Slovakia may lose EU funding due to changes in criminal legislation, and investors have taken serious notice. On February the 9th, a ratings agency, Scope Ratings, downgraded Slovakia’s long-term issuer and senior unsecured debt ratings by a notch after MPs in Bratislava adopted new criminal codes.
Even though Scope Ratings is not one of the three largest rating agencies - Fitch, Moody’s and S&P - it has its place among five agencies accepted by the European Central Bank (ECB).
Scope Ratings has downgraded Slovakia’s rating from an A+ to an A, bringing the country to the same level as Poland and Slovenia. “A worsening fiscal position and challenges for the macro-economic outlook drive the downgrade. Membership in the EU and euro area, a competitive, export-oriented industrial base remain credit strengths”, writes Scope.
For the first time in the rating agency’s assessment, the reason behind the downgraded rating is not only the growth of public debt and unclear consolidation plans of Robert Fico’s government, but also the threat that Slovakia will have problems with the drawdown of EU funds due to the Criminal Code changes.
On December 6th 2023, the new government of Robert Fico launched a procedure to overhaul Slovak’s Criminal Code. His amendments aim to lower penalties for serious offences on a broad scale from corruption to rape. It also wants to dissolve the Special Prosecutor’s Office that handles corruption cases and serious crimes. Should these changes be finalised, it would allow Fico to consolidate his strength.
Members of European Parliament (MEPs) have already expressed concerns and criticised the Slovak Prime Minister’s steps. In a debate in mid-December, with a majority of votes in favour, the European Parliament has adopted “a resolution questioning Slovakia’s ability to fight corruption and protect the EU budget should the reform of the Criminal Code proposed by the new government of Robert Fico be adopted.”
Robert Fico came back to the government in 2023 after a five year break. He stepped down from his role as Prime Minister in 2018 as the murder of a journalist Ján Kuciak and his fiancé destabilised the country and shook trust in the government.
Since Slovakia’s September 2023 election and the formation of a coalition which made Robert Fico prime minister, the country has been in turmoil. The prime minister and several other government officials no longer talk to key media, worrying the opposition as well as the EU Parliament about Bratislava’s transparency and democratic mandate.
An EU press release from last January 17th stated “MEPs are also worried about the planned restructuring of Radio and Television of Slovakia (RTVS) […] They demand an end to verbal attacks on individuals and media representatives, which in the past have contributed to an environment in which violent crimes such as the murders of Ján Kuciak and Martina Kušnírová were committed”.
Demonstrations against the government have been held on multiple occasions across the nation. A protest that was held on February 1st is the biggest so far, with tens of thousands rallying against their government. Many cities across Slovakia are counting increasing participation; Bratislava’s protest remains the most dense, estimates state that more than 30-thousands participants have turned out in the main square. Small gatherings to support demonstrations against the Slovak government were organised in other European cities such as Krakow, Prague, and Paris.
Slovakia also received a new rating last Friday from Morningstar DBRS, which is the last of the five agencies mentioned before. It kept Slovakia's rating, but downgraded its outlook to negative. “The trend change from Stable to Negative reflects the risks related to Slovakia’s structurally large fiscal deficit. Likewise, key governance scores in Slovakia have deteriorated in recent years, and it remains unclear whether the new governing coalition will prioritise the rebalancing of public accounts”, says Morningstar DBRS in its report.
Decisions by S&P and Moody's are expected in April and June. Fitch already downgraded Slovakia in December when it concluded that the planned pace of budget deficit reduction would not be sufficient to stabilise public debt. It is yet to be seen if the amendment of the Criminal Code will pass and how it will affect the stability of the country, as the law has to be ratified by President Zuzana Čapútová.
Regardless, Slovakia's controversial legal overhaul jeopardises its financial stability, as businesses fear the possible loss of EU funding. Additionally, the changes could further threaten the very fabric of Slovakia's democracy and its international standing, since they have done so even before ratification. However, a lot can still change as Slovakia’s next presidential elections, held at the end of March, loom.
Image: Bubamara
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