Slovakia's parliament may vote on the expansion of the euro zone's bailout fund, the European Financial Stability Facility (EFSF), as soon as mid October, but a Greek default is still possible, Slovak Prime Minister Iveta Radicova told CNBC in an interview in Bratislava.
Parliaments in the euro zone have rushed to approve the EFSF's expansion over the past few days as markets demanded a resolution to the prolonged turmoil caused by Greece's debt crisis which spread across the euro zone.
Slovakia's parliament returns to work in October and Radicova said she hoped a vote would take place before the summit of European Union leaders taking place between October 17 and 18.
"The parliamentary session starts on the 11th of October, so the first possible day is the 11th of October," she added.
The Slovak Republic has asked for "principles for regulated default" to be set up in the euro zone as a condition for approving the EFSF, Radicova said.
"From my point of view the risk or the possibility that for Greece there is no other way [than a regulated default] is very probable," she said.
But she ruled out the possibility that the debt-laden country would leave the euro zone altogether.
"I don't think it's necessary that Greece will leave… they can have the way of a so-called default and keep the currency. It's not that Greece will automatically be out of (the) euro zone. I don't think so."
No Slovak Money in EFSF
The Freedom and Solidarity party (SaS), led by Richard Sulik - a Slovak businessman who lived in Germany for a long time during the 1980s but returned after the fall of communism – is a junior member of the government and has refused to support boosting the EFSF.
Richard Sulik, who is Speaker of the Slovakian Parliament, told CNBC Friday that his party would vote against the EFSF in its current form.
"It’s a lot of money for Slovakia," he said. He believes that Slovakia should endorse the EFSF but not put money into it.
Radicova said she was in discussions with SaS towards reaching a compromise that would mean Slovakia itself would not have to invest any money in the EFSF.
Even with its firepower boosted by the agreements in July – permitting the EFSF to offer precautionary credit lines to countries in distress and in extraordinary circumstance buy bonds from the secondary markets – analysts said the fund should be substantially increased, with some even suggesting the amount of 3 trillion euros ($4.08 trillion).
"Such (an) amount of money would be new debt, so it's impossible," Radicova said, explaining that countries already running deficits would have to borrow more in order to meet their obligations to the EFSF, thereby increasing the problem.
"From my point of view it's impossible to cut debt in a country with new debt from another country," she said.
The euro zone was not prepared for the crisis and three major principles of the single currency – the no bailout principle, strict fiscal policy and preventing the European Central Bank from buying government bonds - have been breached by several countries, according to Radicova.
Now the euro zone needs to find new principles and put in place a control mechanism for countries that breach the rules under which "automatic sanctions" are applied "if countries do not behave according to European Union principles," she said.
"In other words, the financial mechanism in my point of view is only one step and we will need more and more new decisions," Radicova added.
New Rules for Markets
Banks, financial institutions and rating agencies are "equally responsible" for the crisis, which is "not only the fault of politicians," Radicova said, adding that she didn't believe that markets and financial institutions behaved according to "normal, standard rules."
"New rules for financial markets and financial institutions are absolutely needed," she added.
Talk has increased lately about creating a kind of euro zone treasury and passing authority to Brussels regarding fiscal matters but in Slovakia, which has had a flat tax for years that helped it attract foreign investors, the idea is anathema.
"If we have a common currency, the main regulator for policy in the country is the fiscal policy," Radicova explained, adding that the country would have no way to react to changes in economic conditions and no means to attract foreign investors.
She added that such a decision would require a popular vote, not just political will. "Without the votes of citizens it cannot be possible, this cannot be decided by a few politicians."
Radicova said she was "really worried" about the possibility of a slowdown because of the global economic troubles.
"We still have economic growth but it's slower, slower, slower," she said.
Slovakia has already made structural reforms, privatization and tax reform but it still needs to do more to become even more competitive on the international scene, Radicova said.
"We need first of all the reform of our justice system. We need reform of the education system, because of quality of education because of innovation and technology. And we need administrative reform. Too much bureaucracy."
She said the government created a better environment for entrepreneurship, reformed social contributions on employment to make the system easier and brought in a new Labor Code which makes the labor force more flexible.
"Slovakia was labeled the tiger of Europe, I am sure we are returning to this label," Radicova said.
Correction:A previous version listed $4.08 billion instead of $4.08 trillion as being equivalent to 3 trillion euros.