By Radu Marinas and Justyna Pawlak
Romania's opposition Social Democrats appeared to have won Sunday's parliamentary election, according to exit polls, reducing prospects for EU-mandated anti-corruption reforms if they succeed in forming a government.
The Social Democrat Party (PSD) tapped into fears about the impact of the global financial crisis and wealth disparities to make a late comeback after itself suffering sleaze scandals. It promised welfare handouts and tax cuts for the poorest.
Two exit polls, one presented by private Realitatea TV and one by the public TVR 1, showed the PSD, heirs to Romania's communist regime overthrown in a bloody 1989 revolt, capturing around 36 percent of the vote.
Another opposition group, the Democrat Liberal Party (PD-L), a centrist grouping linked to reformist President Traian Basescu, won 30-31 percent, while Prime Minister Calin Tariceanu's Liberal Party (PNL) was third on 20 percent.
To form a government, the PSD will have to wrestle with the PD-L, which benefits from close links with the president, who nominates the prime minister under Romanian law. This leaves the Liberals as the potential kingmakers in coalition talks.
Sunday's win boosts the PSD's chances of returning to power after four years in opposition, but a coalition of the Democrats and Liberals, who have a majority together, is also possible.
"Everybody is going to play hardball so we may see a lot of instability ahead," said Alina Mungiu-Pippidi of the Romanian Academic Society think tank.
"There is quite an important chance the PSD will get into the next government. For fighting corruption, the situation is pretty bad," she said.
The PSD government in 2000-2004 was widely accused of allowing corruption to fester. Several of its top politicians have been indicted on graft charges but trials have been blocked by parliament or mired in court proceedings.
TOUGH COALITION TALKS
Romania, a poor EU nation of 22 million, joined the bloc thanks to economic and judiciary reforms introduced by a coalition of Tariceanu's and Basescu's parties after years of Socialist rule weakened by graft and reform gridlock.
But a clash between the prime minister and the president shattered the partnership after EU accession. Reform momentum slowed and parliament blunted anti-corruption efforts, angering the EU. Tariceanu remained at the head of a minority government.
The election came at a critical time.
The economy is slowing and analysts warn poor fiscal policies have made Romania more vulnerable to financial crisis than many of its neighbours.
In response to a policy logjam, two rating agencies downgraded its debt to sub-investment grade in recent weeks, making Romania the only EU member with "junk" status.
To avoid crisis, a new government needs to quickly rein in fiscal spending and convince financial markets that it will conduct policy decisively.
But this will depend on how fast coalition talks progress. Economists also warn the PSD may be less likely than others to tighten fiscal belts.
"Everything that would not involve the Social-Democrats, would be a plus for the markets, at least in the short-term," said James Lord from Standard Bank in London.
One European diplomat in Bucharest was more optimistic, saying the ballot ensured any coalition will safely have more than 50 percent of seats in parliament, giving it power to conduct unpopular fiscal reforms:
"It has given a chance to create a pretty strong government, which is what Romania needs at a time of economic crisis."
PD-L officials were quick to call for talks among centrist groupings to rebuild the alliance that unseated the leftists in 2004, while the PSD signalled it would negotiate with all groups.
Some analysts say a grand coalition that spans all parties is possible.
"The right has won ... so normally the first partner for dialogue will be the PNL," PD-L chief Theodor Stolojan said.
The Liberals took a wait-and-see stance, saying only their demand would be to maintain the post of prime minister.
"Absolutely. We are looking forward to their proposals," Bogdan Olteanu, speaker of parliament, told Reuters.
(Writing by Justyna Pawlak; Editing by Ralph Boulton)