UPDATE 2-Czech govt agrees budget draft,euro entry threatened

(Adds further quote, background)

By Petra Vodstrcilova

PRAGUE, Sept 25 (Reuters) - The Czech government approved the 2007 draft central state budget on Monday with a proposed deficit of 91.3 billion crowns ($4.11 billion) that is likely to derail plans to adopt the euro currency in 2010.

Prime Minister Mirek Topolanek told a news conference after a government meeting that the draft sees expenditures of 1,058 billion crowns against revenues of 966.7 billion.

The gap includes an expected 31 billion crowns through the sale of part of the state's 68 percent stake in power producer CEZ <CEZPsp.PR>, though Topolanek said a decision was not taken on how to sell the shares. At current market prices, 6-7 percent of CEZ would need to be sold off to reach 31 billion crowns.

The government had been discussing a budget gap of 119 billion crowns.

But even with the lower shortfall, the overall public sector gap will be 4.0 percent of expected GDP in 2007, above the 3.3 percent target laid out in the euro convergence programme.

Many of the European Union's newcomers are finding it hard to meet the Maastricht Criteria needed to adopt the single currency, especially with regard to public deficits since painful reforms that even western governments are loathe to take are needed to trim social spending.

"It's very evident that if there will be a government without a mandate to take the necessary reform steps...we will never fulfil the Maastricht Criteria and adopt the euro," he said.

Topolanek's minority government emerged from a June election which saw parliament split completely down the middle.

His rightist Civic Democrats and centrist allies took 100 seats in the lower house, the exact same as the leftist Social Democrats and far-left Communists.

Even though Topolanek formed a government, he still lacks a parliamentary majority and will likely lose a confidence vote due by Oct. 4, making the fate of the budget in its current form unclear.

The opposition Social Democrats said earlier on Monday they are against the sale of the CEZ stake.

The rightist prime minister said the state's finances were in dissary after eight years of governing by the leftists, but that further cuts were not possible.

"We inherited a budget that was structurally bad and on the expenditure side had lines that were not realistic," he said.

"I believe the deficit at this moment is realistic and the least possible that we could given the situation."

Maastricht Criteria say a country's shortfall cannot be more than 3 percent of GDP. ((Reporting by Petra Vodstrcilova, Writing by Alan Crosby; prague.newsroom@reuters.com; Reuters Messaging: alan.crosby.reuters.com@reuters.net; +420 224 190 477; Editing by Ron Askew)) ($1=22.22 Czech Crown)

Keywords: ECONOMY CZECH BUDGET