Czechs Head For Snap Elections to End Political Turmoil

The Czech Republic is moving toward early elections after months of political upheaval, a move that could bring higher spending to help revive economic growth following a record-long recession.

Lawmakers in Prague voted yesterday to shorten their term in office, a condition to trigger the snap ballot sought by the poll-leading Social Democrats. President Milos Zeman, who must formally dissolve the chamber, has said he’ll schedule the vote for Oct. 25-26 after approval of the motion.

An early ballot would end political turmoil that erupted after illegal-spying and graft charges toppled ex-Prime Minister Petr Necas’s pro-austerity government in June. Zeman snubbed Necas’s coalition by naming his own interim cabinet, which lost a parliamentary confidence vote this month, hindering the $196 billion economy’s pursuit of measures to aid recovery.

“The growing feeling of economic insecurity has become a major concern for voters seeking a bigger social safety net and pro-growth measures,” Otilia Dhand, an analyst at Teneo Intelligence, a London-based political risk evaluator, said by e-mail after the vote. “The preferences of the electorate have been gravitating toward the left of the political spectrum for quite some time.”

Bonds, Koruna

While Czech borrowing costs have risen since the start of the political crisis, those of regional peers Poland and Hungary have increased more, according to data compiled by Bloomberg. The yield on 10-year koruna bonds was 2.33 percent as of 9:28 a.m. in Prague, holding at 49 basis points, or 0.49 percentage point, below comparable U.S. Treasuries. The koruna was little changed at 25.784 against the euro.

The previous government focused on narrowing the budget gap by trimming investments and raising taxes. While undershooting 2011 and 2012 deficit targets helped cut borrowing costs, it frustrated the public and curbed private consumption, contributing to a 1 1/2-year slump, the central bank has said.

The economy exited its recession in the second quarter, when gross domestic product advanced 0.7 percent from the previous three months, preliminary data released last week showed. GDP will drop 0.4 percent this year, the International Monetary Fund predicts.

Purchasing Power

Czech GDP per capita in terms of purchasing power, a gauge of a country’s economic performance, declined to 79 percent of the European Union average in 2012 from 83 percent at the end of 2009, the year before Necas took office, according to Eurostat, the EU’s statistics bureau.

The Social Democrats will try to “undo the damage that occurred in the three years under the government of Petr Necas,” leader Bohuslav Sobotka told journalists after yesterday’s vote. “We’re hoping that people will decide in favor of changes that must take place after the years of right-wing rule.”

The party wants to support the economy through higher spending, while keeping the fiscal shortfall below the EU’s 3 percent of GDP limit, shadow Finance Minister Jan Mladek said Aug. 15. Mladek plans to boost state revenue by increasing taxes for higher earners and some businesses, including financial, energy and telecommunications companies.

No Alliance

The three parties that backed Necas’s previous administration had wanted a chance to form a new government before the confidence vote. Their alliance disintegrated during the session, prompting the TOP09 party to join the Social Democratic Party in its push for an early ballot.

The Social Democrats have increased their lead in opinion polls since Necas’s cabinet collapsed and had 34 percent support in a June 14-July 14 survey by Prague-based Median, more than the 22 percent the party got in the 2010 election.

The Communists were next with 18.5 percent in the survey of 1,377 people. TOP09 had 15 percent support, while Necas’s Civic Democrats had 13 percent, according to the poll, which was published July 24 and had a 1 percentage point margin of error for smaller parties and 3 percentage points for larger parties.

Zeman plans to meet leaders of parliamentary parties on Aug. 23 to discuss early elections, the CTK newswire reported, citing Vratislav Mynar, the head of president’s office.

The elections will probably bring fiscal loosening and a “reversal of some reforms” adopted by Necas’s government, according to Peter Attard Montalto, a London-based emerging-markets economist at Nomura International Plc.

“A wider deficit and additional spending could easily be supported by excess liquidity in the local banking system and would help boost growth -- both directly and via sentiment,” Montalto said yesterday by e-mail. “We’d worry about the reversal of reforms, however.”

To contact the reporters on this story: Peter Laca in Prague at placa@bloomberg.net; Michael Winfrey in Prague at mwinfrey@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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