28) -15.1 (-9.47) 0.91

Industrial PL 0.40 (12.2) -6.58 (-2.95) 0.66 Production DE 0.48 (7.6) -0.47 (-2.01) -8.60 (-4.50) 0.90 Source: SU SR, own calculations Note: Estimates were based on quarterly data and year-on-year changes of selected indicators for the period 1Q 2000–3Q 2009. The table shows statistically significant variables (t-statistics in the brackets). BIATEC

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nary conclusion that the euro could have had The current revival of international trade is to 11 See T. Lalinský (2008) a temporary negative impact on enterprises. a large extent driven by the growing demand of 12 In the long view, unit labour costs in industrial production in Slovakia The problem is that the Czech Republic has not Asian countries, dominated by exports to China. were still decreasing. The euro area introduced the euro and Germany had had it The share of Slovak exports to Asia is growing has been stagnating a long time; or long before. Nevertheless, regression models for relatively quickly; however, in 2009 the share of it has seen a slight growth of unit labour costs in industrial produc- these countries are more accurate after intro- Slovak exports to developing Asian countries of tion. ducing the artificial variable for the euro intro- total exports from Slovakia was about half lower duction period in Slovakia. The average value of than the EU average, and several times lower than the indicator showing the close dependency of in the USA. production development and the dummy vari- able is higher too. The simple regression analysis Business Environment Quality therefore only confirms a significant change in In comparison with other countries ranked in the the development of monitored indicators in the same development group, it is mostly innova- given period, which is most likely related mainly tion and professional requirements that we lag to negative impacts of the global economic re- behind in. Slovakia also has great scope for im- cession. provement in the basic infrastructure, institutions, Surveys among enterprisers confirm that the and higher education areas. According to several main factor limiting production in 2009 was a lack renowned studies, biggest competitive disadvan- of demand (Chart 7). Companies in almost all EU tages of Slovakia include inefficient government countries felt lack of demand as a decisive factor bureaucracy, low efficiency of the legal system limiting production. and related administrative burden of enterprises, the purposefulness of government expenditures, 4. FURTHER COMPETITIVENESS and bribery. DEVELOPMENT EXPECTATIONS In the long view it is necessary to focus on en- According to several independent outlooks, the hancing the education system, and to lay greater Slovak economy should see a stronger recovery emphasis on research, development and innova- in 2010 than other EU countries. In late 2009 and tion. The euro introduction and the transition to early 2010, Slovak businesses saw a more dynam- the common monetary policy have led to an in- ic growth in orders and also expected quicker ex- crease of the importance of other economic poli- port revival. cies. It is necessary to continue with structural re- forms and ensure responsible fiscal policy. In view Key factors of competitiveness growth of the sustainable long-term growth of the Slovak Based on the survey among major companies in economy and competitiveness growth, structural Slovakia11, Slovak companies expected stronger policies should focus on increasing economic pressures on costs reduction and buyer demands flexibility; mainly with labour market flexibility satisfiction. Of course, the real pressures on de- playing a crucial role. creasing costs and satisfying customers were probably a lot more intensive in 2009 than the CONCLUSION most pessimistic expectations. In spite of tempo- A detailed examination of the impact of the euro rarily higher labour costs dynamics in the SR as on competitiveness, be it on a company or coun- in the EU, Slovakia has – on the basis of current try level, is not really a common topic of scien- experience – all the prerequisites to maintain its tific studies. Available experience from the euro cost competitiveness.12 area countries suggest that, given the openness Enterprises evaluated capital availability (in and industrial focus of the country, Slovakia and Slovakia represented mainly by the availability of Slovak enterprises should gradually become one bank loans) as above-standard. The global finan- of the winners, or be among the countries and cial and economic crisis brought a fundamental enterprises which the common European cur- change in perceiving the risk rate of entrepre- rency has brought more advantages than disad- neurial activities. Higher cautiousness of financial vantages to. institutions slowed down the volume growth Shortly after the euro was introduced, Slovak of new credits; a similar trend was seen in most enterprises had to face a sharp drop in exports, countries. In this sense we can consider capital industrial production, and revenues. The year- availability as one of the current factors limiting on-year decrease of interest of foreign tourists in the further growth of the competitiveness of Slo- using accommodation facilities in Slovakia was vak enterprises. bigger than other EU countries. The growth of in- The long-term trends in the development of terest of Slovak people in shopping abroad was our export product structure can be considered also publicly felt. The drop in production, exports, as prevailingly positive; mainly the share of ex- and subsequently also added value was com- ports of machinery and transportation equip- parable with the EU average. However, Slovak ment grew. However, Slovakia is not particularly companies started to cut back on prices and staff successful in chemical industry exports. High-tech numbers more significantly, which enabled them products’ export share has increased in the last to reach one of the lowest drop rates of invest- nine years; nevertheless, we are still significantly ment and to maintain good prospects for further

