Currency Traders Gird for Krona Risk in Sweden Vote Thriller

With an election less than two weeks away, traders and investors are bracing themselves for something rarely associated with Sweden: political risk.

“The immediate election outcome and the period after could evolve into a political thriller that would justify a political risk premium being factored into the krona,” said Henrik Unell, a Stockholm-based senior analyst at Nordea Bank AB, the Nordic region’s biggest lender.

Causing much of the uncertainty is the Sweden Democrats, a party no one else in the legislature wants to work with because of its plans to restrict immigration. Its popularity may prevent the Social Democrat-led bloc -- which polls show will win on Sept. 14 -- from gaining a majority. The outcome could result in political stalemate delaying budget talks and putting pressure on the central bank, economists and investors say.

The krona is the worst performing G-10 currency this year after the threat of deflation forced the central bank to lower rates close to zero. The Social Democrats have pledged to bring down Scandinavia’s highest unemployment rate, even if that means delaying the government’s budget goals. The International Monetary Fund warned over the weekend that any policy steps shouldn’t inflate record consumer debt burdens.

The Risk

The Social Democrats, who look set to return after eight years in opposition that ended their post-war dominance, will need support from the Greens, the Left and potentially even the Feminists to rule. Yet even with the help of those three, they’re unlikely to reach 50 percent of the vote, with polls showing the Sweden Democrats poised to win more than 10 percent.

“The risk is big that we end up in a situation that’s not so good given that we may end up with a government that’s very weak and ineffective,” said Andreas Halldahl, who manages about $16 billion in bonds at Storebrand Kapitalforvaltning AS in Stockholm. “All else equal, this is not something that’s going to be beneficial for bonds.”

Sweden’s National Financial Management Authority -- a regulator that oversees government finances -- said today the deficit will be wider than previously estimated next year, reaching 1.8 percent of gross domestic product, versus the 1.4 percent predicted earlier.

‘Very Worrisome’

The budget forecast is “very worrisome,” said Magdalena Andersson, economic spokeswoman for the Social Democrats. She blamed the development on the government’s focus on tax cuts.

The difference between yields on Swedish 10-year government bonds and their German equivalents was about 51 basis points today, compared with an average of 33 basis points over the past five years.

A change in government may also put pressure on the central bank to ease policy, after the Social Democrats and Left Party signaled they want policy to include an employment target.

“It’s not clear if the change in government equals a change in the Riksbank, however, what we can say is that overall it will put pressure on the Riksbank to be more accommodative,” said Jordan Rochester, a currency strategist at Nomura International Plc, in an e-mail. “That is for certain.”

A Social Democratic minority-government may also be vulnerable to retaliation after it used the Sweden Democrats to block government plans to sell state assets and cut taxes for high income earners. The maneuver was the first time an opposition bloc has killed a single initiative in a broader budget bill. According to Swedish law, budgets only need a plurality of votes to pass.

Killing Traditions

Prime Minister Fredrik Reinfeldt says the opposition can expect similar treatment should it win the election.

They undermined “a practice which has given confidence, a feeling of stability among market players when handling budgets and public finances,” he said Aug. 28. “They have now set a precedent which is very unfortunate and which they, of course, will have to suffer the consequences of.”

The opposition has “quite big internal disagreements so we can assume that we won’t get a strong government” if it wins, said Tommy Moeller, professor at Stockholm University. “The Sweden Democrats will probably strengthen their position and that’s not good regardless of which government we end up with. I think there will be problems.”

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