Author: pengovsky

Franc Pukšič, the infamous mayor of Destrnik municipality and MP for Janez Janša’s SDS quit the party and switched over to Radovan Žerjav’s centre-right Slovenian People’s Party (SLS). Regardless of the fact that Pukšič is one of the more annoying appendages of Slovenian parliament (a fact which is not helped by his thick Štajerska drawl) it must be said that he was not just a cog in SDS’s voting machine, but a rather prominent four-term MP who got a lot of airtime and brownie points for the party. He cited disagreements over how SDS ‘s chief whip Jože Tanko went about the business as reasons for switching teams.

Franc Pukšič, formerly of SDS, now of SLS (source)

Although it may seem at first sight that Pukšič’s switch is of little importance (afterall, SDS still has 28 MPs left and the overall balance of power remains undisturbed), this may not be as innocent as we are led to believe. Naturally, SDS is trying to play the whole thing down, but there are a couple of interesting (worrying?) conclusions which can be drawn.

First and foremost. with elimination of Christian-Democratic Nova Slovenia from the parliamentary arena, a vacuum was created on the right side of the political spectrum and Janša is apparently moving to fill the vacuum. This was best demonstrated when he commented on the proposal of the new Family Code (which will provide for homosexual partners to adopt a child) saying that this provision defies the “law of nature” and as such has no place in Slovenian legal system. The problem is that this is not really Janša’s turf and he is having some difficulty adapting.

The other problem is that no matter how he tries, he will not be able to fill all the gaps left over by NSi, which means ample opportunity especially for SLS to bag some small and relativey easy victories. Pukšič’s switch is definitely one of the latter. And while the switch does no threaten the pariamentary future of SDS, it shows that one can actually leave SDS and survive. In a press release SDS admitted the defection, but immediately demanded that Pukšič return some 20+ k€ which the party invested into his relection. Pukšič will obviously do no such thing, despite being threatned with political oblivion which engulfed others who had left the party in earlied years

By spreading himself too thin and trying to fill the gaps left by NSi’s expulsion from paradise parliament, Janša risks the danger of creating factions within the party which covers too much of the right side of the political spectrum. In a monolith party the likes of SDS, which is ran by the ultimate alpha-male, factions can be devastating. Add to that the fact that JJ is not getting any younger and that he had just married, hopefully focusing his attention to Doc Urška, he is in danger of starting to loose control over the party as challenges for his leadership start to mount once the rank-and-file sense that he is not all there. Not to mention that. despite the fact were talking about a single vote here, it should be noted that SDS now has one less MP and SLS has one more, which may become crucial in any of the near-miss votes which are bound to hit the parliament in the next year or so.

It may seem insignificant, but defection of Franc Pukšič (who once publicly slapped his student daughter after he caught her with a cigarette) may herald the advent of a more radical element inside the SDS, which may not get all the support it expects from the party’s chairman leader. If left unchecked, this may well lead to Janša’s fall and removal from party positions.

So, while everyone expects a political crisis in the left bloc, it may very well be that shit it brewing on the other side of the left-right divide

The crisis is hitting Slovenia badly. If countries like Iceland, Ireland, Hungary and the Baltic countries are paying the price for more or less completely opening up their economies in a manner which put a smile on late Milton Friedman‘s face, Slovenia seems to be reaching the end of the rope of a labour-intensive-socially-responsible-state-run capitalism. Or at least an attempt at that. As most of you know, pengovsky doesn’t really feel at home in economy, but then again it turned out most economists don’t feel at home in economy, so it’s OK But fact of the matter is that in Q2 of 2009 year-on-year GDP fell nearly 10 percent. Vast majority of Slovenian industry creates little added value and some companies that were on life-support even when the times were good are now going bust.