lagging behind in high-tech exports. competitiveness growth. BIATEC

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Total competitiveness has not changed notably. ductivity increase; they do not focus only on costs The worsening of price and cost competitiveness decreasing. They are increasingly more aware of related to the fixation of the euro exchange rate the importance of long-term competitiveness was only of a temporary nature. There is no direct factors; they feel the need to invest in research evidence that the euro had a purely negative im- and development, boost innovation activity, and pact on some industries. Our findings suggest support the education of their employees. that the euro was a witness rather than a perpe- Long-term trends in the development of the trator of a significant year-on-year worsening of export product structure reflecting export com- financial results of Slovak enterprises. The decisive petitiveness are considered to be prevailingly factor of the 2009 development was a lack of for- positive. Nevertheless, Slovakia still fails to be suc- eign demand. cessful in chemical industry exports, and still lags Slovakia has relatively good preconditions for behind in high-tech products export. Following a quick adaptation and competitiveness growth. a trend seen in developed countries, Slovak en- The tradable sector represented mainly by indus- terprises should focus more on exports to quickly trial production seems to be competitive enough. developing Asian countries. Enterprises seem to be flexible and prefer pro-

References: 1. Baldwin et al. (2005): Trade Effects of the Euro: Evidence from Sectoral Data, ECB Working Paper No. 446, ECB. 2. Barrell et al. (2008): The Impact of EMU on Growth and Employ- ment, European Economy – Eco- nomic Papers, 318, Economic and Financial Affairs DG, European Commission. 3. De Nardis et al. (2008): The Single Currency’s Effect on Sectoral Trade: Winners and Losers? Economics, Vol. 2. 4. European Commission (2009): Quarterly Report on the Euro Area, 1/2009. 5. Flam and Nordstrom (2003): Trade Volume Effects of the Euro: Aggregate and Sector Estimates, Institute for International Econo- mic Studies. 6. Flam and Nordstrom (2006): Euro effects on the intensive and extensive margins of trade, Insti- tute for International Economic Studies. 7. T. Lalinský (2008): Competitive- ness Factors of Slovak Compa- nies, Working Paper, 3/2008, NBS. 8. T. Lalinský (2010): Business Com- petitiveness after Euro Adoption in Slovakia, Occasional Paper, 3/2010, NBS. 9. NARMSP (2008): Preparedness of Small and Medium Businesses for the Euro Introduction. 10. NBS and MF SR (2003): Euro Adoption Strategy in SR. 11. NBS and MF SR (2005): National Plan of Euro Introduction in SR. 12. NBS (2006): Estimating Potential Impacts of the Euro Introduction on Business Sector in SR. 13. Ottaviano, Mauro and Taglioni (2009): The Euro and the com- petitiveness of European firms, Economic Policy, Volume 24, Number 57, 5-53. BIATEC

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Selected areas of evaluation and reporting on purchased securities in a commercial bank Ing. Mária Schwarzová Faculty of National Economy, University of Economics in Bratislava

