FACTBOX-Key political risks to watch in Sweden

STOCKHOLM, Sept 1 (Reuters) - Sweden is heading toward a close contest in Sept. 19 elections with recent polls giving the edge to the centre-right government, but some also showing a far-right party holding the balance of power. Prime Minister Fredrik Reinfeldt's four-party "Alliance" has held a lead of between 3.4 and 7.6 percentage points over the Social Democrat-led opposition in recent opinion polls after having trailed badly through much of its four years in power.

While the polls tend to show Reinfeldt's coalition in the lead, five out of the last 10 polls forecast he will not have a majority if the far-right anti-immigrant Sweden Democrats win their first parliament seats.

Sweden stands out in Europe thanks mainly to robust public finances -- it expects to have a budget surplus in 2012 after suffering its worst recession since World War Two in 2009.

But growth-dampening austerity measures in trading partner European countries could hinder Sweden's recovery by affecting its exports, while the financial sector is heavily exposed to problems in the Baltic states. The labour and housing markets are among potential problems brewing on the domestic front.

Below are the key political risks for Sweden:

PARLIAMENTARY ELECTION

The centre-right government has polled ahead of the centre-left opposition in every survey tracked by Reuters since the end of June, but the lead has in many cases been slim, suggesting the vote will be a close contest. [ID:nLDE67S06E]

Many polls also show the Sweden Democrats, a far-right party pushing a vocal anti-immigrant agenda, narrowly clearing the 4-percent hurdle to win seats in parliament, setting the stage for minority rule by one of the two blocs.

Should a hung parliament result from the elections, this would be likely to produce a sharp short-term market reaction with the crown expected to weaken while Swedish bonds yields rise due to the political uncertainty. [ID:nLDE67Q0VF]

However, the Nordic country has a long history of minority government rule, a robust fiscal framework and a budget process that empowers governments short of a full majority, leaving most analysts expecting any market volatility to be short-lived.

If re-elected in September, Prime Minister Fredrik Reinfeldt's government is expected to cut income taxes again while keeping a lid on welfare spending in areas such as unemployment and healthcare benefits.

Public spending as a share of gross domestic product remains among the highest of Organisation for Cooperation and Development (OECD) member countries, although it has fallen steadily in recent years.

The opposition, on the other hand, has promised more spending on areas such as healthcare and education, financed by the unwinding of income tax cuts. It has already said it would revive a wealth tax. [ID:nLDE63R2N9]

The two groups also differ on privatisation.

Sweden has holdings in about 50 firms, including almost 20 percent in Nordea (NDA.ST), the Nordic region's biggest bank, which the government has said it wants to cut.

Reinfeldt has said Sweden will consider bringing in minority owners in Vattenfall [VATN.UL], Europe's fifth-biggest electricity producer, and is keen to sell stakes in Nordea and telecom operator TeliaSonera (TLSN.ST).

Social Democratic leader Mona Sahlin wants Sweden to retain Vattenfall and her coalition, which includes the Left and Green parties, is considerably less enthusiastic about privatisation than their centre-right rivals. [ID:nSAT008488]

What to watch:

-- If the anti-immigrant Swedish Democrats win seats in parliament, how will the established parties carry out their plan not to cooperate with the far right, yet get policy approved in parliament?

-- Unemployment figures; figures for August are due on Sept 16. At around 8 percent, unemployment is at a higher level now than when Reinfeldt took office. Youth unemployment is among the highest in the European Union, at around 30 percent.

GOVERNMENT FINANCES AND THE EURO

The European Commission has forecast Sweden will have a public sector deficit of 2.1 percent of GDP this year, the lowest in the EU, and the government expects to return to a surplus in 2012.

However, Swedes are not immune to global events and the economic downturn of the past two years took the wind out of exports, which drive growth, turning a 135 billion crown ($18.27 billion) surplus in 2008 into a 176 billion deficit in 2009.

Sweden has benefited by being a euro outsider. The value of the Swedish crown EURSEK=, one of the world's top 10 most traded currencies, has gained about 20 percent against the euro since March last year.

However, some see staying outside the euro zone in the longer term as problematic since smaller currencies could come under pressure.

What to watch:

-- Can Sweden turn a budget deficit into a surplus by 2012? Further stimulus measures and tax cuts, if too aggressive, could harm public finances.

-- It has benefited from being a euro outsider during the downturn, but independence may hurt it in the long run.

-- Will the exposure of Swedish banks Swedbank (SWEDa.ST), Nordea and SEB (SEBa.ST) to the recession-hit Baltic states cause future economic problems? Although the Baltic region has stabilised, its governments will have to cut costs further and there are few signs of real growth on the horizon or rises in property prices.

-- Will Estonia's entry into the euro zone, expected at the start of 2011, increase investors' confidence in the region, boosting the economy and the Swedish banks active there?

-- Will Latvia, which took a 7.5 billion euro loan led by the International Monetary Fund and the European Union at the end of 2008, stay within its bailout programme? Failure to do so could revive devaluation fears, affecting confidence in the region.

For political risks to watch in other countries, please click on [ID:nEMEARISK] (Reporting by Niklas Pollard and Mia Shanley, Editing by Sonya Hepinstall)