Czech Gridlock Looms as Parties Gear Up for Cabinet Talks

Czech parties are preparing for talks to form a ninth government in 10 years as a leadership fight within the election-winning Social Democrats complicates the search for partners.

Social Democrat Chairman Bohuslav Sobotka is at risk from what he called a “coup” to topple him after the party garnered the country’s lowest-ever tally for first place. Runner-up ANO, founded by billionaire Andrej Babis, meets tomorrow to set terms for negotiations after last week’s ballot.

Voters punished traditional parties following graft scandals and a government austerity drive and elected a record seven parties into a fragmented parliament. Pro-business ANO opposes plans to increase taxes after a record-long recession, raising the chances of protracted talks, said Otilia Dhand, an analyst at political risk evaluator Teneo Intelligence.

“The Social Democrats would have a difficult time aligning their tax policy priorities with ANO,” she said yesterday by phone from London. “The unclear situation within the Social Democrat party also means that potential partners don’t really know who has the actual mandate to negotiate with them.”

The Social Democrats, the largest opposition party in the last seven years, will have 50 of parliament’s 200 seats, followed by ANO with 47 and the Communists with 33. The Christian Democrats will have 14 deputies.

Volatile Past

The fragmented legislature is compounding a history of political instability that’s brought 12 governments since Czech independence 20 years ago. Investors have ignored the political track record as the economy doubled in size from 2003 to $196 billion, according to World Bank data.

The yield on the country’s 10-year government debt has averaged 3.8 percent over the past decade, compared with 5.6 percent for Poland and 3.5 percent for higher-rated France.

Yields on 10-year koruna bonds, the lowest in emerging Europe, fell 3 basis points, or 0.03 percentage point, to 2.31 percent as of 4:28 p.m. in Prague, 21 basis points, below comparable U.S. Treasuries, data compiled by Bloomberg show. The koruna slipped 0.2 percent to 25.752 per euro.

The Social Democrats, who pledged to re-ignite economic growth with more state spending, succumbed to an internal rift one day after the election. The party leadership called on Sobotka to resign because of disappointing results and left the party’s nominee for the prime minister off the team for government talks.

Sobotka’s Defiance

Sobotka, a 42-year-old former finance minister, refused to step down and said he’ll lead his own talks with Babis and Christian Democrat leader Pavel Belobradek.

“The Christian Democrats and ANO are the partners with whom we should be negotiating the next government,” Sobotka said yesterday in an interview during a rally organized by his supporters in front of the Prague castle. “This schizophrenia must end.”

The party’s split will be resolved Nov. 10 at the latest during a meeting of its higher executive council, which has the power to dismiss the chairman, Sobotka said in televised comments today.

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’s higher executive council, which has the power to dismiss chairman, will meet Nov. 10 to debate the split, Sobotka said in televised comments today.

ANO’s Tolerance

While ANO isn’t planning to enter government, the party will consider “tolerating” a minority cabinet led by Social Democrats if there’s enough policy overlap, according to Slovak-born Babis.

“We will be united and we will insist on fulfillment of our program,” Babis, the second-richest Czech with a fortune estimated by Forbes at $2 billion, said in a statement yesterday.

The Christian Democrats, who return to parliament after failing to gain representation in 2010 elections, campaigned for the introduction of constitutional limits to curtail state debt, a proposal the Social Democrats have rejected in the past. The Christian Democrats are waiting for the election winners to resolve their internal rift.

“The situation within the Social Democrats is completely unclear at the moment,” said Daniel Herman, the Christian Democrats’ spokesman.

Zeman’s Pick

President Milos Zeman, a former chairman of the Social Democrats, has the right to name a party leader to try to form a cabinet. He said Oct. 27 that he won’t name the new premier before parliament meets for an inaugural session in the last week of November.

The election result has created an uncertainty over the formation of the new government that may hinder loosening fiscal policy after years of austerity, according to Mohammed Kazmi, an emerging-markets strategist at Royal Bank of Scotland Group Plc. in London.

“Significant delays herein, or a failed confidence vote following the prime minister’s appointment, suggest that the 2014 budget may not be approved in time for the start of next year,” Kazmi said by e-mail yesterday.

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