* Centre-right wins 118 out of 200 seats
* Surprising right win positive for markets
* Centrist Public Affairs party may be difficult partner
By Jan Lopatka
PRAGUE, May 30 (Reuters) - Czech centre-right parties that
won a surprisingly strong victory in this weekend's election
have started talks on forming a coalition government based on
austere fiscal policies.
Three centre-right parties, led by the Civic Democrats under
new leader Petr Necas, won 118 seats in the 200-seat lower
house, a strong mandate that quashed expectations of a tight
result or a stalemate, final results showed on Sunday.
The right had pledged fiscal austerity to avoid a
Greek-style debt crisis, though the central European country's
debt, amounting to 35 percent of gross domestic product, is only
half the EU average and less than a third of Greece's debt load.
But economists say the debt burden will rise quickly unless
the new government starts reforming budget spending, including
longer-term items such as the pensions system.
Civic Democrat leader Petr Necas met the heads of the two
potential coalition partners, the conservative TOP09 late on
Saturday and the centrist Public Affairs on Sunday morning, to
discuss forming a government. Both are newly formed parties.
"I can confirm there has been a meeting," said Public
Affairs spokeswoman Petra Hrusova, but gave no further details.
Analysts said negotiating with the inexperienced Public
Affairs could be difficult, but if the three parties agree on a
coalition, they will have the biggest majority any Czech
government has had since the country was created in 1993.
A centre-right coalition would be the outcome most welcome
to financial markets because investors believe it would be the
govrtnmrnt best equipped to launch the reforms.
AUSTERITY MAY SLOW RECOVERY
"These elections suggest decisive action on the budget and
pension reform," said Timothy Ash, an analyst with Royal Bank of
Scotland. "They should significantly ease market concern over
any vulnerabilities."
But he said fiscal austerity might hurt the recovery of the
Czech economy, which shrank 4.1 percent last year and is
expected to grow by around 1.5 percent this year.
Party leaders were due to meet for a television debate at
1000 GMT, and the Civic Democrat leadership was due to meet on
Sunday afternoon to discuss how to proceed.
The election was a big defeat for the leftist Social
Democrats, who had expected to win by a large margin and to be
the decisive force in building any coalition.
The Social Democrats won 22.1 percent of the vote, more than
any other party. But the Civic Democrats trailed by less than
two percentage points, and the popular new TOP09 and Public
Affairs helped them steal victory from the left.
As the party with the most votes, the Social Democrats may
still get the first shot at trying to form a cabinet, though its
chief Jiri Paroubek quit on Sunday and the party acknowledged it
had little chance of finding partners to form a government.
The big vote for the new parties reflected Czechs' anger
with widespread corruption in the political class. The Civic
Democrats and the Social Democrats lost 15 and 10 percentage
points of the vote, respectively.
The left failed to convince Czechs of the credibility of its
generous pledges to raise welfare payments at the same time as
cutting the budget deficit to 3 percent of gross domestic
product by 2013 from 5.3 percent expected this year.
"I am happy that the rightists have a majority, a leftist
party would not be good for this country at this time," said
44-year-old IT specialist Ivana Urbanova.
"The Social Democrats got used to buying votes for economic
advantages, I began to be allergic to this bribing of voters."
(Additional reporting by Jana Mlcochova and Robert Mueller,
editing by Tim Pearce)
