Czech Exit Poll Points to Unexpected Social Democrat, Civic Democrat Tie

Czechs began voting in the second day of elections as polls showed the balloting may produce another government lacking the strength to cut a budget deficit that widened last year, putting the country’s credit rating at risk.

Public opinion polls showed the Social Democrats, who promise to increase social expenditure, will win the most seats in parliament, though not a majority. As many as seven parties may cross the 5 percent threshold needed for representation, making coalition talks more difficult and possibly delaying spending changes made urgent by Europe’s fiscal crisis.

Voting stations opened at 8 a.m. today and close at 2 p.m., when exit polls will give the first indications of the outcome. The final result may be known by late Saturday in a country that has had two minority governments and two interim Cabinets in the past 12 years.

President Vaclav Klaus said he hoped for a “strong, stable government” that will adopt the necessary policies to help the strengthen an economic recovery after the European Union member fell into its first recession since the fall of communism two decades ago because of the global financial crisis.

Governments across Europe are battling to cut budget deficits after spending to help revive their economies and lower tax revenue boosted shortfalls above the EU’s 3 percent of gross domestic product limit.

‘Trustworthy’ Plan

The Czech gap nearly doubled last year to 5.9 percent and Finance Minister Eduard Janota said on May 27 the country needs a “trustworthy” plan on how it wants to curb the deficit in order to eliminate risks to its credit rating. Spain had its AAA rating cut one notch yesterday by rating company Fitch to AA+ as Europe battles a debt crisis that’s prompted policy makers to forge an almost $1 trillion bailout package for the region’s weakest economies.

The koruna posted its biggest weekly drop in more than five months this week over concern that the elections would end in a stalemate, losing the most among 177 global currencies tracked by Bloomberg today. The koruna fell as much as 1 percent against the euro and closed down 0.9 percent at 25.841 yesterday.

The currency has dropped 3.1 percent since reaching a 17- month high on April 14, the third-biggest drop among 25 emerging-market currencies tracked by Bloomberg. Only the Polish zloty and Hungarian forint have fallen more.

‘Highly Uncertain’

“The only certainty from the forthcoming vote is that the make-up of the new government is highly uncertain,” Nigel Rendell, a senior emerging-market strategist at RBC Capital, said in a report. “All this suggests that the tough fiscal decisions that have been ignored for too long will not be resolved anytime soon; adding to the risks of holding koruna- denominated assets.”

The EU has told the Czech Republic to cut its budget deficit in half by 2013 to meet the bloc’s requirements and adopt the euro. The government plans to sell a record 280 billion koruna ($13.5 billion) of debt this year, including bonds denominated in the euro, as Europe’s sovereign debt crisis drives up bond yields.

The new cabinet will replace the interim government of 59- year-old Prime Minister Jan Fischer, who assumed power after his predecessor, Mirek Topolanek, 54, of the Civic Democrats, lost a confidence vote in March 2009 over his handling of the economy.

Opinion Polls

A poll taken May 7 to May 12 by Factum Invenio showed the Social Democrats with 62 seats and the Civic Democrats with 55. The poll of 1,004 people had the Communists with 28 deputies; Veci Verejne, which pledges to cut state administration, 26; TOP 09, a member of Topolanek’s cabinet, 21; and the Christian Democrats 8. Factum didn’t give a margin of error.

A May 17 poll by the researcher Stem showed the Social Democrats with 75 seats, followed by the Civic Democrats at 55, the Communists at 28, and TOP 09 and Veci Verejne with 21 each. The survey, based on responses from 1,257 people, has a margin of error of as much as 2.5 percentage points.

Turnout yesterday was heavier than in the last election in 2006, the CTK newswire reported, citing Electoral Committee officials. About half of the country’s 8.3 million eligible voters have already cast ballots, and participation may be over 70 percent, compared with 64 percent in the previous vote, they said, according to CTK.

The Social Democrats, who teamed with the Communist Party to push through increases in welfare spending in December, have promised to pay bonuses to pensioners and boost medical benefits, partly financed by dividends from state-controlled power company CEZ AS in Prague.

‘Hasty’ Cuts

The party pledged to cut the deficit by raising taxes for wealthy Czechs and reducing spending on state administration, while its leaders say they will avoid “hasty” cuts to protect growth.

The pace of growth in the national debt is a risk for fiscal stability, Civic Democrats leader Petr Necas, 45, said in an interview. The Czech Republic’s debt, estimated at 40 percent of GDP this year, is about half the euro-area average, according to European Commission forecasts.

“We don’t want to end up in Budapest, we don’t want to end up in Athens,” Necas said before the vote, referring to Hungary and Greece, which needed international bailouts. programs such as pensions, opinion polls show.

The Czech Republic has an A1 credit rating at Moody’s Investors Service, the fifth-highest investment grade, an A rating from Standard and Poor’s and A+ from Fitch.

To contact the reporter on this story: Peter Laca in Prague at placa@bloomberg.net

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