* Public finance may worsen dramatically in several years
* Fiscal revamp needed to avoid mid-term trouble
By Jana Mlcochova and Robert Mueller
PRAGUE, July 21 (Reuters) - The Czech Republic must revamp
its public finances to avoid a dramatic erosion in several years
which may lead to a crisis already seen in some other central
and east European countries, central bank Vice-Governor Miroslav
Singer said on Tuesday.
The Czech Republic has experienced a deep economic downturn
due to a collapse of demand in export markets, which has sharply
raised the budget deficit to an expected nearly 5 percent of
gross domestic product this year.
The country remains one of the best credits in the region,
with credit default swaps at 105 basis points, compared with 321
for Hungary. Agency Fitch rates the Czech Republic at A+,
Moody's at A1 and Standard and Poors at A.
But Singer warned that action was needed now to steer the
public sector finances, burdened by growing non-discretionary
spending, in the future.
"Considering the horizon of public finances, which is
several years, we really face the threat that they will start
developing dramatically worse than now," Singer told Reuters in
an interview.
"On an ocean ship, there is no point in asking where it will
be the next minute, the position in the next minute was
determined long ago. It is worth discussing where it will be in
an hour," he said.
Several countries in the region, such as Hungary, have been
forced to take out an IMF-led bailout package and deep cuts in
spending after falling deep into debt.
"If we do not do something about it within some mid-term
horizon, we could in the next crisis get into the position of
those who have no room today and must accept very dramatic
measures, which further deepen the crisis," Singer told Reuters
in an interview.
"Their people are almost getting out on the streets, I would
not like to see that day."
The Czech government debt stands at 29.8 percent of gross
domestic product but it will jump fast this year and the next
due to the combination of high deficits, growing costs of debt
and falling GDP, and is expected to hit 34 percent in 2009.
The central bank has raised its warning over the fiscal
policy in the past weeks.
The country will hold parliamentary elections on Oct 9-10,
and the mainstream political parties have so far not come up
with plans to narrow the budget gap.
The leftist Social Democrats have proposed a tax hike for
top earners but that would be more than offset by a hike in
benefits.
The interim government in charge until the election has no
time to present any fiscal revamp, but it has called for a
change in the budget structure.
Spending on pensions, welfare and other costs mandated by
law have grown to about 80 percent of the budget, and will keep
rising without a restructuring.
Finance Minister Eduard Janota said budget gaps have made
discussion about adoption of the euro currency irrelevant for
now.
The country has no euro entry target but the government does
not see adoption possible until the second half of the next
decade.
(Editing by Stephen Nisbet)
