Czech Parties Say Cabinet Formation May Take Two Months, Koruna Weakens

Three Czech parties pledging to cut spending said talks on forming a coalition government may take two months, damping expectations that a new Cabinet will be formed quickly after weekend elections, weakening the koruna.

The Civic Democrats, TOP09 and Veci Verejne, which secured a majority in the May 28-29 vote on promises of fiscal responsibility, signed a “declaration of will” in Prague today to create an administration that will have to cut the budget deficit in half by 2013 to within the European Union’s limit of 3 percent of economic output. The leader of the strongest party said an agreement may be reached by the end of July.

The koruna has lost most of its post-election gains because of investor concern that the talks will be prolonged. The currency fell 1 percent the past two days, underperforming the Polish zloty and Hungarian forint.

“Initial expectations that a strong pro-reform government will be quickly formed are gradually returning to more realistic levels,” Jan Vejmelek, an economist at Komercni Banka AS in Prague, wrote in a report today. “We’ll only see a more lasting positive reaction on the currency after the parties reach an agreement and start implementing the planned reforms.”

Fiscal Prudence

The new Cabinet will have to cut spending and boost revenue to curb a fiscal deficit that doubled to 5.9 percent of gross domestic product last year after the country fell into the deepest recession since the end of communism in 1989. The Finance Ministry forecasts economic growth to resume in 2010 on renewed demand for exports, including Skoda Auto AS cars.

The negotiating teams for the three parties will hold talks on seven main themes of government cooperation, which include lowering the fiscal shortfall, fighting corruption, changing the health-care and pension systems, the party leaders said.

“The negotiations will be intensive, and I’m confident that a coalition agreement may be reached in a month, or during the second month from the elections,” Petr Necas, the leader of Civic Democrats who have the most parliamentary seats among the three parties, told reporters. “Based on the talks so far, I have no doubts about the political will to reach an agreement.”

Czech President Vaclav Klaus, who will name the new prime minister and Cabinet, will meet Necas tomorrow for talks about the progress of negotiations, his office said in a statement.

Snags in Talks

Initial talks hit a snag yesterday after the smallest faction, Veci Verejne, said it doesn’t have to be a part of the government and may only support a minority Cabinet if the parties fail to agree on program priorities. The party said today ruling in a majority coalition would be the preferred option, although it left the door open for other possibilities.

“The declaration signed today is no contract, it’s no blank check from which to draw any conclusions on whether there will be or won’t be a coalition,” said Vit Barta, a member of Veci Verejne’s negotiating team.

The Czech koruna jumped 1.6 percent one day after the three parties started talks toward building a coalition with 118 deputies in the 200-seat lower house of parliament, which would replace an interim administration unable to rein in the deficit.

Currency Losses

The currency has erased most of the initial gains, falling 1.1 percent since the close on May 31. The Hungarian forint lost 0.3 percent to the euro, and the Polish zloty was down 0.7 percent in the same period. The koruna was at 25.808 against the common currency as of 5:20 p.m. today in Prague, compared with 25.728 at yesterday’s close.

The government plans to sell a record 280 billion koruna ($13.5 billion) of debt this year, including bonds denominated in euros. It will almost double sales of local-currency bonds and Treasury bills in the third quarter from the second quarter to as much as 127 billion koruna, the Finance Ministry said yesterday.

Veci Verejne campaigned to curb state administration by firing clerks, set up special anti-corruption courts and cut budget spending by electronic auctions of state procurement orders. It rose in opinion polls after it elected Radek John, a former journalist and author, as chairman one year ago.

TOP09, led by former Foreign Minister Karel Schwarzenberg and ex-Finance Minister Miroslav Kalousek, was set up last year and like Veci Verejne, was in its first general election.

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

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