Bloomberg News

Swedish Haven Status at Risk as Budget Fight Thwarts Government

July 22, 2011

July 22 (Bloomberg) -- Sweden risks damaging its status as a haven for international investors as opposition parties put up their biggest fight yet to block a key part of the minority government’s budget.

Prime Minister Fredrik Reinfeldt has staked the remaining three years of his term on further tax reductions after lowering income levies representing about 2 percent of annual economic output since 2006 and trimming payroll and corporate fees. The opposition, led by Social Democrat Hakan Juholt, has signaled it will reject the plan, which may provoke a new election and cut short a sitting government’s term for the first time since 1953.

“The situation is precarious,” said Jenny Madestam, a political scientist at Stockholm University. The government has “been caught by surprise,” she said.

Sweden was one of two European Union countries to have a balanced budget or post a surplus last year -- the other is Estonia -- after delivering the bloc’s biggest economic rebound. That’s allowed the government to pursue tax cuts when much of the rest of Europe is trying to persuade voters to accept austerity packages. Juholt, who took over as party head in March, has derided lower taxes as “passive” and is lobbying instead for more spending on infrastructure and welfare.

Voters seem to agree. A poll of 9,123 people released by the Swedish statistics office in June showed the Social Democrats and its allies, the Left party and the Greens, would get 47.4 percent of the vote versus 45.4 percent for the government. The anti-immigrant Sweden Democrats, which both sides have refused to work with, would get 5.7 percent.

‘Knee-Jerk Reaction’

A government switch could initially cause a “knee-jerk reaction to sell the krona,” said Martin Enlund, a strategist in Stockholm at Handelsbanken Capital Markets. “Juholt is an unknown quantity.”

The krona has advanced 22 percent against the dollar and 20 percent against the euro in the past two years. Sweden’s 10-year government bonds yield 2.87 percent, 1 basis point less than benchmark German bunds of similar maturity. Foreign investors increased their share of the total market value of the Stockholm stock exchange to 37.8 percent at the end of last year, compared with 37.1 percent at the end of June of 2010, Statistics Sweden data shows.

Confidence in Swedish banks means it’s cheaper to insure debt than for European and U.S. financial companies. The cost of protecting Svenska Handelsbanken AB debt is the second-lowest in the world among 197 banks tracked by Bloomberg at 70.64 basis points, compared with the 321.93 average. The average for U.S. banks is 135.65 and 435.94 in Europe. A basis point is one- hundredth of a percent, and each additional point means an extra $1,000 a year to protect $10 million of debt for five years.

Sharp Tools

Jimmie Akesson, 32, leader of the Sweden Democrats, said in parliament in a debate last month that he wants lawmakers to deploy “sharp tools” to block further tax cuts. His party’s entry into the legislature last September has made it more difficult for either bloc to secure a majority vote.

Sweden’s budget law means that a minority can pass a budget bill as long as the majority is not united in support of a single opposing proposal. So far, minority governments have shepherded their spending and tax bills through parliament without being hampered by the opposition. That may be about to change.

Social Democrats and their allies are trying to maneuver around the budget law, creating a precedent that may weaken minority governments in future. Reinfeldt has warned he won’t compromise, bringing the country closer to a snap election. Lawmakers vote on the budget in December.

Ultimate Weapon

“If you’re ready to take collective responsibility for dismantling our jobs-line, increasing aid to those that don’t work, and taking down our whole jobs policy, so be it,” Reinfeldt, 45, said during the June debate. “Parliament always has the ultimate weapon in a vote of no confidence if it wants to switch governments.”

Reinfeldt’s Moderate Party has set up a ticker on its website to track Juholt’s proposals, which it estimates will cost taxpayers 135 billion kronor ($21 billion).

Julholt, 48, says a lack of labor market policies has created a large group of long-term unemployed who have been excluded from the economic recovery. He wants more spending on railways and roads to spur growth.

“A government shift would be negative for the markets,” Nicola Mai, an economist at JPMorgan Chase & Co., said by phone from London. “This government is seen as pushing measures that are growth friendly.”

Falling Debt

Sweden’s economy grew 5.7 percent last year, the most in the EU. Output will expand 4.5 percent this year, compared with the average 2.3 percent for industrialized countries and 2 percent for the 17-member euro area, the Organization for Economic Cooperation and Development said in May.

Swedish debt will fall to 33.4 percent of gross domestic product next year from 39.8 percent in 2010, according to the European Commission. That’s less than half the EU 2012 average of 83.3 percent, the commission estimates.

According to Roger Josefsson, chief economist at Danske Bank A/S in Stockholm, a Social Democrat-led government is just as likely to pursue responsible fiscal policies as Reinfeldt’s coalition. He also said he expects the opposition to exercise caution in its efforts to derail Reinfeldt’s tax cuts to avoid leaving itself “open to political backlash later.”

Reinfeldt’s four-party coalition has 173 lawmakers in the 349-seat assembly, after winning 49.3 percent of the vote in the September election. The Sweden Democrats won 5.7 percent, depriving Reinfeldt of a majority and leading to a number of legislative defeats for the government since the election. The coalition has had to drop plans to sell some state assets and has shelved a jobs program.

“The government is in trouble,” Stig-Bjorn Ljunggren, a Social Democratic political scientist and author, said by phone on July 12. “I think we will see more frequent defeats this fall unless Reinfeldt switches tactics.”

--With assistance from Adam Ewing in Stockholm. Editors: Tasneem Brogger, Tim Quinson

To contact the reporters on this story: Kim McLaughlin in Stockholm at Kmclaughlin6@bloomberg.net; Jonas Bergman in Oslo at jbergman@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net


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