Chapter 1

Main Principles of Government Debt Management

Government Debt Management at Danmarks Nationalbank manages the central-government debt on behalf of the Ministry of Finance. The central government borrows in the financial markets in order to meet its financing requirement covering maturing loans and budget deficits.

The overall objective of the government debt policy is to cover the central government's financing requirement at the lowest possible long-term borrowing costs, while taking the degree of risk into account. Furthermore, the aim is to facilitate the central government's access to the financial markets in the longer term and to support a well-functioning domestic financial market. The financial crisis has implied that the aims of supporting the domestic financial market and facilitating the central government's access to the financial markets in the longer term have become more prominent in government debt policy.

Responsibilities of Government Debt Management 1.1

Government Debt Management manages central-government borrowing and debt within the following areas:

• Issuance of government securities to cover the central government's borrowing requirement
• Management of the assets of the three government funds ¹ included in the central-government debt
• Calculation of the central government's financing requirement on the basis of the government budget forecast from the Ministry of Finance and sales of government securities to ensure that the central government's account at Danmarks Nationalbank is not overdrawn²
• Management of risk on the central-government debt portfolio. The risk on central-government financial assets and liabilities is managed on a consolidated basis
• Management of access to re-lending and government guarantees for a number of companies
• Settlement and bookkeeping of transactions
• Establishment of a framework to ensure a well-functioning market for government securities, e.g. through market-making agreements with primary dealers in Danish government securities
• Information to investors on the government debt policy and financial and economic conditions
• Advising the Ministry of Finance on issues concerning the central government's other financial risks, e.g. interest-rate risk in relation to the financing of subsidised housing
• Participation in international cooperation in the area of government debt management, including the OECD's Working Party on Government Debt Management and the Economic and Financial Sub-Committee on EU Government Bonds and Bills Markets
• Advising other government debt management offices.

Objectives and Strategy 1.2

The overall objective of the government debt policy is to cover the central government's financing requirement at the lowest possible long-term borrowing costs, while taking the degree of risk into account. Furthermore, the aim is to facilitate the central government's access to the financial markets in the longer term and to support a well-functioning domestic financial market.

The financial crisis has implied that the aims of supporting the domestic financial market and facilitating the central government's access to the financial markets in the longer term have become more prominent in government debt policy, cf. Chapter 10.

The strategy for management of central-government debt is agreed at quarterly meetings between the Ministry of Finance and Government Debt Management on the basis of a strategy proposal prepared by Government Debt Management. At the meetings, the Ministry of Finance authorises Government Debt Management to implement the agreed strategy, including the government's issuance strategy and risk management, cf. Box 1.1.

In December, the overall strategy for the following year is agreed upon, and at the subsequent three quarterly meetings any further adjustments of the overall strategy for the year are adopted. Government Debt Management reports to the Ministry of Finance on the implementation of the strategy on a monthly basis and also reports at the quarterly meetings. In addition, Government Debt Management is regularly in contact with the Ministry of Finance.

To support the openness and credibility of government debt policy, the government debt strategy is announced to the market immediately after the government debt meetings in June and December. The strategy is assessed on an ongoing basis in order to ensure the best possible fulfilment of the objectives, and to ensure that Danish government debt management complies with international standards formulated by e.g. the IMF, the World Bank and the OECD.

Government Debt Management Portfolios 1.3

The central-government debt comprises domestic and foreign debt, the assets of three government funds and the balance of the central government's account with Danmarks Nationalbank:

• The domestic debt is denominated in Danish kroner
• The foreign debt is denominated in foreign currency. The main part of the foreign debt is raised in order to maintain a foreign-exchange reserve and is denominated in euro
• The assets of the three government funds administered by Government Debt Management are invested in Danish government securities and other listed bonds
• The balance of the central government's account with Danmarks Nationalbank accrues interest at the discount rate.

At end-2008, the central-government debt amounted to DKK 195 billion, equivalent to 11 per cent of GDP, cf. Table 1.3.1. Re-lending is part of the debt portfolio, but assets related to re-lending are not included in the definition of central-government debt. The central-government debt adjusted for re-lending amounted to DKK 144 billion, or 8 per cent of GDP, at the end of 2008.

The risk on central-government assets and liabilities is managed according to the Asset Liability Management (ALM) principle, which means that the assets and liabilities of a portfolio are managed on a consolidated basis, cf. Chapter 11.

Government Debt Management uses standardised, well-known financial instruments in relation to issuance, investment of the assets of the government funds and risk management. This reduces operational risk. The central government's credit risk on swap agreements is limited by only transacting swaps with counterparties with high credit ratings that have signed a unilateral collateral agreement. Legal risk is minimised by using standardised contracts.

DOMESTIC AND FOREIGN FUNDING RULES 1.4

The Danish government and Danmarks Nationalbank have agreed on the framework for the distribution and volume of the central government's domestic and foreign borrowing. The domestic and foreign funding rules support the separation of fiscal and monetary policy. The funding rules are formulated in the "Agreement on the division of work in the area of government debt between Danmarks Nationalbank and the Ministry of Finance", 13 November 2006.