The goverment of Borut Pahor is going about handling the crisis in a rather awkward manner. Curiously enough, the left block had been elected (among other things) on a ticket of being ready to face the onslaught of the crisis, while the previous government of Janez Janša feigned ignorance on the issue, with Janša famously saying just before elections that you don’t prescribe antibiotics to cure a cold. Fast forward nine months, and the new government is simultaneously dealing with a credit crunch, failing companies, unsustainable pension system, unprecedented rise in public sector wages and a severe lack of money. Not to mention an occasional tycoon

Throughout the spring and summer the main preoccupation was alleviating the effects of the credit crunch. Since Slovenian banking sector at the time was underdeveloped (to great dismay of free market zealots and IMF), exposure of Slovene banks to toxic assets and other elements of investment-banking alchemy was minimal. However, it turned out that their exposure to home-grown bad debt was quite substantial as they bankrolled many an MBO, most notably that of Istrabenz and Laško Brewery, but also MIP meat processing factory (driven into the ground by management bleeding the company to death while MBOing) as well as NFD investment company headed by Stane Valant which was heavily involved in helping Boško Šrot and Igor Bavčar with their MBOs. As you know, there was a lot of political pressure exerted on banks to stop extending these loans, especially since value of various stock that was subject of these MBOs went south, which meant that there suddenly wasn’t enough collateral. So the banks started requisitioning assets which they previously bankrolled.

But in the autumn the crisis struck for real and first big companies started to fail. Case in point being Mura, based in Murska Sobota (located in Prekmurje region, which is the most underdeveloped region in Slovenia), the largest textile factory in Slovenia which for the past ten or fifteen years was basically just a subsidiary of the local unemployment office. Every government to date was more keen on keeping 3000+ strong workforce employed, if only by throwing shovelfuls of money at them. Not that they earned a lot of money, because they didn’t (around 450€ monthly can hardly be called a decent paycheck), but 450 euros time 3000 employees time 12 months means a lot of money every year for more than a decade. Keeping Mura and its workers on life support always server a higher purpose. First of all it meant keeping the unemployment statistics down artificially in an already impoverished region. Then there was the EU membership where Slovenia needed a more or less clean bill of economic health. Then there was the adoption of the euro, where this bill of health needed to be squeaky clean. Then we had a period of very high economic growth (albeit artificially fuelled) under Janša when it would be politically impossible to allow Mura to go bust while GDP grew at about 7 percent yearly. Then the music suddenly stopped and after a string of angry protests and several suspicious offers to “save” the company, the latter finally filed for bankruptcy, putting almost all of its 3000+ employees on the dole at the worst possible time.

One of the reasons companies are going bust is also the fact that there is simply not enough money in state coffers. This year’s budget was re-balanced twice in a single year, something which hasn’t happened for a very long long time. This only shows how fast the macroeconomic outlook was changing. In fact, most schemes which the government put in place in the beginning only went so far and while they did alleviate the immediate blow of the crisis (like allowing companies to cut working hours per week and covering the difference in wages out of state budget), the problem was painfully simple: not enough money was rolling in. So instead of simply boosting public consumption (a classic Keynesian anti-crisis measure) the government had to start cutting down costs too.

Primarily this means reneging on the deal struck with the public sector unions while times were good that their wages will go up in the near future. What looked like a simple mathematical exercise under PM Janša became impossible under PM Pahor. The unions predictably don’t give a pair of fetid dingo’s kidneys, saying that they will not have the crisis being solved over their backs and demand (among other things) a higher tax on bigger income. As you know, this has been tried, but the idea was DOA. Other major public expenditures include health care and pensions. The latter were a source of a near-miss within the coalition last couple of weeks, as the government debated whether to freeze pensions on their current level. Naturally, this sent Karl Erjavec of DeSUS (pensioners’ party) through the roof, his being a single issue party and all. In the end a slower rise in pensions was agreed, which allowed the 2010 budget to be put together just in time (the budget has to enter parliamentary procedure no later than October 1st).

