By Martin Santa and Michael Winfrey
BRATISLAVA, June 13 (Reuters) - A group of four Slovak centre-right opposition parties began talks to create a ruling coalition on Sunday to replace leftist Prime Minister Robert Fico after they won a majority in a parliamentary election.
Slovakia has one of the lowest public debt burdens in the euro zone, at 35.7 percent of gross domestic product, but that is seen rising fast unless the next government reins in spending and revamps welfare.
The poorest euro area member needs to slash the fiscal deficit, implement new market and system reforms to cope with ageing population, jobless rate at 12.25 near its five-year high, crack down on corruption and boost law enforcement.
Two of the four parties that now look set to rule have also said they would refuse to pay Slovakia's 800-million-euro share of the EU bailout for Greece.
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The following are key political risks investors may face in the central European country of 5.4 million people:
COALITION SCENARIOS
A centre-right coalition:
- Seen as the most probable result, it would include Slovak Democratic and Christian Union (SDKU), Freedom and Solidarity (SaS), the Christian Democrats (KDH), and the ethnic Hungarian party Most-Hid, all centre-right parties.
- This cabinet would be seen as business-friendly in contrast to Fico's current cabinet, which has squeezed big companies and foreign investors in favour of worker protection, and more positive for public finances than Fico's coalition.
- The decision-making process might be difficult due to the number of parties and bickering in the past.
Similar coalitions ruled from 1998 until 2006, but frequent infighting led to defections by some ruling party deputies, and a departure by the Christian Democrats in 2006 toppled an SDKU-led government and led to early elections.
- May be better equipped to fight corruption although the main parties were accused of graft in previous governments.
Transparency International's corruption perception index showed Slovakia fell to 56th place in 2009, down from 52nd the previous year, the worst performance among its Central European neighbours Poland, Hungary and the Czech Republic.
PM Fico stays in power:
- Fico's left-wing SMER party won the most votes and 62 of parliament's 150 seats, but its ruling Slovak National Party partners won only nine seats and the centrist HZDS party did not cross the threshold to stay in parliament.
- President Ivan Gasparovic said he would tap Fico for a first chance to form a government, as is tradition.
Fico said on Sunday he wanted to create a two-party coalition and could potentially try to lure one of the four opposition parties over to his side with generous offers of ministries, but the four parties have all rejected cooperating with him and analysts say this scenario is very unlikely.
- It would not be welcomed by employers, who complain that Fico's government has caused a deterioration in business climate, accompanied by higher level of a perceived corruption.
FISCAL CONSOLIDATION
- Slovakia, a euro area member since 2009, has pledged to cut its fiscal deficit -- which jumped to 6.8 percent of gross domestic product last year -- to 5.5 percent this year and to the EU-prescribed level of 3 percent by 2012.
Economists say the centre-right majority makes this outcome more likely. SDKU has not outlined a specific consolidation plan but its potential ruling partner SaS has said it wants to balance the budget by 2014.
- The centre-right parties aim to cut the fiscal shortfall by cutting spending and reducing waste but have pledged not to change Slovakia's flat 19 percent income and corporate tax.
- Substantial changes of the state-run pay-as-you go pension system, taxes, and adjusting social and healthcare transfer systems needed to prevent the fiscal gap from jumping to 7.4 percent/GDP this year, a study of analysts has shown.
- Slovakia's economy seen as the fastest growing in the EU in 2010, but growth is mainly export-driven and many of the companies are foreign owned, so they bring in little budget revenue.
GREECE LOAN
- With living standards at just 72 percent of the EU average, a majority of Slovaks disagree with contributing to bailouts for richer euro zone states such as Greece, polls show.
- SDKU and SaS have threatened to refuse to pay Bratislava's 800 million euro contribution to Athens' 110 billion euro bailout agreed by EU states, although some analysts say diplomacy may prevail and the Slovaks could back down.
- While a Slovak rejection could not stop the bailout, which has already won parliamentary support from euro zone stalwarts France and Germany, a refusal would hurt solidarity in the bloc and could have negative implications for any need for future cooperation in case another member needs aid.
SLOVAK-HUNGARY RELATIONS
- The two nations have had rocky relations for centuries.
- There was hope that both countries' EU entry in 2004 would smooth relations, but instead they have eroded to the point that analysts feared violence could erupt.
- The election result is expected to ease tensions. The Nationalist Party has no chance to stay in power and the next cabinet looks set to include Most-Hid, a party that represents many people in Slovakia's 10 percent Hungarian minority.