CLASSIFICATION OF PURCHASED ties with floating interest yield. 1 Act on accountancy No. 431/2002 SECURITIES AND THEIR FILING INTO Securities procured by a commercial bank for Coll. 18 June 2002 as amended by PORTFOLIOS later regulations and on changing the purposes of tenure or trading according to and completing some acts of law. Purchased securities of every commercial bank IAS 39, which do not represent any share on basic 2 IAS 39 Financial tools: reporting and represent assets of the bank that result from past capital in subsidiary accounting unit nor in an af- evaluation. events. It is almost certain that in the future such filiated accounting unit, are divided by commer- securities will increase those economical ben- cial banks according to intention into securities: efits of the bank that can be reliably evaluated in • intended for trading, accordance with articles No. 24 up to 28 of the • intended for sale, act on accountacy1. According to international • being held up to maturity. accounting standards2, security is a financial in- According to IAS 39, a security intended for trad- strument, i.e. a legal relationship on the basis of ing is a financial asset being held for the purposes which financial assets are originated at one con- of trading and profit achievement from price as tractual party and financial obligation or capital well as exchange rate differentials resulting from instrument at the other contractual party. the development of a continuous change of its In a commercial bank, purchased securities are value or exchange rate, or acquired value at its classified into the following categories: sale. Even when a commercial bank purchases a According to the character of investment: security with the intention of profit achievement • debt securities (bonds, mortgage bonds, bills of resulting from assumed development of market exchange and the like), price or exchange rate increase, it sometimes • proprietary securities (shares, participation cer- happens that the effect is opposite, wherein the tificates). market price or security exchange rate decreases. The mentioned development has an influence According to the issuer: on the whole reported profit/loss of the bank. If • financial sector securities (banking, non-bank- the development is positive, profit/loss reported ing), according to IAS 39 rises, if the development is • securities of the public sector (central govern- negative, profit/loss - on the contrary - decreases. ment, self-governing regions, towns, public According to IAS 39 rules, a security held in the sector agencies and other institutions of the portfolio up to maturity is held in accordance with public sector), the maturity period of the security. A commercial • securities of entrepreneurial sector, bank should not only have the intention, but • securities of multi-national corporations, foremost the ability to hold this security without • securities of EU central institutions. trading with it, and that up to its maturity period. If a commercial bank lacks the ability to hold a se- According to the place of issuance and denom- curity up to maturity or does not have financial ination: resources to keep this security up to maturity, or if • issued and conducted in euro area (domestic), it is subject to legal or other restriction capable of • issued and conducted outside euro area (for- destroying its intention, there is no possibility to eign), hold this security in the portfolio up to maturity. • denominated in euro, If a commercial bank procures a security with • denominated in other currency than euro. the purchase of a sales option with the intention to file into the portfolio up to maturity, then it is According to the maturity period: possible to file the security into the portfolio up • up to 1 year inclusive, to maturity in the case that the sales option is not • from 1 up to 2 years inclusive, exercised. • from 2 up to 5 years inclusive, A security can be reported as a security intend- • over 5 years. ed for sale, if it is not intended for trading nor for In a commercial bank the securities are also being held up to maturity. It concerns a security, monitored separately, e.g. separately debt securi- which is, for example, not traded on the stock ex-

ties with fixed interest yield, and separately securi- change and whose fair value is determined by a BIATEC

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3 Amortised cost of e.g. security being quantified estimate (by theoretical price). A secu- primarily – when they are allocated into portfolio held up to maturity is the price used rity reported in this portfolio may change its fair – evaluated by acquisition prices. at the initial accounting of this asset, being gradually decreased or value. The difference from the development of its • Changes of fairl values of securities intended for increased by amortised premium or fair value is reported according to International trading and differences between acquisition discount and decreased by allowance Accounting Standards as a component part of prices of securities intended for trading and created for this asset, provided it is created for this asset. the equity of a commercial bank, which is pre- their fair values during the period up to maturity sented in the balance sheet reported according are determined according to the development to IAS 39. If there is a positive difference, the eq- of their market prices on the regulated financial uity rises, and if there is a negative difference, the markets, for example on the stock exchange, equity decreases. where the development of supply meets the financial market demand for them. In the case ALLOCATIONS OF SECURITIES BETWEEN that the liquidity of securities on the stock ex- PORTFOLIOS change is very low (for example, trades are ex- • Allocations of securities from the portfolio of se- ecuted once a month, etc.), the fair value of se- curities intended for trading into the portfolio of curities calculated through theoretical price by securities intended for sale or into the portfolio means of a yield curve composed of short-term of securities being held up to maturity are not and long-term prices of appropriate referential carried out, as it is not only necessary to keep financial instruments is more precise. the given trading intention, but the primary ap- • Changes of fairl values of securities intended for praisal of the particular security as well, which sale and differences between acquisition prices stems from the development of its market fair of these securities intended for sale and their value, which is given by its price on the real fair values are considered as positive or nega- market. tive evaluation differences from the valuation • Allocations of securities from the portfolio of secu- of the securities intended for sale. These evalu- rities intended for sale into the portfolio of secu- ation differences influence the amount of eq- rities intended for trading are only carried out in uity. exceptional cases. This situation can happen if • Securities being held up to maturity are evaluated the commercial bank really begins trading such by amortised (redemption) cost . Amortised securities with the aim of profit formation based cost3 is represented by initial procurement on short-term changes of their market prices. price decreased by eventual instalments of Assuming that the principle of international ac- the principal. If a commercial bank purchased counting standards is substance over form, in this security with a premium, it is necessary to this case it means that the commercial bank gradually decrease (redeem) by this very value starts from conditions on the market where the difference between initial value and its ma- subsequently the securities become part of the turity value, which may be decreased by the portfolio of securities intended for trading. amount of a temporary downturn of its value • Allocations of securities from the securities portfo- (allowance). If a commercial bank purchased lio being held up to maturity into the portfolio of this security with a discount, it is necessary to securities intended for sale are carried out by gradually increase (redeem) by this very item the change of business plan or after expiration the difference between initial value and its ma- of the given period, which can be, for exam- turity value, which may be decreased by the ple, up to three months before their maturity. amount of temporary downturn of its value (al- Changes of interest rates should not consider- lowance). ably influence the fair value of these securities then (it is more precise to measure such a pe- ALLOCATIONS OF SECURITIES riod by duration). A situation when the bank AND BALANCE SHEET STRUCTURE OF accepts from the issuer besides interest yields A COMMERCIAL BANK (through payout of coupons) achieved during If a commercial bank allocates a certain portion of the period of tenure of these securities at least securities from the portfolio of securities intended 90% of procurement price of these securities is for sale into the portfolio of securities being held also possible. Allocation of securities from the up to maturity, their fair value on the date of allo- portfolio of securities intended to be held up cation is considered to be a new amortised cost, to maturity into the portfolio of securities in- which is subsequently increased by achieved tended for sale may be carried out because of interest yields. If there is objective proof that the a unique event which could not be expected loss incurred because of decrease of value, allow- or influenced by the bank, being for example a ances are formed to this security, the costs being considerable worsening of economic situation debited. of the issuer. By the allocation of securities from the portfolio of securities being held up to maturity into the SECURITIES EVALUATION portfolio of securities intended for sale is the se- In the sense of the Act on accountancy, the se- curity from the date of allocation evaluated by fair curities intended for sale and securities intended value with simultaneous accounting of difference for trading are evaluated by their fair value. Secu- from evaluation into the entry of evaluation dif-