At the same time a comprehensive overhaul of the pension system was proposed by minister of labour Ivan Svetlik, which – among other things – proposes that pensions should be calculated based on one’s wages for the entire duration of his active status (today only the best 18 years in a row count) as well as increasing the minimum retirement age to 65. Then there’s the health care reform also aims to redistribute the monies its sector, much to the dismay of the doctors which were used to get more money every time a problem needed to be solved. Usually the problem wasn’t solved (such as waiting periods) but they got to keep the money anyway. And there’s the question on where to get the money if less people are/will be paying taxes due to unemployment and companies will no longer be posting big profits. One of the more likely solutions is implementation of the real-estate tax. It remains to be seen whether that will ever see the light of the day. State coffers are empty indeed, but this tax apparently cannot start to be levied earlier than 2011!

In these circumstances the government put together the 2010 budget, which is aimed to keep the deficit at around 5% and yet to be development-oriented. It was organised in such a way that it pursues specific strategic policy goals (like modernising the railway infrastructure) rather than just incrementally financing programmes which may or may not yield results.

Then there’s the opposition whose leader only a year ago accused the left bloc of trying to cause panic, but which chastises the government for its apparent sluggishness in handling the crisis. SDS even proposed its own agenda on how to go about it. This can be summed up in one sentence: cut taxes and increase spending. Which is basically what they have been doing while they were in power until 2008, only they did that by ballooning the country’s debt in a very good macroeconomic climate.

But at the end of the day one fact remains. Janez Janša and his SDS are not in power, while the left bloc is. And they said that they are can handle the dire straits this country will be facing and that we should all get ready for them. But while they may really have expected times like this, I have a distinct feeling that never thought they’d be so long, so bad and so frequent…

Yesterday Slovenian police arrested Igor Bavčar, formerly of Istrabenz and Boško Šrot, formerly of Laško Brewery. In a surprise move, both were taken into custody as were nineteen other individuals in what is most likely and orchestrated manoeuvre to hit as many birds with one stone as possible.

Igor Bavčar and Boško Šrot were arrested yesterday morning (source: RTVSLO)

Media speculation is centered around a 7.3 percent share of Istrabenz which had changed quite a few owners lately. Reportedly this is the best lead the investigators have if they are to prove that Bavčar and Šrot acted in concert when they tried to take over Istrabenz and Laško respectively, which – as you know – was the supposed “reward” (via under-the-table sale of Mercator) for helping Janez Janša to get a grip on Delo newspaper in 2005. Things, however, got badly out of hands, Boško Šrot ditched Janša who (as PM) declared war against tycoons and went specifically after Šrot, by ways of having a couple of construction barons arrested in Operation Clean Shovel.

However, Janša was removed from power in last years elections and it just so happened that the two “model tycoons” were arrested during the tenure of the government which Janša claimed is sponsored by those very tycoons, especially Boško Šrot (Janša always took it easy with Bavčar, to whom he is forever indebted for launching him into the mainstream political orbit in 1988). Admittedly most of the arrested were subsequently released (including Igor and Boško) once the crim police collected the evidence, but fact of the matter is that since the “game over” moment things went downhill for both of them.

Having said that, it must be noted that arrests came at an extremely convenient time: government of Borut Pahor is taking more and more flak for ramming through the deal with Croatian PM Jadranka Kosor and at the same time the government is having increasing difficulties in handling the crisis, with companies going bust or on strike (or both). It was only yesterday night than an agreement on whether to keep the pensions at their current level for the next couple of years or have them increased yearly in accordance with inflation. The agreement made passing the next years’s budget possible, but only after some serious wrangling between PM Pahor and president of coalition DeSUS (pensioners’ party) Karel Erjavec, where Pahor even threatened to demand a vote of confidence in the parliament. Ultimately the deal was reached, but apparently it left a sour taste in everybody’s mouth. Yesteday’s arrests will (at least) temporarily divert the public attention on other issues.

And while I’m on it. Just like I resented Janša photo-opping the moment of the arrest, I must say that I’m equally appealed appalled by this practice continuing under the new government. I know they go for maximum public effect, but there are limits to this.

