Czechs Vote as Social Democrats Vow to Reverse Austerity

Photographer: Michal Cizek/AFP via Getty Images

People walk past an election campaign banner of the Social Democrats party in front of the Prague castle in Prague. Close

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Photographer: Michal Cizek/AFP via Getty Images

People walk past an election campaign banner of the Social Democrats party in front of the Prague castle in Prague.

The Czechs began voting in a snap election that may pave the way for a reversal of austerity policies that fueled the nation’s longest-ever recession.

The Social Democrats, who are advocating more spending, are leading all surveys with about 26 percent support, followed by the Communists and ANO, founded by self-made billionaire Andrej Babis. Polling stations across the central European country of 10.5 million opened at 2 p.m. and will close at 10 p.m. today. Voting will resume at 8 a.m. tomorrow and end at 2 p.m.

The Czechs may join an anti-austerity wave that swept away governments from Portugal to Finland and toppled established parties during Europe’s sovereign-debt crisis. Voters may also hand the Social Democrats a fragmented legislature, with a record seven parties set to enter parliament, threatening to prolong political gridlock that followed the fall of former Prime Minister Petr Necas in a spying and graft scandal in June.

“This election is unlikely to be conclusive and policy implications may not be clear for many months to come,” Charles Robertson, global chief economist at Renaissance Capital in London, said in an e-mailed report yesterday. The Czech Republic “is more likely to shift toward tax and spend policies.”

Zeman Spotlight

The vote will bring President Milos Zeman back into the spotlight, giving him the right to name the leader who will try to form a cabinet with majority backing in parliament. If the first pick fails to win a confidence vote, Zeman will have another attempt, with the head of parliament making the third selection.

In June, Zeman roiled political parties by snubbing lawmakers and picking non-partisan Jiri Rusnok as the technocrat prime minister. While Rusnok’s cabinet failed in a confidence vote, it’s staying in power in a caretaker role until a new administration is formed after the elections.

Zeman would favor a cabinet formed by the winning party even if the administration lacked a parliamentary majority, he said Sept. 1. Such a government would approve laws based on agreement with other parties in parliament, Zeman said.

The Social Democrats are considering forming a single-party cabinet, possibly backed by the Communists. The main opposition party in the past seven years, led by Bohuslav Sobotka, plans to raise taxes on top earners and businesses including banks, utilities and telecommunication companies to finance spending increases on pensioners and infrastructure. It’s targeting a budget deficit of less than 3 percent of economic output.

Inconclusive Vote

Necas credited deficit reductions with helping to secure the highest credit rating among the EU’s post-communist members at Moody’s Investors Service and Standard & Poor’s, on par with Estonia, which adopted the euro in 2011.

The cuts in state investment and increases in the value-added tax curbed domestic demand and exacerbated 18 months of economic recession the country exited in the second quarter.

The Czech Republic, which has a history of unstable governments, is preparing to elect its eighth premier in a decade, more than Italy or any other EU country in the period.

Elections in 2006 resulted in a hung parliament, leading to months of wrangling before Mirek Topolanek’s cabinet was approved. It collapsed three years later in the midst of the country’s EU presidency.

Investors have ignored the political track record as the Czech economy doubled in size from 2003 to $196 billion, according to World Bank data. The yield on the country’s 10-year government bond has averaged 3.9 percent over the past decade, compared with 5.6 percent for Poland and 3.5 percent for higher-rated France. (GFRN10)

Currency, Bonds

The yield on 10-year koruna debt was little changed at 2.33 percent today, holding 19 basis points, 0.19 percentage points, below comparable U.S. Treasuries, according to data compiled by Bloomberg.

“The koruna and Czech government bonds will be probably in a wait-and-see position, because there’re quite a few possible post-election scenarios,” Jan Cermak, an analyst at CSOB AS, the Prague-based KBC Groep NV (KBC)’s unit, said in an Oct. 21 e-mail.

Apart from the austerity fatigue, polls showed niche parties with names such as Head Held High and Dawn are tapping into anger over Czech graft, which Transparency International ranks as the worst among the largest ex-communist EU economies. Parties campaigning against corruption, which also include ANO, or YES, are backed by a quarter of the electorate, according to the latest polls.

“The larger the number of parties represented in parliament and the broader the governing coalition, the less likely it will be to serve its term in office,” Tsveta Petrova, an analyst at New York-based Eurasia Group, said by e-mail.

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

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

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