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Zeman Defies Critics With Cabinet Picks as Showdown Looms

Czech Republic's Jiri Rusnok & Milos Zeman
Czech Republic's President Milos Zeman, right, gestures next to newly appointed interim Czech Prime Minister Jiri Rusnok at Prague Castle on June 25, 2013. Photographer: Michal Cizek/AFP/Getty Images

Czech President Milos Zeman named an interim government, asking it to face down threats from lawmakers to block the cabinet’s legislation and budget plans amid a record-long recession.

Zeman announced the new cabinet, which includes Jan Fischer as finance minister, today at the Prague Castle, the seat of the Czech presidency. The three parties that made up the previous ruling coalition oppose his pick for premier, technocrat Jiri Rusnok, saying they still command a majority in parliament.

“Do not get discouraged by media criticism from the envious chumps who never accomplished anything real in their lives,” Zeman said. “I want to thank all members of this government for the courage with which they entered this cabinet. There is a lack of courage in Czech politics.”

Zeman, the Czech Republic’s first directly elected head of state, picked economist Rusnok to replace Prime Minister Petr Necas, who resigned last month amid a spying and bribery scandal. His move snubbed the three-party coalition that had backed Necas and wants to stay in power to avoid early elections. It plans to challenge Rusnok in a confidence vote and block his proposals for fiscal stimulus including infrastructure spending.

“Maneuvering room with this year’s budget isn’t large,” Pavel Sobisek, chief economist at UniCredit Bank Czech Republic, said yesterday by phone. “Assuming this government loses the confidence vote, any initiative in parliament will face an impenetrable wall.”

Record Slump

The political turmoil risks snarling policy debates and extending the country’s longest recession on record, with the poll-leading Social Democrats demanding early elections. Rusnok’s government must survive a confidence motion in the lower house of parliament to be held within his first 30 days in charge.

“The fundamental priority is to reverse the trend from the past several quarters, when the performance of the Czech economy resembled a walk downstairs, to revive growth,” Fischer told reporters in Prague today. “Fiscal policy must be pro-active in this matter. The state must primarily save on its own operations. I’m prepared to boost funds going to infrastructure, to research, universities.”

Rusnok said he won’t seek to change the 2013 budget parameters, and will try to use more funds from the EU or money from state companies lying idle in bank accounts for pro-growth spending.

Bond Yield

The yield on 10-year government koruna debt, which reached an all-time low 1.48 percent on May 17, fell 6 basis points, or 0.06 percentage point, to 2.136 percent today, holding 54 basis points below comparable U.S. Treasuries, according to data compiled by Bloomberg.

Borrowing costs plunged under Necas, who in his three years in power focused on narrowing the budget deficit by cutting investment and raising taxes. Those policies also damped household spending and fueled six consecutive quarters of economic contraction through March, the central bank has said.

The Civic Democrats, the strongest party in the previous administration, urged Rusnok to ask for a confidence vote as early as possible after his Cabinet is named.

“Knowing that his government can’t push through the state budget law, any delay of the confidence motion would endanger the Czech economy and mean a risk of a provisional budget,” the party said in a statement on June 27.

Snap Election

The former pro-austerity coalition is trying to prevent the early ballot demanded by Social Democrats, who’ve pledged higher taxes and spending to pull the $217 billion economy out of its recession.

Rusnok chose Fischer as finance minister to help invigorate the economy. The 62-year-old, who studied statistics and econometrics at Prague’s University of Economics, led a temporary Cabinet for a year before the 2010 elections, during which time the country suffered its deepest economic contraction.

If Rusnok’s government fails to win a simple majority in the confidence vote, it would stay in office on a caretaker basis and Zeman has no constitutional deadline to name a replacement before the next scheduled elections in May 2014.

Spending Levels

While that would allow it to draft a budget for next year, its proposals would probably be opposed by lawmakers from the former coalition, limiting non-mandatory spending at 2013 levels, according to UniCredit’s Sobisek.

The Czech Republic has a history of political instability, notching up seven prime ministers in the past decade, more than any other European Union nation.

Finance Minister Fischer experienced the limitations of an interim government’s mandate in 2009, when lawmakers pushed through changes to his draft budget that widened the deficit against his will.

His ability to shape the state budget may be restrained again, according to Jan Vejmelek, chief economist at Komercni Banka AS in Prague.

“Revenue and expenditure frameworks are pretty set and the political representation wouldn’t allow a caretaker minister to push through any major changes,” Vejmelek said July 8.

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