By Gilbert Kreijger and Harro ten Wolde
AMSTERDAM (Reuters) - Dutch Liberals began informal coalition talks on Thursday but their austerity policies will mean hard bargaining with at least three other parties before a government can be formed.
Results from Wednesday's election gave Mark Rutte's Liberals a one-seat victory, but deep divisions over policy with other parties will likely translate into messy and protracted coalition talks and possibly a short-lived administration.
The election ousted Christian Democrat Prime Minister Jan Peter Balkenende from eight years in office. Geert Wilders's anti-immigration Freedom Party more than doubled its seats to be the third-largest parliamentary group and a possible kingmaker.
Protracted talks would be bad news for investors betting on spending cuts, but for now the market appears to have found some reassurance that a cost-cutting government will emerge, the cost of insuring Dutch government debt and spreads on Dutch State Loans narrowing after the vote.
With 99.5 percent of votes counted, the Liberals had 31 seats in the 150-member parliament against 30 for the Labour Party, which wants slower and fewer cuts to tackle a deficit expected to reach 6.6 percent of GDP this year.
"The fact that the outcome of the election will provide no obvious coalition increases the odds of a lengthier formation process," Maureen Schuller at ING Credit Strategy said.
"This situation, if a negative for confidence in the strength of the Dutch budgetary policy and economic outlook, could also reflect negatively on Dutch credits," she said.
Exit polls had shown the Liberals and Labour running neck-and-neck in an election dominated by debate on fiscal austerity after the euro zone's stability was threatened by sovereign debt woes plaguing Greece.
Balkenende conceded defeat for his Christian Democrats when voters turned against the party, nearly halving its seats from 41 to 21. He resigned as party leader.
The election was triggered when his Christian Democrat-Labour coalition government collapsed in a row over extending the deployment of Dutch troops in Afghanistan.
Wilders and his Freedom Party gained 10 seats to come third with 21, reflecting persistent concern in the country about immigration and foreign policy.
"More security, less crime, less immigration, less Islam -- that is what the Netherlands has chosen," Wilders said.
SPENDING CUTS
The Liberals are calling for the steepest spending cuts of up to 39 billion euros (32 billion pounds) over the next decade but may have to compromise if they are to form a coalition.
"The Netherlands can emerge stronger from the crisis by taking measures now," Rutte, a 43-year-old former human resources manager who once worked at Anglo-Dutch consumer goods giant Unilever, told reporters.
Labour, led by former Amsterdam mayor Job Cohen, could conceivably join the Liberals in a coalition but as the second-biggest election winner it is likely to want concessions.
"Although circumstances are difficult, we again will take our responsibility to make sure our country continues down the social road," Cohen said.
Although the euro zone's fifth-largest economy enjoys one of the highest debt ratings in the currency bloc, borrowing costs had edged higher ahead of the vote.
But the spread between Dutch bonds and their German benchmarks tightened, as a recently-auctioned three-year bond saw its spread tighten to 22 basis points, down from 40 just before the vote and back near levels seen a week ago. Five-year credit default swaps dipped to 46 from 56, meaning it would cost investors 46,000 euros to protect 10 million euros-worth of Dutch government bonds.
"I don't think there will be a significant response on the bond markets. Only if it were to take a very long time or if it was very difficult would you see an impact, but I don't expect it," said Walter Leering, a fixed income analyst at Dutch private bank Theodoor Gilissen.
Casting aside decades of stern fiscal policies, the government took over the country's biggest bank ABN AMRO in 2008 after its buyer Fortis collapsed, spending more than 26 billion euros to prop it up. It spent more later to boost the economy, offer tax relief and support other financial groups, heightening investor concern over its finances.
(Writing by Reed Stevenson; Additional reporting by Catherine Hornby and Bart Meijer; Editing by Janet Lawrence)