Yesterday Slovenian parliament passed a law imposing additional 49% tax on wages exceeding 12,500 EUR per month and bonuses exceeding 25,000 EUR per year. The law, which effectively imposes a 90% tax on top wages of state-owned companies or companies which have applied for state help was proposed by Zares and is controversial enough to have caught the attention of Reuters. The law was supported by all parliamentary parties, which shouldn’t come as a surprise, given the current economic and financial crisis, in light of which wages and bonuses of some managers, which were huge to begin with, seem enormous in an economy which is projected to drop 8% in 2009 and which suffered a 10% year-on-year drop in the second quarter of this year.

Give me money by Magnifico. A must if you haven’t seen it yet

According to Slovenian Statistics Office, the average gross wage in Slovenia in July 09 was around 1,420 EUR (average net wage in the same period was 922 EUR), which means that earnings higher than ten times the average salary will fall under this “special tax” law. To be even more specific, the law applies to earnings between 1 January 2009 and 31 December 2010 or whenever state help scheme expires (in case of a privately owned company). The law was – among other things – prompted by the fact that former Marjan Kramar CEO of Nova Ljubljanska Banka (NLB) collected about one million euros in accumulated bonuses at a time when the country was already in turmoil over tycoon-loans and when the first contours of crisis were becoming visible. One million knaaks is a lot of money no matter how you look at it but in that particular climate it was just one excess by the fat cats too many.

However. This “special tax” law stinks and is probably the worst piece of populist legislation passed ever since Janez Janša got his ass kicked in the elections.

First of all, if the law indeed is (as it seems to be) a response to Kramar’s bonus excesses, this is yet another example of a introducing systemic changes to deal with specific problems. This was a trademark of Janša’s government, which went on a legislative rampage every time a specific individual needed to be replaced, demoted or otherwise made an example of. Four years of reflex legislation was quite enough, thank you very much. If the left bloc is going to use tricks of the political right, we might just as well close the shop and call it a day.

Secondly, the law will most likely be declared unconstitutional. Since it retroactively taxes wages and bonuses paid since 1 January 2009, it interferes with “an already acquired right or benefit” (not sure about the exact legal term). For this reason and especially in light of decisions in similar cases the Constitutional Court is expected to have a field day with it.

Thirdly. Immediately after the enormity of Kramar’s bonus became know, finance minister Franci Križanič publicly outlined legislation going along exactly the same lines (90% tax on very high wages) but was quickly rebuffed by legal experts for reasons cited above (another case of him working better than speaking).

Fourthly (is that a word?): When Križanič finally got his bearings and was persuaded not to try to introduce the special 90% tax (which, remember is to be comprised from the basic 41% tax for top wages and sweetened by additional 49% tax for excess wages and bonuses) he went about and tried to amend the current taxation system, by raising the top wage tax from 41% to 48%. All hell broke loose, the opposition and part of the coalition pinned him to the wall and he was forced to withdraw the proposal. And now everybody is happily introducing a 90% tax? What the fuck?

Fifthly (how about this?): The law holds mostly symbolic value. Monies returned to state coffers will be barely worth a mention. But since no political party can afford to look like it is protecting the fat cats, everyone voted for the law. But this is no time for symbolism. People are losing their jobs, GDP is southbound and budget deficit is bulging. Some real and bold moves are needed. But by passing symbolic measures the parliament and the coalition (and the opposition in this case) is wasting time we haven’t got.

And last, but certainly not least: I’m willing to bet the law was passed precisely because for reasons for which it shouldn’t have been passed. The opposition and the coalition probably knowing that it will meet its early demise in the Constitutional court, which meant that they could support it without the danger of actually making a difference. And thus everything will remain the same.

Dogs bark but the caravan moves on.

P.S: As you have no doubt noticed, pengovsky is posting a bit more irregularly as of late. Sorry about that, but it seems that one of the effect of the crisis is that we all have to work more for less, while the day refuses to be extended beyond 24 hours.