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Czechs Vote as Stalemate May Hinder Spending Cuts

Czechs are voting in elections as polls showed the balloting may produce another government lacking the strength to cut spending after the budget deficit more than doubled as a percentage of economic output last year.

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 across the country opened at 2 p.m. today and close at 10 p.m. They re-open tomorrow at 8 a.m. 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.

“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.”

Koruna Drop

The koruna headed for its biggest weekly drop in more than five months, losing the most among 177 global currencies tracked by Bloomberg today. The koruna fell as much as 1 percent against the euro and traded down 0.9 percent at 25.841 as of 5:17 p.m. in Prague. The koruna 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.

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 gap widened to 5.9 percent of gross domestic product last year, compared with the EU limit of 3 percent, as the country experienced its deepest recession since the end of communism 20 years ago.

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.

Mixed Polls

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.

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.

‘More Risky’

“This year’s elections are more risky, because new players who may change the situation have emerged,” President Vaclav Klaus, who has the sole right to name the future prime minister and the Cabinet, said after casting his vote in Prague.

The koruna will likely drop to 26.20 per euro by the end of June because of concern that “it will be difficult to form a coalition with sufficient majority to implement budget cuts,” BNP Paribas SA, France’s largest bank, said. Societe Generale SA’s forecast is for the koruna to decline 0.7 percent to 25.80 per euro in the same period.

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. 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.

“We will start economic growth by giving business to companies and jobs to people, by starting to draw billions from European funds and resuming incentives for investors,” Social Democrat leader Jiri Paroubek, 57, said yesterday.

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, referring to Hungary and Greece, which needed international bailouts.

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