| Milos Zeman | ||||||
What is it about Central Europe’s conservatives that leaves markets so unmoved? Barely a month after investors cheered the demise of Hungary’s nationalist coalition, a rout of the right in the Czech Republic saw the koruna make big gains against the euro.
While the junior half of the country’s now defunct “opposition agreement” was always freer with free-market talk than deeds, the triumphant Social Democrats have made little secret of their desire to build an EU-style (ruinously expensive and rigid) welfare state. Even worse, the new Social Democratic-led coalition will likely go into government with a majority of precisely one, facing cut-throat opposition composed of anti-EU nationalists and barely reconstructed Communists.
“The most important aspect of the election results is that the new government will be quite fragile,” says Jan Schiesser, an analyst at brokerage Atlantik Financni Trhy. “From this perspective the results don’t promise enough long-term political stability.”
But instead of flinching from the impending 101-99 deadlock, the forex market’s response to the election was to send the already buoyant koruna past the psychologically key Kc30 level.
“It’s a mystery – there are no known factors behind this move – no FDI, no privatizations, no new liquidity,” says Pavel Sobisek, chief economist at HVB Czech Republic.
Despite criticism that the left-right compact of the past four years fostered corruption and apathy, the outgoing government of Milos Zeman led the Czech economy through its dark days of transition, restructuring and selling off the largest state banks and making the country the regional FDI champion. After a period of disputes, the Czech National Bank is going about its inflation-targeting business, sitting on a reserves hoard of $20 billion, twice that of Hungary.
Perhaps because of all this good news, the government has become increasingly confident. It recently told two potential suitors to up their bids for Cesky Telekom by at least 10% and is considering an unorthodox remerge and sell option for the country’s electricity generation and distribution companies. Shares in Cesky Telekom and electricity giant CEZ made gains following the poll result, reflecting a wide belief that progress will be made on the sales, if not instantly.
Less understandable is the carefree response of players in the fixed-income market to the leftist impulses of the incoming premier, Vladimir Spidla. After the election Spidla rubbished proposals to radically reform the country’s pension system, and said adherence to the Maastricht fiscal deficit limits could wait until 2007.
“The market does not fully reflect the danger for fiscal instability,” says Sobisek of HVB. “This is clearly bad news for long-term fixed-income yields.”
Schiesser agrees: “The market should look to 2007 and 2008, but it doesn’t.”
Sobisek says one explanation for the narrowness of spreads is the lack of alternatives for domestic investors. Also investors are waiting to see the outlines of the 2003 budget. Sobisek says: “The reaction will only come then, when it becomes clear that they will not push for fiscal consolidation.”
