Czech president undermines PM with pension reform veto

PRAGUE (Reuters) - Czech President Vaclav Klaus vetoed the government's pension reforms on Monday, the latest in a series of moves that undermine the prime minister and could bring his fragile coalition down.

The Czech Republic and some other central European economies have so far largely avoided the political and market upheaval seen in the neighbouring euro zone and even been regarded as a safe haven because they have relatively low debts and deficits.

But Czech public debt is rising and the government has cut spending and raised taxes to balance the budget and keep investors onside.

This has sent the economy into recession and made the cabinet deeply unpopular, increasing the chance of instability faced by several euro zone states pushing through austerity.

Klaus has made it harder for the government, vetoing several reforms, and some analysts say he wants to weaken Prime Minister Petr Necas and boost his own ratings before leaving office in March next year.

The pension bill is the biggest reform of the centre-right government's two years in office and is seen by economists as essential to putting Czech finances onto a healthier path.

But Klaus said the reform, which allows workers to divert a portion of social security payments into private schemes, lacked political acceptance and was badly timed as it would initially worsen the deficit at a moment of economic turmoil in Europe.

"Launching the reform in such a situation is a hazard with people's confidence, a hazard with the stability of the pension system and a hazard with both public and private finances," Klaus said.

INSTABILITY

Necas, who relies on a fragile coalition to get bills passed in parliament, is facing a rebellion in his party that may cost him his job. He said Klaus was hurting the cabinet.

"Mr. President surely knows that some of his steps, based on the opposition's arguments, do not contribute to the government's political stability," he said in a statement.

The eurosceptic Klaus opened the battle last month by lambasting Necas's plan to increase the value added tax (VAT) while the economy is in a recession, a move the government says is necessary to squeeze the 2013 budget deficit below 3 percent of gross domestic product (GDP).

Czech bond yields have fallen to record lows during the euro zone crisis but the government fears a ratings downgrade or investor exodus if it does not stick to its fiscal targets.

Fiscal tightening has played a big part in pushing the Czech economy into a recession which started in the final months of last year. Plans for further tax hikes have added to the gloom and made people and companies freeze spending and investment.

A group of deputies in Necas's Civic Democrat Party have sided with Klaus, the veteran leader who has shaped much of the past 20 years of democracy. The tax package was defeated in a parliamentary vote this month.

Necas has opened negotiations with the rebels to find a compromise and said he would quit unless the government's tax plans are approved in a repeated vote in the coming weeks.

The veto of the pension reform, which would allow people to send part of their social security contributions to private pension funds, is a new worry.

Analysts have said the rebellion may be inspired by jockeying for power ahead of a party congress in November where Necas has to defend his chairmanship.

PLAYING FOR INFLUENCE

Klaus won acclaim for the country's macroeconomic transformation in the early 1990s but was later criticised for failing to promote the rule of law in the capital markets.

He is opposed to European integration and in 2009 several Civic Democrat deputies loyal to him downed a cabinet led by Mirek Topolanek in the middle of the country's EU presidency.

As prime minister in 1992-1997 he oversaw the 1993 split of Czechoslovakia and often squared over policies and political culture with President Vaclav Havel. Opponent of the euro, he also despises any action against global warming and has warm relations with Russian President Vladimir Putin.

Some commentators say the pension veto might be another example of Klaus squaring off with the government to increase his influence.

The standoff brings memories of 2009 when several Civic Democrat deputies loyal to him downed a cabinet led by Mirek Topolanek in the middle of the country's EU presidency, said political commentator Petr Kambersky of newspaper Lidove Noviny.

"Klaus...will do anything that will weaken or down the cabinet and raise his own influence," he said. "His term ends in five months and he wants to leave with a bang as a big player and not fizzle out quietly as an old-timer ignored by all."

But Necas may still survive, Kambersky said.

"There is fear of what would follow," he said.

A new election, a possibility if Necas fell, would almost certainly be won by the opposition centre-left Social Democrats.

The pension reform, seen by private-sector analysts as necessary but too mild, would initially deepen the public sector deficit as the savings would be missing in the budget.

But eventually it should help people sustain their living standards in retirement even as population ageing eats into money available to pensioners in government budgets.

The lower house can overturn Klaus's veto with at least 101 of the total 200 votes, an uncertain prospect for Necas given the rebellion by a handful of his backbenchers.

(Additional reporting by Jana Mlcochova; editing by Patrick Graham and Anna Willard)