It’s down to Slovakia on Europe bailout plan

Following approval by the tiny island of Malta, a crucial plan to beef up Europe’s bailout fund for debt-strapped nations now lies in the hands of lawmakers in Slovakia, where the outcome remains up in the air.

The Maltese parliament voted unanimously Monday in favor of the plan, which would increase the rescue fund’s lending capacity to about $600 billion and enable it to buy government bonds and extend credit lines to distressed banks. European leaders hope the extra firepower will help contain the debt crisis that has rocked both the regional and global economy.

But the strengthened fund requires ratification by all 17 nations that use the euro, and in Slovakia, the only one left to decide, a junior party in the governing coalition has threatened to block the plan. Last-ditch talks with the dissidents on Monday reportedly failed to reach a resolution, leaving European officials and international investors on tenterhooks ahead of a vote expected in the Slovak parliament Tuesday.

Still, Europe’s main stock markets all closed higher Monday. The rally was fueled by hope that the expanded bailout fund would eventually pass and that the leaders of France and Germany, the Eurozone’s most influential countries, would fulfill their pledge to present a new strategy for dealing with the debt crisis and the region’s shaky banks by the end of the month.

Markets were also buoyed by an agreement among Belgium, France and Luxembourg to shore up jointly owned Dexia bank, the first major lender to fall victim to the crisis because of its large holdings of Greek debt. Many experts say that Greece is on track to default in the near future, which would inflict heavy losses on banks across Europe; those without a sufficient capital cushion could be wiped out.

Brussels said Monday that it would buy Dexia’s retail division within Belgium for $5.4 billion, essentially nationalizing the privately owned Belgian portion of the institution. All three countries also agreed to provide about $122 billion in guarantees to the bank while it prepares to sell off some of its operations to raise money.

German Chancellor Angela Merkel and French President Nicolas Sarkozy acknowledged over the weekend that the debt crisis now encompassed a banking crisis as well. The two leaders said they would unveil a new plan to recapitalize Europe’s banks as soon as possible.

As for the beefed-up rescue fund, what was originally touted as a comprehensive solution is now widely considered merely a prelude to stronger measures that will have to be taken to keep the euro crisis from spreading to larger economies, such as Spain and Italy. European officials are scrambling to put together a package that could leverage the fund to make it worth more than $2 trillion.

But such a move is likely to be controversial and subject to intense debate by European leaders. On Monday, Herman Van Rompuy, president of the European Union, said he would postpone a summit scheduled for next week until Oct. 23, to give officials more time “to finalize our comprehensive strategy.”

In Slovakia, Prime Minister Iveta Radicova is trying to overcome objections to a strengthened bailout fund raised by one of her party’s coalition partners, the Freedom and Solidarity party, which contends that Slovak taxpayers should not have to pay for the mistakes of richer countries that recklessly overspent.

Without the party’s support in parliament, Radicova would have to rely on opposition votes to pass the measure. But the main opposition leader has said that the price for his backing would be new elections.

henry.chu@latimes.com