AMSTERDAM Dutch Liberals began informal coalition talks on Thursday but their austere policies will mean hard bargaining with other parties before a government can be formed to bring worsening government finances under control.
Wednesday's election gave Mark Rutte's right-leaning Liberals a one-seat victory, but deep policy differences with other parties will likely result in long and messy coalition talks and possibly a short-lived administration.
The election ousted Christian Democrat Prime Minister Jan Peter Balkenende after eight years in office. Geert Wilders's anti-immigration Freedom Party more than doubled its seats to be the third-largest parliamentary group and a possible kingmaker.
Historically it has taken an average of 87 days to form a Dutch government after an election, but lengthy negotiations would be bad news for investors betting on spending cuts.
For now the market appears to be reassured that a cost-cutting government will emerge, and the cost of insuring Dutch government debt and government debt spreads narrowed after the vote.
With nearly all the votes counted, the Liberals had 31 seats in the 150-member parliament against 30 for the Labour Party, which wants slower and fewer cuts to tackle a deficit expected to reach 6.6 percent of GDP this year.
"The fact that the outcome of the election will provide no obvious coalition increases the odds of a lengthier formation process," Maureen Schuller at ING Credit Strategy said.
Exit polls had shown the Liberals and Labour running neck and neck in an election dominated by debate on fiscal austerity after the euro zone's stability was threatened by sovereign debt woes plaguing Greece.
Balkenende conceded defeat for his Christian Democrats when voters turned against the party, nearly halving its seats from 41 to 21. He resigned as party leader.
The election was triggered by the collapse of his Christian Democrat-Labour coalition in a row over extending the deployment of Dutch troops in Afghanistan.
Wilders and his Freedom Party gained 15 seats to come third with 24, reflecting persistent concern in the country about immigration and foreign policy.
"More security, less crime, less immigration, less Islam -- that is what the Netherlands has chosen," Wilders said.
The Liberals are calling for the steepest spending cuts of up to 39 billion euros ($52 billion) over the next decade but may have to compromise.
"The Netherlands can emerge stronger from the crisis by taking measures now," Rutte, a 43-year-old former human resources manager who once worked at Anglo-Dutch consumer goods giant Unilever, told reporters.
Labour, led by former Amsterdam mayor Job Cohen, could join the Liberals in a coalition but as the second-biggest party it is likely to want concessions.
Although the euro zone's fifth-largest economy enjoys one of the highest debt ratings in the currency bloc, borrowing costs edged higher before the election.
But the spread between Dutch bonds and the German benchmark bond tightened on Thursday, when the spread on a recently auctioned three-year bond tightened to 22 basis points, down from 40 just before the vote and back near week-ago levels.
Five-year credit default swaps dipped to 46 from 56, meaning it would cost investors 46,000 euros to protect 10 million euros-worth of Dutch government bonds.
"I don't think there will be a significant response on the bond markets. Only if it were to take a very long time or if it was very difficult would you see an impact, but I don't expect it," said Walter Leering, a fixed income analyst at Dutch private bank Theodoor Gilissen.
Casting aside decades of stern fiscal policies, the government took over the country's biggest bank ABN AMRO in 2008 after its buyer Fortis collapsed and spent more than 26 billion euros propping it up. It spent more later to boost the economy, offer tax relief and support other financial groups, heightening investor concern over its finances.
(Writing by Reed Stevenson; additional reporting by Catherine Hornby and Bart Meijer; editing by Tim Pearce)