* Agreement removes key hurdle in coalition talks
* Leading Civic Democrats give up key ministerial posts
* Kalousek to resume FinMin post after a year break
(Adds quotes, background, analyst comments)
By Robert Mueller and Jana Mlcochova
PRAGUE, June 30 (Reuters) - Czech parties building a
centre-right government agreed on the division of ministries on
Wednesday, clearing a major hurdle in a drive to form a cabinet
able to cut the budget deficit and revamp the public sector.
The three parties won an unusually large majority in an
election last month, giving them a mandate for fiscal austerity
and allowing the formation of the strongest cabinet the former
communist country has had since the early 1990s.
The central European EU member has relatively low debt and
has avoided funding problems in the financial crisis. But the
economy suffered from a sharp drop in west European demand and
the government must rework its fiscal framework to stem a sharp
rise in borrowing.
Prime Minister Petr Necas's Civic Democrats (ODS), the
strongest rightist party, took 6 of the 15 cabinet positions
including defence and industry.
But they gave the finance, labour and social affairs,
health, foreign and interior ministries to their coalition
partners, the conservative TOP09 and centrist Public Affairs.
Miroslav Kalousek, vice-chairman of TOP09, will return to
the finance ministry, which he ran from 2007 to 2009 in a
centre-right cabinet that collapsed last year.
"We are aware as a party that budget responsibility is the
biggest priority," said TOP09 leader Karel Schwarzenberg, a
popular pipe-smoking 73-year old aristocrat who will return to
the foreign ministry. The party got five cabinet seats.
Kalousek, an advocate of fiscal austerity and opponent of
tax hikes, cut the budget deficit to 0.7 percent of gross
domestic product in 2007 but was slow to respond when the
economy fell into recession, allowing sharp deficit growth.
Economists have said it was appropriate to allow a bigger
budget gap to counterbalance the drop in output.
KEEP EYE ON PARTNERS
Public Affairs leader Radek John got the interior ministry,
which his party had demanded to showcase its agenda of fighting
chronic corruption. The novice party will also hold the
transport, education and regional development portfolios.
Necas said he would take charge of leading reforms to keep
an eye on the coalition partners, especially TOP09, which has
challenged ODS for dominance on the political right.
"It will be the task for the prime minister, who will
personally coordinate and direct the decisive reform steps,"
Necas told reporters.
Market watchers said the cabinet line-up promised sensible
policies and should strengthen the Czechs' long-held safe-haven
investment status.
"This only boosts the Czech Republic's position as a
low-risk emerging market," said Miroslav Plojhar, an EMEA
economist at JP Morgan.
The Czech crown <EURCZK=>, which has remained flat since the
May 29 vote, was little changed on Wednesday.
The next step is for the three parties to sign a coalition
agreement and for President Vaclav Klaus to appoint the cabinet,
which would then have 30 days to win a parliament confidence
vote. Necas hopes to have the ministers in office by mid-July.
The outgoing cabinet has pledged to cut the budget gap to 3
percent of gross domestic product (GDP) in 2013, from 5.9
percent last year. Necas has promised to meet that target, which
foresees a cut to 4.8 percent of GDP next year, or do better.
The parties have already agreed to cut spending by 56
billion crowns ($2.65 billion) next year, with Kalousek's TOP09
pushing for tough reductions in spending. []
Czech public debt was just 35.4 percent of GDP last year,
less than half the European Union average, but welfare costs
could raise that burden quickly without reform.
Key is to reform the healthcare system, as well as pensions
to alleviate the burden of the pay-as-you-go system on the
budget, cut welfare spending, and government operating costs.
The parties have largely agreed to tackle these issues,
mainly by raising individual top-up payments for medical care
and increasing private pension savings.
(Writing by Jan Lopatka and Jana Mlcochova; editing by Noah
Barkin and Paul Taylor)
