No Government No Problem as Czechs Unfazed by Instability

Photographer: Sean Gallup/Getty Images

While the Czechs avoided the violent anti-austerity protests that swept out governments across the region, the administration of Prime Minister Petr Necas collapsed this month. Close

While the Czechs avoided the violent anti-austerity protests that swept out governments... Read More

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Photographer: Sean Gallup/Getty Images

While the Czechs avoided the violent anti-austerity protests that swept out governments across the region, the administration of Prime Minister Petr Necas collapsed this month.

Czechs are preparing for their seventh prime minister of the past decade, more than any European Union nation. For entrepreneurs from Karlovy Vary to Ostrava, it’s business as usual.

The second-richest of the EU’s ex-communist countries has attracted foreign direct investment of about $65 billion since 2003, helping double the size of the economy to $217 billion. The koruna has gained more than 20 percent against the euro and the government borrows for less than the U.S.

While the Czechs avoided the violent anti-austerity protests that swept out governments across the region, the administration of Prime Minister Petr Necas collapsed this month under the weight of a scandal over illegal spying and bribery allegations. As Europeans grapple with the continent’s debt crisis destabilizing governments from Lisbon to Helsinki, the short shelf life of Cabinets became mundane for Czechs.

“There isn’t any direct impact onto business as such, because we run it ourselves and politicians only influence it indirectly,” said Stanislav Bernard, whose namesake brewery doubled its output in the past decade. “But it does hurt the the overall attitude of people. Despite the frequent changes of governments we have been growing continuously for the last 12 years and we expect to keep improving.”

No Continuation

Czech President Milos Zeman yesterday picked ex-Finance Minister Jiri Rusnok to form the government and replace Necas, who was forced to resign on June 17 following a scandal in which his closest aide was charged with ordering illegal spying. The pick suggests the country is moving toward a snap election.

“I believe that most of the public, and I don’t mean just my voters, wouldn’t want” a continuation of the current coalition “with or without Necas,” Zeman told reporters yesterday at Prague Castle.

Rusnok’s nomination isn’t certain to end the uncertainty as his “government of experts,” as Zeman calls it, has to win a confidence vote in the lower house of parliament -- which all parties said they would reject.

If it fails in the confidence motion, the Rusnok Cabinet will stay in office on a caretaker basis until Zeman names a replacement or an election is held, with the next general ballot scheduled for May 2014. To call an early vote, 120 members of parliament would have to back dissolving the assembly.

Overnight Raids

The political turmoil erupted June 13 after nighttime police raids resulted in the detention of eight people, including the head of the premier’s office, former ruling-party lawmakers and the current and former heads of military intelligence.

Necas’s ensuing resignation made him the sixth consecutive premier who failed to complete a full four-year term since Zeman temporarily retired in 2002. Amid the slew of interim governments, snap elections, no-confidence votes and coalition breakups, investors kept betting on the Czech Republic.

While the economy plunged into recession along with the rest of Europe in 2009 and is contracting again, industrial exports continue to provide a solid base, according to Jaroslav Hanak, the head of the Confederation of Industry of the Czech Republic.

“Despite the political instability, the Czech Republic is not any waste land,” Hanak said by phone. “The businesses that are linked to export continue to grow whatever the political circumstances.”

Bond Yields

Coupled with public debt at 46 percent of economic output, about half of the EU average last year, that has been enough to lure buyers to government bonds even as the central bank cut its benchmark interest rate to effectively zero.

The yield on the Czech 10-year koruna bond fell to an all-time low of 1.48 percent on May 17, according to data compiled by Bloomberg. The debt is the highest rated in the post-communist EU, on par with Estonia at Moody’s Investors Service and Standard & Poor’s.

It has since risen to 2.34 percent today, after the U.S. Federal Reserve indicated it could start paring asset purchases should risks to the world’s biggest economy abate, while still remaining below comparable U.S Treasuries. The yield on the Czech government’s five-year bonds dropped 6 basis points, or 0.06 percentage point, to 1.63 percent today, according to generic data compiled by Bloomberg.

‘Unexpected Twists’

“Czech government bonds, and essentially also the koruna, will continue ignoring the domestic political scene despite the unexpected twists,” Jan Cermak, a CSOB AS analyst in Prague, said in a note today. “The situation will only become interesting when the date of a parliamentary election is set.”

Exports, which account for about 75 percent of Czech GDP, are led by manufacturers including the factories of carmakers Hyundai Motor Co., Volkswagen AG’s Skoda Auto AS, Peugeot SA (UG) and Toyota Motor Corp. (7203)

Sales of goods and semi-finished products to Germany, the country’s main export market, almost doubled to 963 billion koruna ($49 billion) last year from 507 billion koruna in 2003, according to Statistics Office’s data.

“The car industry has benefited from positive decisions that attracted foreign direct investments,” Helena Horska, the head of research at Raiffeisenbank AS in Prague, said by phone. “The economy has been riding the momentum from the past.”

Still, prolonged instability would potentially endanger that link by failing to give political backing to “structural reforms that would require a stable government,” Horska said.

German Links

Being so channeled into the German industrial machine helped the Czech Republic weather political storms better than other parts of former communist eastern Europe. Several countries in the region have been rocked by instability as Europe’s debt crisis forced economies still in transition to tighten spending and resort to bailouts.

“Forty-plus years of Soviet rule and all the value-distorting, economy-strangling, society-warping pressure that entailed and then a crash transition to the market take time to assimilate,” Mark Galeotti, Clinical Professor of Global Affairs at New York University’s Center for Global Affairs, said in an e-mail. “Lobbyists who go beyond the usual bounds, illegal wiretaps, embezzlement, sweetheart deals -- they are hardly unique to the Czechs.”

The Czech Republic ranked 54th of 174 countries in Transparency International’s 2012 corruption perception index, tied with Latvia, Malaysia and Turkey. In the 27-member EU, only Slovakia, Romania, Italy, Bulgaria and Greece did worse.

Even as they get on with everyday business, that continues to frustrate executives such as Bernard.

“Billions are lost in black holes and I will only start to be an optimist when the shady figures who pull the strings from behind are charged,” said Bernard, who’s active in a foundation aimed at fighting corruption. “Internationally, it shows us as a young, non-matured democracy that’s still ruled by gold miners that get public functions with an aim of getting rich rather than help improve things.”

To contact the reporters on this story: Peter Laca in Prague at placa@bloomberg.net; Lenka Ponikelska in Prague at lponikelska1@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; James M. Gomez at jagomez@bloomberg.net

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