Lithuania opposition wins vote in austerity backlash

VILNIUS Sun Oct 28, 2012 6:49pm EDT

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VILNIUS (Reuters) - Lithuanians angry at spending cuts put left-wing opposition parties on the path to power in an election on Sunday that likely spelled the end for a conservative government praised abroad as a model of austerity.

The Social Democratic Party and the Labour Party, which have promised to raise the minimum wage and shift the tax burden to the better off, were headed for a parliamentary majority in combination with their likely partner, the Paksas Party, according to preliminary results from the second-round vote.

The Homeland Union of conservative Prime Minister Andrius Kubilius, who slashed the budget deficit at the cost of falling wages and rising unemployment, was set to be the second biggest party in parliament but with little chance of a coalition deal.

Whatever the composition of its next government, Lithuania, which must borrow 7.6 billion litas ($2.85 billion) in 2013, about 7 percent of output, will likely be given little room to loosen austerity by debt markets, analysts say.

"The trend is showing that the results are quite good," said Algirdas Butkevicius, leader of the Social Democrats. The former finance minister is a possible coalition prime minister.

With a 13 percent jobless rate, the Baltic nation is one of the European Union's poorest countries and the population has fallen below 3 million for the first time since the Soviet Union's collapse in 1991 as thousands leave to find work.

The government's failure at the ballot box comes despite warm words abroad for a more resolute economic course than those taken by Greece and other euro zone states struggling with debt.

The International Monetary Fund praised the government's "determined policy implementation" in June.

After a collapse in economic output of 15 percent in 2009, the second-biggest decline in the European Union after northern neighbor Latvia, gross domestic product rose 6 percent last year and is expected to increase by about 3 percent this year.

The budget deficit fell to 5.5 percent of GDP in 2011 from 9.4 percent in 2009. The Kubilius government has drafted a 2013 budget with a 2.5 percent fiscal gap.

TENSION AHEAD?

In a sign of possible coalition tension ahead, Labour's leader, Russian-born businessman Victor Uspaskich, has said he may push for a budget deficit above the EU limit of 3 percent of output.[ID:nL5E8LE6ZU] Butkevicius has said he would be fiscally responsible and could seek euro entry in 2015. [ID:nL6E8L2DQJ]

Lithuania has sought ever closer ties with the European Union since becoming independent from the Soviet Union in 1991.

Uspaskich says the country should not rush to adopt the euro while the currency is in crisis and public support is low. The Labour leader is on trial for tax evasion by his party between 2004 and 2006, a charge he denies.

The Social Democratics were set for about 38 seats and the Labour Party 30 in the 141-seat parliament, according to votes from 94 percent of polling stations in Sunday's second-round vote. A first round was held two weeks ago.

The Paksas Party, led by an impeached former president. was heading for about 11 seats, enough for a coalition majority.

Lithuania's politicians were aware pressure from the markets would not allow them to be too generous, said Lars Christensen, chief emerging markets analyst at Danish bank Danske Bank.

"I'm quite happy that this election, no matter the outcome, will not lead to crazy economic policies," Christensen said.

Lithuania takes the EU's rotating presidency in the second half of 2013 and must repay a 1 billion euro bond in March.

"They have their hands tied at the moment," said DNB economist Rokas Bancevicius.

(Writing by Patrick Lannin; Editing by Andrew Osborn and Jason Webb)

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