BUDAPEST/ZAGREB: The kuna eased and Croatian credit default swaps rose on Monday after the narrow victory of the conservative opposition HDZ party on Sunday at the country's first election since joining the European Union in 2013.
More broadly, expectations for Federal Reserve interest rate hikes to start in December weighed on Central European markets.
HDZ faces tough coalition talks after besting the ruling Social Democrats, who could still form the government if they strike a deal with the 'Most' (Croat for "bridge") party, which came third and presses for public sector reforms and better business climate.
The new Croatian government will need to nurture economic recovery after years of recession and budget deficits
"We still don't know who will form the government and, even more so, we don't know what are the (economic) preferences of the Most party, which seems the key player now in talks about forming the new government," said a dealer at a major Croatian bank.
The kuna eased 0.1 percent against the euro by 0931 GMT to 7.56.
Croatia's 5-year dollar-based credit default swap, which shows the highest default risk in the EU's eastern wing, rose 2 basis points to 308, the highest since December.
The new government will need to embark on ambitious fiscal reforms, Raiffeisen said in a note.
"Markets would definitely like to see the first positive indications in the post-election year 2016," it added.
The main index of the Zagreb stock exchange was flat.
"We see no major impact on Croatia's equity market, at least in short-term, as all major parties are open to foreign investors," local brokerage Intercapital said in a note.
The stocks of Hungarian oil group MOL, which has been long at odds with the outgoing Zagreb government over its Croatian unit INA, rose by 0.6 percent.
"It is worth waiting to see if there will be kind of a turnaround (in the Croatia-MOL relationship) after so many years," Erste said in a note.
Hungarian government bond yields dropped 5-6 basis points, with the 10-year paper trading at 3.39 percent, after Moody's raised the outlook on its rating to Hungary, which is one notch below investment grade, to 'positive' from 'stable' on Friday.
But the forint eased slightly due to the Fed rate hike expectations and last week's dovish comments from the Hungarian central bank.
The zloty was a touch firmer after the Law and Justice party, which won Polish elections last month and may announce its government later on Monday, gave more details on its tax hike plans.
The leu eased 0.1 percent to 4.458 and it could stabilise around 4.45 as markets are calming down following the resignation of Prime Minister Victor Ponta last week, ING analysts in Bucharest said in a note.
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