Under the domestic funding rule, the central government issues debt denominated in kroner to cover its current deficit and redemptions on the domestic debt. This means that the central government's payments as a general rule have no impact on domestic liquidity, and the separation of fiscal and monetary policies is supported.

As a result of the special situation in the financial markets in 2008, the government's domestic borrowing, primarily due to issuance in 4.5 per cent bullet loans 2039, was considerably higher than the domestic borrowing requirement, cf. Chapter 3.

The foreign debt is issued in order to maintain an adequate foreign-exchange reserve. The foreign funding rule determines that, as a general rule, the central government issues debt denominated in foreign currency equivalent to the redemptions on the foreign debt. Borrowing in foreign currency does not influence domestic liquidity, but is included directly in the foreign-exchange reserve.

The central government may raise short-term foreign loans via its Commercial Paper programmes, which allows rapid build-up of the foreign-exchange reserve or the balance of the central government's account.

Under Article 101 of the EU Treaty, which prohibits monetary financing, the central government's account with Danmarks Nationalbank must not show a deficit. Central-government borrowing is planned so as to ensure an appropriate balance on the central government's account which can absorb fluctuations in central-government receipts and payments.

Framework of Government Debt Management in Denmark 1.5

The Minister of Finance is authorised by law to raise government loans and has the overall and political responsibility for central-government borrowing and debt, including relations with the Folketing (Parliament), cf. Box 1.2. Day-to-day management of the central-government debt is conducted by Government Debt Management on behalf of the Ministry of Finance, in accordance with the government debt strategy agreed with the Ministry of Finance.

The distribution of responsibilities between Government Debt Management and the Ministry of Finance is specified in the "Agreement on the division of work in the area of government debt between Danmarks Nationalbank and the Ministry of Finance"³, 13 November 2006. The framework for management of the assets of the Social Pension Fund is laid down in the "Regulations governing the management of the Social Pension Fund"⁴. Tasks undertaken by Government Debt Management in relation to the management of the assets of the two other government funds and the management of re-lending and government guarantees are specified in separate agreements.

In most countries, day-to-day management of the central-government debt is undertaken by the Ministry of Finance or a separate government debt management office. In Denmark, Government Debt Management is located in Danmarks Nationalbank, but its tasks and organisation correspond to debt management offices in other countries.

The internal structure of Government Debt Management reflects international standards and recommendations. Government Debt Management is divided into front, middle and back offices with separate functions. A division of functions and explicit procedures reduce operational risks and ensure a clear division of responsibilities, which in turn facilitates internal control. A well-defined division of responsibilities also ensures that tasks related to the management of government debt are undertaken independently of other activities at Danmarks Nationalbank.

The middle office formulates the general principles concerning government debt policy and prepares proposals for borrowing strategies and risk management prior to the quarterly government debt meetings. With due consideration of current market conditions, the middle office also lays down monthly guidelines for the front office with regard to sales, buy-backs and swap transactions in accordance with the overall objectives for government debt and the agreed strategies. In addition, the middle office undertakes the overall management of re-lending and government guarantees, represents Danmarks Nationalbank on the Committee of the Social Pension Fund and has an advisory role regarding the financing of subsidised housing.

The front office is responsible for the operational element of the government debt policy, including sales of government securities, buy-backs and execution of swap transactions, within the framework of the monthly guidelines. In addition, it determines market terms for re-lending and manages government guarantees.

The back office settles payments concerning central-government debt, including servicing of debt and swaps, and prepares the accounts together with the Danish Agency for Governmental Management.

Government Debt Management is audited by Danmarks Nationalbank's auditors on behalf of Rigsrevisionen (the National Audit Office of Denmark). Danmarks Nationalbank's auditors ascertain that the accounts of Government Debt Management give a true and fair view, i.e. that they are without significant errors and omissions. Rigsrevisionen may assess whether the funds received by Government Debt Management are applied in the best possible way. The results of its investigations are published at www.rigsrevisionen.dk.

Box 1.3 summarises the structure of Government Debt Management.

Structure of Government Debt Management	Box 1.3

Information on the central-government debt 1.6

An important element of the government debt policy is to give market participants and the public access to information on the central-government borrowing strategies, borrowing requirement, etc., as well as information of a more general nature on the framework for government debt management. Government Debt Management aims to be clear and unambiguous in its communication of the government debt policy strategy to market participants. The prevailing financial and economic uncertainty may entail a greater need for flexibility in government debt policy, thereby accentuating the need for clear and unambiguous communication.

Government Debt Management uses Danmarks Nationalbank's news service, DN News, as the primary channel for announcements concerning government debt. DN News ensures that the announcements are distributed simultaneously to a number of news agencies.

Information about government debt and Government Debt Management is available at www.governmentdebt.dk. In addition, information is published via other sources on an ongoing basis, cf. Box 1.4. An overview of the information regularly published on central-government borrowing and debt is presented in the Appendices.