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Markets wary as Czech rightist looks for partners

Written by: Staff

PRAGUE, June 5 (Reuters) Czech conservative leader Mirek Topolanek takes his first steps toward trying to form a centre-right government today following an inconclusive election that is likely to unsettle financial markets.

Topolanek's opposition Civic Democrats won the biggest share of the June 2-3 vote but not a majority in the first election since the ex-communist nation joined the European Union in 2004.

The party and its two smaller potential centrist allies, the Greens and Christian Democrats, will hold 100 seats in the 200-member lower house -- the same as the ruling Social Democrats and the far-left Communists.

The deadlock may take weeks to resolve and is likely to produce a weak government, unless the two main parties can forge a ''grand coalition'' -- an unlikely outcome given the acrimony between Topolanek and Social Democrat Prime Minister Jiri Paroubek.

''The stalemate could lead to standstill in fiscal and other economic policies, and raise the risk of a euro adoption delay.

Tax and pension reforms will likely be postponed until at least 2008,'' said Lars Christensen of Danske Bank.

Topolanek, a former businessman who campaigned on a promise to cut taxes and implement fiscal reforms, said he would start negotiations with an open mind. He is scheduled to meet with President Vaclav Klaus on Monday to discuss the situation.

But his options will be limited since he -- along with other centre-right leaders -- have long ruled out any negotiations with the little-reformed Communists.

''I think we will be able to propose a government that will produce a programme and it will ask the lower house of parliament for approval,'' he said. ''We will negotiate with the Christian Democrats and the Green Party.'' Paroubek, whose party came second on a platform of higher social spending, said he would propose his party go into opposition, and will wait to see the centre-right government's agenda. But he bluntly warned the three parties that any administration would be on a tight leash.

''I would like to tell the (parties), if they haven't realised it so far, they will not even be able to wash their hands without the opposition,'' he said. ''We will not allow for any reforms which would draw blood from the people.'' Record economic growth of 6 percent annually, low inflation and public debt, as well as a healthy trade surplus have shielded Czech asset prices from repeated emerging markets sell-offs and domestic political turbulence.

But investors had hoped a centre-right government ready to push ahead with an overhaul of taxes, pensions and health care to cap a rise in welfare and other state spending would emerge from the vote and their distaste for the election outcome is likely to be seen in the early hours of trading.

Reuters PDS VP0433

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