Czech Election Winner Feuds Before Talks With Billionaire

The Czech Social Democrats sank into internal bickering before talks to form a government as they stake a return to power on a billionaire-backed party that opposes their key policy plan to increase taxes.

The Social Democrats, who campaigned on pledges to raise state spending, took 20.5 percent of the votes in an unexpectedly close Oct. 25-26 ballot. ANO, a pro-business party founded by tycoon Andrej Babis two years ago, garnered 18.7 percent, followed by the Communists with 14.9 percent, the Statistics Office said.

Voters from Prague to Ostrava punished parties ensnared in corruption scandals as they joined an anti-austerity wave that has brought down leaders during Europe’s debt crisis. Disappointed in the vote outcome, the Social Democrats’ leadership last night called on Chairman Bohuslav Sobotka to resign and left him off the negotiating team for government talks with ANO and the Christian Democrats.

“It’s obvious that there’s a risk of deadlock, and the government won’t be able to do much,” Daniel Hewitt, an economist at Barclays Plc in London, said by phone yesterday. “They need to loosen fiscal policy, and it would be a shame if they had such deadlock that they couldn’t at least bring the deficit up to 3 percent of gross domestic product at this time when growth is not very strong.”

The deficit adjusted for one-time accounting operations was 2.5 percent of economic output last year. Jiri Rusnok, the current technocrat premier, sees the 2013 gap at less than the European Union’s limit of 3 percent of GDP.

Parliament Divided

The Social Democrats, the largest opposition party during the past seven years, won 50 mandates in the 200-seat parliament, followed by ANO with 47 and the Communists with 33. The Christian Democrats will have 14 deputies.

Three more parties will enter parliament, with the fragmented legislature compounding the Czech Republic’s history of political instability as it prepares to install the eighth prime minister in the past decade.

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 is the lowest in emerging Europe and has averaged 3.9 percent over the past decade, compared with 5.6 percent for Poland and 3.5 percent for higher-rated France.

Below Treasuries

The rate on 10-year koruna debt was unchanged at 2.34 percent today at 12:45 p.m. in Prague as Czech banks were closed for a public holiday. The yield was 17 basis points, or 0.17 percentage point, below comparable U.S. Treasuries, according to data compiled by Bloomberg.

The koruna weakened 0.1 percent to 25.736 per euro, paring last week’s 0.4 percent advance. It has gained 1.1 percent in the second half, the fourth-best performance among 31 major currencies tracked by Bloomberg.

President Milos Zeman has the right to name a party leader to try to form a cabinet. Zeman, a former chairman of the Social Democrats, said he would resign if he were in Sobotka’s place, according to an interview published yesterday on the website of the magazine Tyden.

Zeman won’t name the new premier before parliament meets for an inaugural session in the last week of November, the first directly elected Czech president said yesterday. Government talks may drag on for as long as three months, Zeman told the public broadcaster Czech Television.

Internal Rift

The Social Democrats succumbed to an internal rift as the party leadership called on Sobotka to resign because of the disappointing election result. Sobotka, the 42-year-old former finance minister, refused to step down, telling reporters in Prague the appeal was an “attack on the party’s unity.”

The Social Democrats plan to raise taxes on top earners and businesses including banks, utilities and telecommunication companies to finance spending increases on pensions and infrastructure. The party is targeting a budget deficit of less than 3 percent of economic output.

While ANO opposes tax increases, the party will consider “tolerating” a minority Social-Democrat-led government if there is enough policy overlap, Babis said in televised remarks. ANO’s newly elected members of parliament are expected to meet tomorrow to debate how to proceed, he said

The Christian Democrats campaigned for the introduction of constitutional limits to curtail state debt, a proposal rejected by the Social Democrats in the previous election term.

Coalition Doomed?

Differing economic plans will provoke tension among the potential three-member governing alliance, similar to the previous ruling coalition that disintegrated after quarreling over money and posts, according to Jan Outly, a political scientist at the Metropolitan University of Prague.

“I’m quite skeptical,” Outly said by phone yesterday. “So far nothing suggests that such a coalition would survive a full term. We will see bickering among the parties, rifts inside the Social Democrats, and there is also the factor of the unpredictable ANO.”

While the risk of political instability exists, cooperation between the Social Democrats and ANO may prevent a full reversal of the previous government’s austerity approach, according to Marek Drimal, an economist at Komercni Banka AS in Prague.

“The overall result may be slightly positive for market sentiment as the Social Democrats and Communists don’t control parliament the way opinion polls suggested,” he said by phone yesterday. “Any government will raise public spending, but with Babis now being a key player, the funds are more likely to go into things like transport infrastructure rather than social benefits.”

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