Slovakia rejects European bailout plan

Slovak Prime Minister Iveta Radicova will resign as a result of Parliament's rejection of a beefed up bailout fund for banks and euro area governments.

NEW YORK (CNNMoney) -- Lawmakers in Slovakia rejected a plan late Tuesday to expand the powers of a bailout fund for banks and troubled European governments.

The development, which was tied to a vote of confidence in the government of Slovakian Prime Minister Iveta Radicova, is a bit of a setback for European leaders that are struggling to deal with the continent's growing debt crisis.

Slovakia is the only member of the 17 nation euro currency bloc that has not approved the plan to overhaul the bailout fund, known as the European Financial Stability Facility, or EFSF.

Tuesday's "no" vote does not necessarily mean that the plan to expand the EFSF is dead. But the vote means Radicova will resign. The incoming government could hold a second vote on Thursday or Friday, according to a spokeswoman for the Slovakian Parliament.

Increasing the power of the EFSF is viewed as a crucial first step towards strengthening the banking system in Europe and addressing a long-running sovereign debt crisis in Greece and several other euro zone nations.

Under an agreement reached in July, the €440 billion fund will have greater powers to intervene in sovereign debt markets and provide funding for banks that need to raise capital.

Portugal and Ireland have already tapped the fund and officials have proposed using it to back a second €109 billion bailout for Greece.

The revamped fund could also be used to buy government bonds issued by Italy, Spain and other nations struggling to pay down debt.

That would take some pressure off of the European Central Bank, which has been reluctantly intervening in the sovereign debt market for months.

The EFSF is also viewed as a potential lender of last resort for European banks.

The European banking system has been under increasing pressure as worries about exposure to bad sovereign debt has led to a pull-back in interbank lending.

But overhauling the EFSF has been a contentious issue in many European capitals, where taxpayers have resisted backing further bailouts.

In Slovakia, one of the euro area's smallest economies, the issue has been particularly unpopular.

Richard Sulik, chairman of Slovakia's Freedom and Solidarity party, said rejecting the EFSF overhaul will save European taxpayers more than €300 billion, according to the Slovak news agency.

Sulik argued that expanding the EFSF would benefit banks at the expense of the public. "We didn't get a mandate for that," he said. "We got a mandate to protect the money of Slovak taxpayers."

Investors around the world have been closely following political developments in Europe as policy makers struggle to contain a crisis that could have global implications.

U.S. stocks ended little changed Tuesday as traders awaited an outcome to the vote in Slovakia.