Flash Comment: Czech election results pave the way for further fiscal consolidation and reforms

• The outcome of the Czech general election was fairly surprising. Although the Social Democrats (CSSD) won, the party received far fewer votes than polling agencies forecast. Also, the margin of victory over the second placed Civic Democrats (ODS) was very tight. Consequently, there appears to be only a limited possibility of the Social Democrats forming a government.

• The election result suggests a centre-right government is very likely with the ODS and the other two parliamentary parties, the centre-right TOP09 and centrist Public Affairs, forming a coalition. All three parties have already begun coalition talks.

• The outcome of the elections is positive for Czech markets with a centre-right coalition likely to facilitate implementation of further fiscal austerity measures to tackle rising Czech public debt and the introduction of necessary pension and healthcare reforms.

Assessment and outlook

The result of the Czech general elections was surprising not just in terms of the decisiveness of the centre-right victory but also the weakness of public support for the traditional largest
parties. The Social Democrats, favourites ahead of the elections, failed to secure sufficient
votes to form a government. The centre-right Civic Democrats received the smallest number of
votes in its entire history. Conversely, new more moderate sized parties, i.e. the centre-right
TOP 09 and centrist Public Affairs, received more votes than expected, clearly demonstrating
popular dissatisfaction with the traditional large parties.

Although as election winners, the Social Democrats should be given the chance to form a government first, Czech President Vaclav Klaus will decide whether they will be given the opportunity to do so. However, even if they are afforded the chance, we do not believe the Social Democrats will be able to do so, being unable to attract coalition partners. It is therefore very likely that the second placed Civic Democrats together with two other parties, the centre-right Top 09 and centrist Public Affairs, will form a majority coalition comprising 118 of the 200-seat Czech parliament. Overall the result of the Czech elections is good news for local markets and the best possible outcome market participants could hope for with all three centre-right parties supporting fiscal austerity measures to tackle rising public debt. Furthermore, its strong parliamentary majority will help facilitate implementation of pension and healthcare reforms. We are overall bullish on both Czech FX and fixed income markets.