* Czechs seen avoiding big budget risks despite poll turmoil
* Strong consensus towards fiscal prudence
* Budget fix may be delayed by months
By Michael Winfrey
PRAGUE, Sept 3 (Reuters) - A constitutional crisis in the
Czech Republic may delay efforts to control a ballooning state
budget deficit, but it also illustrates how confident investors
have become in the country's economic policy-making.
A Constitutional Court decision this week cast doubt on
whether an early general election will take place as scheduled
on Oct. 9-10. The polls were called to install a new government
with a stronger mandate to tackle the recession and the deficit.
But financial markets have barely moved in response to the
court decision, a sign that political uncertainty is not
seriously threatening the Czech Republic's reputation for
economic prudence.
"The overall consensus has been for small budget deficits, a
responsible attitude towards public debt, and don't take risks
with the economy," said Charles Robertson, ING head of research
and chief economist for emerging Europe in London.
The interim government, in charge since a centre-right
cabinet collapsed March, has warned of a Hungary-style meltdown
down the road if parties do not back steps to cut the deficit to
below an expected 7 percent of gross domestic product this year
and next. In 2008, the deficit was just 1.5 percent.
So far, the top two parties -- the right-of-centre Civic
Democrats and the leftist Social Democrats -- have ignored the
interim government's pleas. With an election looming, they are
averse to any public pledges of higher taxes or spending cuts.
A delay to the election as a result of the court decision
could prolong the stalemate over policy. Prime Minister Jan
Fischer warned on Thursday that it could force the country to
start 2010 with a provisional budget. []
In Hungary, an election-year budget gap reaching 11 percent
of GDP in 2006 produced a fiscal crisis that slashed economic
growth to around 1 percent the following year, when the rest of
the region was booming.
CONSENSUS
But the Czech Republic still looks likely to avoid such a
fate. Analysts point to a record of years of relatively
conservative economic policy this decade, regardless of who was
in power.
Although few states in ex-communist Europe are strangers to
political turmoil, the Czechs stand out for having lacked a
strong government since the late 1990s -- yet the country has
jumped closer to Western economic standards than its neighbours.
In the past 12 years, the only majority administration was
the 2002-2006 Social Democratic government, which had just 101
votes in the 200-seat house. The rest have all been cabinets
backed by minorities, deals with the opposition, or ad hoc
agreements with independent and rebel deputies in key votes.
Despite that, the country of 10.5 million is far ahead of
its eastern neighbours in terms of GDP per capita, coming in at
80 percent of the EU average versus 58 percent for the Poles.
Public debt is relatively low at 34 percent of GDP.
And a budget deficit of roughly 7 percent of GDP in 2009 and
2010 would still be comparable with neighbours Poland and
Slovakia, and much better than the double digits expected in
higher-rated countries such as Britain and the United States.
QUICK AGREEMENT
Pavel Mertlik, former Social Democratic finance minister and
now chief economist at Raiffeisen Bank in Prague, pointed to a
quick agreement by political parties on Wednesday to overcome
the election quandary.
President Vaclav Klaus, Prime Minister Fischer and the heads
of parliamentary parties agreed on Wednesday to form a working
group to prepare options for changing the constitution in order
to secure a quick election.
The crisis arose after an independent deputy challenged the
idea of an early election on the grounds that he had the right
to serve his full four-year term, which ends in mid-2010.
News agency CTK said the plan being prepared by the parties
could mean the election occurred in early November. Conceivably,
depending on how fast the court moves, it could still be held in
early October as originally scheduled. []
Mertlik said that despite a near-even split in support for
leftist and rightist parties, most Czech voters saw big budget
deficits as a threat, rather than as a way of obtaining more
benefits from the state.
"People don't really understand it, but they feel it is
something dangerous, so I think there is some public demand to
keep public finances under control," Mertlik said.
"I can imagine that a solution will be found with a certain
delay, a few weeks, months."
The financial markets are fairly confident that Mertlik will
be proved right.
The Czech crown <EURCZK=> edged up 0.4 percent with its
regional peers on Thursday, while government bonds were stronger
at the short end of the curve, with the two-year <CZ2YT=RR>
yield dropping around 17 basis points to 2.475/2.006 percent.
"Fortunately, the Czech Republic's macro situation and
public debt metrics were pretty healthy going into the downturn,
so there is some -- but not infinite -- latitude for delay in
implementing the planned budget restraint," said Dietmar
Hornung, vice president at credit rating agency Moody's.
Fischer said on Thursday that his government would continue
preparing the 2010 budget, along with the plans rejected by the
parties, to cut the deficit to 5 percent of GDP.
Some analysts think that if the election is delayed
considerably, until next year, that might actually be positive
for budget-cutting efforts -- parties might become willing to
reach an agreement on spending cuts soon and then blame them on
the interim government.
Either way, the main parties appear likely to end up working
to avoid a budget meltdown.
"I don't think they want to follow the Hungarian scenario,"
said Jaromir Sindel, analyst at Citigroup in Prague.
(Editing by Andrew Torchia)