BIATEC rities being held in portfolio up to maturity are ferences, which may be positive or negative and

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thus influences the amount of equity of a com- It concerns the moment when the reporting or mercial bank. If allowances were created to the accounting of financial assets in the form of secu- securities being allocated to portfolio of securities rities in the balance sheet of a commercial bank being held up to maturity, these are cancelled by is taking place. Purchase or sale thereof is car- the allocation into the returns of the commercial ried out within the framework of a contract, the bank. By the allocation of securities into the port- conditions of which require delivery thereof and folio of securities intended for sale, the difference subsequent reporting within the framework of a between amortised cost and fair value is reported period of time. in the equity. Current purchase of financial assets is reported By the allocation of securities from the portfolio according to suitability: of securities being held up to maturity into the a) by using accounting on the date of execution portfolio of securities intended for trading, a se- of the trade, curity is from the date of allocation evaluated by b) by using accounting on the date of settlement fair value with simultaneous accounting of differ- of the trade. ence from evaluation on the accounts of costs or By sale of financial assets the reporting thereof revenues of the commercial bank. If an allowance ends: is created to the securities allocated to the port- a) by using accounting on the date of termination folio of securities being held up to maturity, this of the trade, is cancelled before allocation through profit/loss. b) by using accounting on the date of settlement After allocation of securities to the portfolio of se- of the trade. curities intended for trading, only the difference If a commercial bank uses accounting on the between the fair value of the allocated security date of execution of the trade in relation to the and its amortised cost is included in the costs or financial assets in the form of securities which are revenues. subsequently evaluated in acquisition price or ad- If a security is reported during the whole period justed price of the acquisition, so the assets are of tenure in the trading portfolio, the differences initially reported in their fair value on the date of between acquisition prices of the securities in- execution of the trade. Differences from the devel- tended for trading and their fair values are con- opment of fair values up to the date of settlement tinuously accounted to the accounts of costs or of the trade are a component part of profit/loss of revenues of a commercial bank correspondingly a commercial bank. Date of execution of the trade with the concerned accounts of securities. is the date on which the accounting unit obliges If a security is reported during the whole period itself to purchase or sell assets. Accounting on the of tenure in the portfolio for sale, the differences date of execution of the trade is related to report- between acquisition prices of the securities in- ing of the assets which are about to be accepted. tended for sale and their fair values are continu- When using the accounting on the date of execu- ously accounted to the accounts of evaluation tion of the trade on the date of sale of assets, it is differences reported in the liabilities of the bank the date of termination of their reporting and at correspondingly with the concerned accounts of the same time on this date a reporting of profit securities. Such evaluation exerts influence on the or loss from sale and reporting of a receivable amount of equity, where in the case of reporting against the buyer takes place. a negative difference between acquisition price The settlement day of the trade (property set- and its fair value, or in the case of the unfavour- tlement) is the date on which the financial as- able development of its value it concerns an item sets in the form of securities are delivered to the decreasing its amount. In the case of achieving commercial bank or on which the commercial positive difference – a profit – between acquisi- bank delivers the assets to the business partner, tion price and its fair value or in the case of the whereas financial settlement also takes place. Ac- favourable development of its value it concerns counting on the date of settlement of the trade is an item which increases equity. On the date of related to the reporting of the assets to the date sale, the maturity of security which was reported of their acceptance or to termination of their re- in the portfolio intended for sale, the positive dif- porting and reporting of profit or loss from their ference is reported in the profit/loss of current retirement on the date on which handover or de- accounting period as a profit from sale, negative livery thereof by the commercial bank took place, difference shows itself in profit/loss of current together with financial settlement. accounting period as a loss from sale, which in- Ranking of securities into particular portfolios fluences the amount of costs and decreases the follows the business and investment plan of a profit/loss of the current period. commercial bank. Reporting according to the In the sense of the application of Interna- rules of international accounting standards has tional Accounting Standards, it is also necessary an influence on the value of particular items in to present a common method of purchase or the balance sheet of a commercial bank, on the sale of financial assets in the form of securities. profit/loss statement, and report on equity. BIATEC

