Sweden sinks into political chaos after classified data breach

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(Bloomberg) -- Scandinavia’s biggest economy has been hit by a political crisis that threatens to topple the Social Democrat-led government before the summer is over.

Prime Minister Stefan Lofven must now decide how to respond to parties representing a majority in the parliament as they plan no-confidence motions against three of his Cabinet ministers. They’re being targeted for their botched response to a security breach that could have resulted in classified information getting into the hands of foreign powers.

Elections aren’t due for another year, but economists and political analysts say the prime minister will probably need to resign, or call an early election, if Sweden is to move on.

“Lofven has the right to call a snap election but it’s more likely that he will step down,” said Robert Bergqvist, chief economist at SEB AB, one of Sweden’s biggest banks. That would leave the speaker of parliament to appoint a caretaker government until elections.

Doing nothing isn’t really an option for the prime minister, according to Bergqvist. For the opposition to target three ministers is “too big a setback” for inaction, he said. Lofven declined to comment, through a spokeswoman. He is due to hold a press conference on Thursday at 10:45 a.m. local time, 45 minutes later than initially planned. The last time Sweden held snap elections was in 1958.

The four parties in the main opposition bloc -- known as the Alliance -- called for the motions to be brought against Home Affairs Minister Anders Ygeman, Infrastructure Minister Anna Johansson and Defense Minister Peter Hultqvist. The move also has the support of the anti-immigration Sweden Democrats party.

The prime minister “has put Sweden in a serious security crisis,” Moderate Party leader Anna Kinberg Batra told reporters in Stockholm on Wednesday.

Just days earlier, Lofven had promised to start an investigation into the Swedish Transport Agency’s decision to outsource its IT operations to IBM in 2015. The agency ignored warnings from the Swedish Security Service, and sidestepped rules on outsourcing. Romania and the Czech Republic were among countries handling the contract, with foreign personnel who didn’t have Swedish security clearance gaining access to classified information. This included data on military vehicles, protected identities and Sweden’s register of drivers’ licenses.

Swedes first learned of the breaches in July after the agency’s director general, Maria Agren, was fired and fined by prosecutors for carelessness with classified information. Lofven says the government acted as soon as the situation was made known to the Justice Department. He says he was first informed of the issue in January.

The political chaos that has ensued threatens to derail the legislative process. The tax hikes that the government was planning to put forward in the autumn are looking increasingly remote. But Bergqvist says reforms addressing the labor market, technology and globalization are also at risk.

The “power vacuum” created by the scandal will slow things down, he said.

“Sweden can afford some political uncertainty, because we have strong state finances, but it can’t continue indefinitely,” Bergqvist said. “Long-term political paralysis would come at an economic cost.”

But the opposition might also find its approach could backfire, with the anti-immigration Sweden Democrats likely to win more seats in the parliament in a snap election, said Jonas Hinnfors, a political science professor at Gothenburg University.

That “has the potential to be problematic for the opposition bloc,” which is split over how to handle the party, he said. The Sweden Democrats party, which has its roots in right-wing extremist groups that have since merged, has soared in the polls after Sweden took in tens of thousands of refugees from Syria and Iraq.

To avoid a complete political meltdown, Lars Henriksson, a foreign exchange strategist at Svenska Handelsbanken AB, says Lofven may decide to fire one, or even two, of the ministers being targeted in the motion.

He could “then negotiate with the Alliance to try to get them to withdraw the vote,” he said.

But Bergqvist says that “even if we solve the political situation now, we will still have a political void until the next election, and the current situation also creates uncertainty beyond the 2018 election.”

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