May 29, 2010 / 6:19 PM / in 9 years

Snap Analysis: Czech vote good for markets but new party a risk

PRAGUE (Reuters) - The Czech Republic looks set for a new center-right government that could launch long delayed fiscal reforms but there are still question marks over the stance of the smallest party in that potential coalition.

GOOD FOR MARKETS, STRONG MANDATE

With nearly all votes counted, the leftist Social Democrats led with 22.2 percent, but three center-right parties — the Civic Democrats, the conservative TOP09 and Public Affairs — had enough support to form a solid parliamentary majority.

According to preliminary calculations by Czech media, a center-right coalition could have around 110-112 seats in the 200-seat lower house, the biggest majority of any government since the country was established in 1993.

This is the most favorable outcome for financial markets. Analysts see a center-right coalition as best equipped to cut the budget deficit and kick-start reforms needed to make the pension and health systems sustainable over the long term by restructuring mandatory spending requirements in the budget.

TOUGH FISCAL PLEDGES CREATE PLATFORM FOR REFORM

All the center-right parties campaigned on the threat of a Greek-style financial meltdown — which analysts said was somewhat overstated. Still, they now have a strong mandate to push through reforms.

The Civic Democrats — who want to cut the budget gap to 3 percent by 2012 and balance it by 2017 — have proposed legislation that would set spending ceilings. TOP09 wants sharp spending cuts in state administration and a rule on balancing the budget once growth hits 2 percent.

But before investors push the crown higher on Monday, they should bear in mind several points.

PUBLIC AFFAIRS - UNKNOWN FACTOR

One problem could be the smallest party in a center-right coalition, Public Affairs.

Led by a popular former TV host, Radek John, its popularity has shot up thanks to blunt slogans criticizing corruption and debt, the main topics in the campaign.

But it has almost no record in policymaking, a small membership and a reputation for a populist streak that could make the party a volatile partner.

Because some of their supporters lean left, the party may be want to remain on the fence, said political analyst Tomas Lebeda.

“There is no guarantee that John will be willing to create a coalition with rightist parties,” he said. “The party has a number of voters that are close to the Social Democrats, there are voters coming from the left to the right.”

OPEN TO TALKS BUT NON-COMMITTAL

John himself said when results were coming in that he could see common ground with Civic Democrat leader Petr Necas and did not trust the Social Democrats to rein in debt.

But he added that his party would not try to force its way into a coalition government and could back whatever legislation it saw as positive, whether it came from the right or left.

Political analyst Vladimira Dvorakova said the party may opt to stay outside the cabinet, only supporting it in parliament — a stance that would obviously weaken what could turn out to be a minority government.

STRUGGLE FOR RIGHT-WING DOMINANCE

The other risk is that TOP09, formed by popular pipe-smoking prince Karel Schwarzenberg and former Christian Democrat leader Miroslav Kalousek, won so much of the vote that it may clash with the Civic Democrats over who should lead the political right.

WILL SOCIAL DEMOCRATS TRY STEP IN?

Another potential hurdle arises from the fact that traditionally the leader of the biggest party in parliament gets a political mandate from the president to try form a government.

This would mean that Social Democrat leader Jiri Paroubek could still try to stitch up a deal — although it looks increasingly unlikely that TOP09 or the Civic Democrats would agree to any form of right-left coalition.

Editing by Noah Barkin

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