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Conference The Euro Area and the Financial Crisis Continuation from page 2 of the cover story

and regulation, crises happen from time to time. not show such a large deviation. If we evaluate Due to unclear rules, countries or regulators try to the ECB according to the price stability outcomes, transfer responsibility to others, or they postpone there are no uncontrolled inflation pressures we necessary solutions. Crisis resolution costs thus could criticize. Financial systems in some Europe- increase. With the creation of good rules it is pos- an countries were very fragile, but in other coun- sible to both lower the frequency of crises and to tries they showed great resilience. Important un- decrease their costs when they happen. balances developed in various countries, which, Thomas Huertas from the UK Financial Services however, had no common European denomina- Authority also addressed the area of regulation tor. The next part of the conference presented the and crisis resolution. He pointed out that no bail- experience of various individual countries. Biswa- out rules do not prevent bail-outs in practice. We jit Banerjee, Damjan Kozamernik and Ľudovít have seen lots of examples when in the situation Ódor compared the path of Slovenia and Slovakia of an existing crisis governments abandon pre- into the euro area. The countries had very differ- crisis rules and bail out financial institutions in dif- ent initial positions, they chose diverse economic ficulties. Huertas warns that the rules in normal policies before entering the euro area and they – non-crisis – times should take into account how introduced the euro in diametrically different global economic conditions. At the same time, both countries are satisfied with their approach to the euro changeover, and both countries are perceived externally as successful models of euro introduction. The authors therefore conclude that for every country there may be a different optimal approach, and thus experience from one country cannot be automatically applied to another one. Slovakia was also the topic of the presentation of Miroslav Beblavý from Comenius University in Bratislava, who examined whether the euro con- tributed to a rise in prices in Slovakia. Looking at the overall price level, as well as viewing particu- lar groups of goods and services, it cannot be said that prices have considerably increased in the Miroslav Beblavý, from the Comenius University in Brati- period of euro introduction. Volatility of prices, slava, dedicated himself in his contribution to the issue of though, did rise – in the period of price conver- euro introduction in connection with the growth of prices. sion from koruna to euro there was a considerably more frequent price adjustment, which, however motivations change when the crisis breaks out. could be in both directions. Financial institutions as well as regulators should Philip Lane from Trinity College Dublin de- have prepared plans for crisis resolution. One of scribed the situation before and after the out- the plans could also be subordinated debt, which break of the crisis in Ireland. Imbalances started is automatically converted to capital, whereby on to grow in Ireland approximately around 2003, the one hand it replenishes the missing capital of mainly due to the growing bubbles in the real the financial institution in question, and on the estate sector. While previously high productivity other hand it reduces the costs of state assistance. growth significantly decelerated, the consumers Thorvardur T. Ólafsson and Thórarinn G. Pétursson remained very optimistic, real estate prices grew, from the Central Bank of Iceland analyzed factors employment rose, and the construction sector, that caused banking and exchange-rate crises and the public budget was in a surplus. The glo- in the past decade. Their results are like pouring bal financial crisis was only an impulse to burst balm into the soul of a central banker, as one of the Irish real estate bubble. Majority of financial the main factors that increase the risk of crisis is institutions got into difficulties, public revenues high and volatile inflation in the years preceding declined dramatically, and GDP fell by approxi- a crisis. A crisis tends to be stronger if the country mately one eighth. Although Ireland still has a experienced a crisis in the past, which points out very flexible economy and reacted very quickly to a persistence of systemic risks in some countries the crisis, the size of the decline was so large that (or an inability to learn from own mistakes). Ireland still remains in a difficult situation, both The overall reasons for the outbreak of the cur- from the point of view of financial sector stability rent crisis were also examined by Laurent Clerc as well as public finances. and Benoit Mojon from Banque de France. While Four authors from Banco de España – Gavilán, at the beginning of the decade the monetary de Cos, Jimeno and Rojas – presented the situ- policy in the USA was considerably loose in com- ation in Spain. Growing real estate sector imbal-

