Czech Graft Anger Aiding Niche Parties Threatens Revival

When Milan Kastil was asked for a bribe to avoid a 250,000 koruna ($13,000) fine that threatened to ruin his Prague restaurant, he worked with Czech police to have the corrupt officials arrested in a sting operation.

“The fine was unjustified and paying bribes is against all my principles, so I had to report them,” Kastil, 38, said in an interview. Elections this week “present a very hard choice. The only option I see is to vote for a new party that hasn’t been tainted by corruption.”

Niche parties with names such as Head Held High and Dawn are tapping into anger over corruption, which Transparency International ranks the worst among the richest ex-communist European Union states, after Prime Minister Petr Necas was sunk by a spying and graft scandal. Polls show a record seven parties may enter parliament, with a fragmented legislature threatening to hinder recovery from the nation’s longest-ever recession.

“There’s the possibility of a stalemate,” Vaclav France, an analyst at Raiffeisenbank in Prague, said yesterday by phone. “It may be very difficult to create a stable government. Protracted post-election negotiations, and the related uncertainty over future government policies would probably be the worst outcome for the market.”

Billionaire’s Party

Niche parties that have campaigned against graft, which also include ANO, or YES, and Dawn, are backed by a quarter of the electorate, according to the latest polls. ANO, founded by self-made billionaire Andrej Babis, who’s labeled rivals inept liars out for personal gain, is as high as second place.

Ninety-four percent of Czechs perceive corruption as widespread throughout government, the worst result among countries with a free press, according to a Gallup survey published Oct. 18.

The nation ranked 54th in Transparency International’s 2012 Corruption Perception Index, the lowest among the European Union’s three largest post-communist economies. The country was one place below Bahrain and two below the Seychelles and Georgia. It was tied with Latvia, Malaysia and Turkey.

Fraud in public contracts is about 100 billion koruna a year, the size of the Czech budget deficit, according to Karel Janecek, who co-owns Prague-based algorithmic trader RSJ AS and who’s set up an anti-corruption foundation.

Wine Box

The graft scandal that toppled Necas, in which three of his former lawmakers were charged for swapping their seats for jobs at state companies, “underlines the magnitude of the problem,” Gallup said in a statement. Those detained had parliamentary immunity and escaped prosecution.

Opposition politicians have also become embroiled in graft scandals. Police arrested then-Social Democrat lawmaker David Rath last year in possession of a wine box filled with 7 million koruna of banknotes that prosecutors said was bribes from public projects. Rath, who now faces a trial for corruption, has denied knowledge of the money and wrongdoing.

With trust in government, parliament and political parties at historical lows, non-parliamentary political parties and movements have a substantial chance to get elected, according to Jan Herzmann, a statistician who analyzes opinion polls.

“People want to see the state defending their interests, they don’t want it to be just a front for transferring public money into private hands,” he said Oct. 3 by phone.

Volatile History

The Czech Republic has a history of unstable governments and will usher in an eighth premier in a decade after the Oct. 25-26 vote, more than Italy or any other EU country in the last decade. 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.

At the same time, investors have ignored the country’s political track record as the economy doubled in size from 2003. The yield on the country’s 10-year government bond has averaged 3.9 percent over the past decade, compared with 5.7 percent for Poland and 3.5 percent for higher-rated France. The Czech 10-year yield was at 2.38 percent today, 11 basis points, or 0.11 percentage points, below comparable U.S. Treasuries.

While polls suggest three niche movements may cross the 5 percent threshold for entering parliament, a traditional party retains the upper hand as voters seek policies to revive an economy that shrank for six quarters through the end of March.

‘Relatively Stable’

The Social Democrats, the main opposition party during the last seven years, are poised to win the elections with as much as 26 percent support, most polls show. It’s considering forming a single-party government that may be backed by the Communist Party in parliament.

“Despite some changes in ratings, our baseline scenario remains a center-left minority coalition government supported by the Communist Party,” Otilia Dhand, an analyst at London-based Teneo Intelligence, said Oct. 10 by e-mail. Such an option “could in fact be a relatively stable arrangement.”

That hasn’t deterred Babis, who vows to battle the “stealing and lying” that’s become ingrained in Czech politics with his ANO party enjoying 16 percent support.

In Prague, those promises have resonated with Kastil, who plans to vote for the tycoon, the country’s second-richest person with a fortune Forbes estimates at $2 billion.

“I can’t give my vote to any of the existing parties because they already had their chance to stop graft,” Kastil said. “They missed it and nothing happened.”

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