* Strong centre-right cabinet best outcome for markets
* Crown to recoup pre-vote losses
* Still some risk of bickering among centre-right parties
* For other election stories, click on []
By Jason Hovet
PRAGUE, May 30 (Reuters) - Czech markets looked set for a
post-election rally starting on Monday after a decisive victory
for centre-right parties seen as having the best shot at forming
an austerity-minded government.
The outcome was the one markets had most hoped for and
almost eliminates fears of a stalemate that could have led to
drawn-out coalition talks and delay plans on next year's budget.
The crown fell 0.8 percent when the polls opened on Friday
due to fear over the vote in a country that has not had a stable
cabinet this decade, causing it to lag neighbours in reform.
With the strong centre-right victory, RBC Capital Markets
strategist Nigel Rendell said the crown could quickly recoup
those losses on Monday and double its gains throughout the week.
"Over the course of the week it could be one of the
best-performing currencies in emerging markets without a shadow
of a doubt," he said.
"I would imagine most people will want to buy as soon as
they get to their desks Monday morning."
The three centre-right parties, which led by the Civic
Democrats won 118 seats out of 200, have promised fiscal
austerity measures to avoid falling into what the say is a
Greek-style debt trap.
Civic Democrat leader Petr Necas said on Sunday he aimed to
cut the 2011 budget deficit to 4.0 to 4.5 percent next year from
this year's 5.3 percent, more than the outgoing government's
plan of 4.8 percent.
Analysts say cuts are needed but could prove to be a drag on
domestic demand in the country of 10.5 million.
"These elections suggest decisive action on the budget and
pension reform. They should significantly ease market concern
over any vulnerabilities," said RBS strategist Timothy Ash.
"That said, the Czech economy has been badly impacted by the
global crisis ... The prospect of fiscal austerity will further
slow the recovery."
This, he said, may lead to lower interest rates even after a
surprise cut to an all-time low of 0.75 percent on May 6.
Interest rate swaps dropped around 40 basis points since then
and only started to rise again last week.
The crown is often seen as safer haven than the more
volatile Hungarian forint or Polish zloty and it has led gainers
in the region with a 1.8 percent rise so far this year
But it is 3.8 percent off an April 15 high this year of
25.015 against the euro as Europe's debt crisis sours investor
appetite. The Prague stock market lost 11 percent this month.
Analysts said shares in 69.8 percent state-owned CEZ
<> may drop as some investors had expected a higher
dividend payment because of left campaign pledges to use the
power group's record profits to fund a bonus pension payment.
The centre-right's tight fiscal pledges, though, can support
long-end bond yields. But the outlook was still for higher
yields in the last half of the year when the country must raise
about 70 percent of its gross borrowing needs, analysts said.
The yield on the benchmark 2019 bond <CZ1002471=> has risen
40 basis points since mid-April, widening the spread over
benchmark German bonds to 150 basis points.
Two new political parties, TOP09 and Public Affairs, would
be in the coalition now in the works and a risk remains fighting
between the parties could paralyse policy.
RBC's Rendel said that as long as they come up with credible
budget cuts, markets will be happy.
"Hopefully they'll consider the greater good of the country
and put fiscal differences to one side and concentrate on
sorting out the economics and the budget," he said.
"That's what markets will hope for."
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For a Take a Look on the Czech Parliamentary Elections,
click on: []
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(Editing by Hans Peters)