BIATEC parison with the Taylor rule, the ECB policy did ances and labour productivity slowdown were

32 volume 18, 7/2010 from Edinburgh University, whochaired thediscussion,sitsĽudovít from theNBS. Ódor ddle), Governor oftheAustrianNational Bankpresented theirviewsinanotherpanel. Cobham Intheplace ofDavid oftheHungarianNationalBank andEwald (firstfrom formerDeputy-Governor György left), Nowotny Szapáry (mi- butitisalsonecessary criteria, nominal Maastricht otny have countries to concentrate notonlyon According to NationalBank. Now- the Hungarian of and György Szapáry, former Deputy-Governor Nowotny, oftheAustrian Governor NationalBank, was given bythepanel, withdiscussants Ewald the Czech Republic. Anoverall viewoftheregion reviewedfrom University Mendel thesituationin Central European University, while Lubor Lacina waspresented from the byLajosBokros Hungary to thesituationinCentral Europe. of Aperspective lower foreign indebtedness. a healthierfiscalsituation,whilstLithuaniahad tions), whileoneoftheadvantagesEstoniawas relatively stableresources from mother corpora- domestic owners(andtherefore cannotrely on has where ofthefinancialsector agreat part players. The mostdifficultsituationisinLithuania, aswelloptimism ofthedomesticprivate aspublic gressive growth andover- ofthefinancialsector recession ofEUmembers, causedbythepastag- thehardestAll three experienced Balticcountries nia studiedthesituationinBalticcountries. entered Spainperyear. top ofthis, hundreds ofthousands ofimmigrants present here before theoutbreak ofcrisis, too. On lia ,andĽudovít from theNBS. Ódor euro area. Inthephotograph Jacques from left Mélitzfrom Edinburgh University, Franco Daniele from Banca D’Ita- sessionoftheconference apaneldiscussedtheissuesofbetterIn afourth inthe managementofeconomic policy Another part oftheconference wasdedicatedAnother part from Randveer theCentral Bankof Esto- Martti impact on Europe and longer recovery times. onEurope andlongerrecovery impact and inadequate fiscalrulesledto astronger crisis situation ofmany countries sis, weak budgetary was notthesource pointofthecurrent globalcri- better enforceable fiscalrules. AlthoughEurope Europe needsstrongerpanel participants, and union.Accordingrest to several ofthemonetary to maintainoptimalrelative level price againstthe to stabilize level price and should usefiscalpolicy union she proposed inamonetary thatcountries forward, when thisideastillfurther shifted Carlin stable macroeconomic environment. Wendy conditionsleadto amore could undercertain of targeting levels price instead ofinflation,which ances. presented Cournede Boris theadvantages deficits willbemanifested inthegrowth ofimbal- exchange rate ortheinterest rates, persistent vents current accountdeficitpressures onthe pre- a country. Althoughthecommoncurrency to monitor thecurrent accountof it isnecessary union Spaventa thateven warned inamonetary in theeuro area. Francesco Giavazzi andLuigi setting to questionsofabetter economicpolicy country. euro canrepresent introduction agreat for risk a to achieve durablereal convergence, otherwise The last part oftheconference wasassignedThe lastpart I NFORMATION Martin Šuster Martin BIATECPhoto: Igor Plávka BIATEC