RE-ELECTION WOES FOR SLOVENIA'S CENTRAL BANK

UNCLAS LJUBLJANA 000080

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR EUR/NCE (SSADLE),TREASURY FOR V.ATUKORALA

E.O. 12958: N/A
TAGS: ECON EFIN PREL SI
SUBJECT: RE-ELECTION WOES FOR SLOVENIA'S CENTRAL BANK
GOVERNOR: DRNOVSEK AND JANSA FACE OFF

REF: A. LJUBLJANA 0051

B. LJUBLJANA 0002


1. (SBU) Summary. In a close vote February 2, Mitja Gaspari
failed to get the 46 votes necessary for re-election as the
governor of the Bank of Slovenia (BOS). On February 9,
President Drnovsek put forward BOS Vice-Governor Andrej Rant
as his second nominee. The ostensible cause of Gaspari's
downfall was the charge that he had sent analytical documents
to the European Central Bank (ECB) painting an unfairly bleak
picture of the Government of Slovenia's (GOS) fiscal policy.
Subsequently, it was determined that the documents had, in
fact, not been sent to the ECB at all but were, rather,
internal documents pondering possible scenarios. The concerns
surrounding the leaked documents seems to have hurt him
politically, more because it gave his detractors something to
use against him than any inappropriate behavior on his part.
Now there is a stalemate between Drnovsek and Jansa's
Slovenian Democratic party (SDS). Drnovsek has stated that he
will not submit a new candidate if Rant is not confirmed, and
the SDS is not expected to support Rant's candidacy. If left
unresolved by March 31, it is unclear whether the GOS will
have official representation in the ECB after Gaspari's term
ends. End Summary.

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Background
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2. (U) Before the uproar over the "controversial" documents,
Mitja Gaspari had an exemplary career in the Slovenian
Central Bank, with Slovenia's entry into the euro zone as his
crowning achievement. Previously, at the time of the
dissolution of Yugoslavia, he went to work at the World Bank
in Washington D.C. as a senior financial economist. In June
1992, Gaspari returned to Slovenia when he was appointed
Minister of Finance by then Prime Minister, Janez Drnovsek.
Gaspari was Finance Minister until Drnovsek nominated him --
and parliament confirmed him -- to be the new Central Bank
Governor in 2001. Drnovsek, now president of Slovenia,
recently nominated Gaspari to a second term, with his current
6-year term ending in March 2007.

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An Unexpected Bump on Euro Trail
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3. (U) Slovenia's entry into the euro zone was historic (Ref
B). The only one of the new EU accession countries to join,
Slovenia showed discipline and resolve in its drive to adopt
the euro. From beginning to end, ECB officials lauded the
work of Gaspari and the Bank of Slovenia in not only meeting,
but exceeding the Maastricht criteria. ECB Governor
Jean-Claude Trichet has even said that Gaspari was "one of
the most important people in Slovenia." On January 15, a gala
event heralded in the euro as Slovenia's official currency
and paid tribute to the tolar, Slovenia's official currency
since 1992. Even as Gaspari's and the Government of
Slovenia's achievements were being celebrated, controversy
was brewing over Gaspari's alleged defamatory report to the
ECB. When the accusations became public, Gaspari and Trichet
both categorically denied that documents painting a dire
picture of Slovenian public finances were sent to the ECB.

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Lies...And Statistics
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4. (U) The disagreement centers around assumptions about the
Government's fiscal health. The BOS's divergent unofficial
internal assessment predicts that Slovenia could have budget
deficits of up to 2% in 2007 and 2008, which could spiral up
to 8-11% by 2011. For its part, the Ministry of Finance (MOF)
projects deficits of 1.5% in 2007-8. The BOS says its numbers
are based on conservative estimates with minimal government
intervention, and, also include worst-case scenarios. Finance
Minister Andrej Bajuk argued that the assumptions underlying
the BOS report amounted to irresponsible conjecturing and
simplistic thinking, whereas the Finance Ministry's report
assumed a scenario by which the GOS could raise the
value-added tax (VAT) and use other tools to contain budget
deficits. The BOS countered that its projections were based
on current realities rather than possible future actions.

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Gaspari Vindicated But Still Under Fire
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5. (U) After heated exchanges between the Ministry of Finance
and the Bank of Slovenia, it became clear that the BOS had
never sent the documents in question. In reality, the
documents were internal projections, which included
projections for worst-case scenarios. With the main criticism

of Gaspari a non-starter, MPs opposed to Gaspari's nomination
then attacked his past record as Finance Minister as well as
his leadership of the BOS. Gaspari's supporters, on the other
hand, claimed that the accusations were a smokescreen and the
real agenda was an attempt to diminish the independence of
the BOS and install a governor that is politically acceptable
to Jansa.

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Next Steps
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6. (U) On learning that Gaspari did not receive the necessary
votes, Drnovsek decried the parliament's decision as
undermining independent institutions in Slovenia. Drnvosek
stated that he would choose someone like Gaspari again:
"someone with impeccable professional credentials as well as
political independence." Drnovsek met with PM Jansa on
February 7 and suggested Joze Mencinger, a vocal critic of
the Jansa government, as his potential nominee. Jansa made it
clear that he was not an acceptable option and Drnovsek
withdrew his name. Then, on February 9, Drnovsek surprised
everyone by submitting to parliament BOS Vice-Governor Andrej
Rant, a 30-year central bank veteran, as his new nominee.
Rant, as one of Gaspari's deputies, is known as a strong
Gaspari supporter and by association is considered a Drnovsek
"insider" who is not expected to garner the necessary votes
in parliament. Business daily Finance described Rant as
knowledgeable but "anemic," -- lacking charisma and
leadership skills. Prior to Rant's nomination, pundits had
been speculating that the front-runners were Egon Zakrasek,
an economist working at the US Federal Reserve, Boris
Pleskovic, a long time economist at the World Bank in D.C.,
or Marko Kranjec, renowned economist and former finance
minister. On February 12, Drnovsek stated that he would not
submit any more names if Rant is not confirmed. In response,
Joze Tanko, deputy of Jansa's Slovenian Democratic party
(SDS),stated that SDS would not support Rant. Drnovsek said
this would lead to an institutional crisis, but expert
opinions vary. Slovenian law states that in the absence of a
governor, one of the central bank deputies would assume the
role of acting-governor, though there is no law explicitly
regulating participation in the ECB. Also, Slovenian
newspaper Delo noted that a parliamentary majority could
remove Drnovsek's right to nominate the candidate.


7. (SBU) Comment. The public fracas between the Bank of
Slovenia and the Ministry of Finance is being fueled by what
has now, over the last year, become a more contentious
relationship between President Drnovsek and PM Jansa.
Although many people in the government and the press have
been critical of Gaspari's treatment by Jansa's camp, they
have been equally critical of Drnovsek's unilateral
decision-making on key appointments and nominees. Social
Democrats party (SD) leader and presidential contender, Borut
Pahor, criticized Drnovsek for his refusal to work with
lawmakers to find a suitable central bank governor nominee.
The back and forth on the nominations of Gaspari, Mencinger
and then Rant is a classic example of the political wrangling
between Drnovsek and Jansa. Local media speculated that
Drnovsek's strategy was to suggest Mencinger, someone so
unacceptable to Jansa, so that Rant would seem acceptable by
comparison. The economic implications of this struggle are
not the focus of the media or the public. Instead, this
dispute is a battle of wills between Jansa and Drnovsek to
install "their" man at the helm of the central bank. End
Comment.

ROBERTSON