Another threat for Czech economy has emerged on the horizon. Economists say the October elections and a potential election stalemate are among the main risks.
Politicians’ inability to form a government could scare foreign investors into selling their Czech crowns.
A subsequent fall in the crown’s value could lead to an increase in interest rates for state bonds which, in the worst-case scenario, lead the state into a debt trap.
“In the past, the political problems affected the crown rate only slightly and briefly, but now we see the risk as very serious,” said Pavel Mertlík, Raiffeisenbank’s chief economist.
“If the formation of new government will be as difficult as last time, it might be difficult to reach an agreement on the budget and that would get us into a budget stopgap. This is what we perceive as the fundamental risk for the currency rate development, and through that a number of other problems can come up,” the former finance minister said.
Bankers’ worries
The biggest effect the crisis has had on the Czech Republic so far is the necessity to finance the CZK 200 billion budget deficit. There has been no trouble as yet with the sale of state bonds.
“We have banks with a sufficient level of liquidity here that will be happy to buy any issue because state is a solvent partner and the revenues are high,” Mertlík said.
Complications are likely to appear if trust in Czech state falters after the announcement of a budget stopgap.
If there is no interest in the bonds, the country will fall end up like Latvia, Lithuania, Hungary and Romania and need to ask the EU and IMF for help.
The new government does not have an option to avoid the budget stopgap, however. Since the elections take place in the second October week, it is impossible to approve a new budget this year.
The first post-election meeting of parliament is planned for 3 November. This is the earliest talks on the budget can begin. If all the legal dates are observed, it might be endorsed in early January at the soonest.
On its own, this does not necessarily mean catastrophe. “If it is clear on 15 November that the budget will be approved sometime around 15 January, then a couple of weeks of a stopgap don’t matter,” Mertlík said.
