Chapter 3

Borrowing in 2008

In 2008, the government surplus was DKK 52 billion corresponding to 3 per cent of GDP. The central government's borrowing requirement was low in 2008, which provided room for flexibility in the issuance policy.

The market for Danish government securities was affected by the international financial crisis in 2008. Consequently, borrowing was limited in the first three quarters and the planned opening of a new 10-year government bond was postponed to 2009. The fourth quarter was characterised by new government debt policy initiatives, including the opening of 4.5 per cent bullet loans 2039 in response to strong demand from the pension sector. Due to illiquid currency swap markets, the central government's foreign redemptions were financed by foreign loans.

Development in interest rates 3.1

In 2008, the international bond markets were significantly affected by the financial turmoil, which also influenced the Danish market for government bonds, cf. Chart 3.1.1. In the 1st quarter, interest rates declined as a result of a weaker global economic outlook. In the 2nd quarter, rising commodity and food prices led to fear of inflation and increasing interest rates. In the 2nd half of 2008, deteriorated economic prospects, diminishing inflationary pressures and investors' flight to government securities caused yields to drop to below the level at the beginning of the year.

yields to maturity of benchmark securities, 2008	Chart 3.1.1

The Danish yield curve was flat during most of 2008. At the end of 2008, the yield curve was inverted until the 2-year maturity segment, reflecting a wide monetary-policy spread to the euro area, cf. Chart 3.1.2. The 2-year maturity segment accounted for the strongest fall due to a weaker economic outlook and expectations of lower monetary-policy interest rates. This resulted in a steeper yield curve.

zero-coupon yield curves	Chart 3.1.2

Yield spreads to Germany
The uncertainty in the financial markets led to increasing volatility and flight to the safest asset classes, and resulted in considerable demand for government securities in general. Demand was particularly strong for German government securities that have a special status due to high liquidity and high credit standing. The Danish yield spread to Germany widened, as did those of other countries. The widening was most pronounced in October, reflecting, inter alia, great international uncertainty concerning the rescue packages for the banking sector and the implications for public finances. At the end of the year, the Danish 10-year yield spread narrowed to a lower level than in most countries in the euro area, cf. Chart 3.1.3.

10-year yield spreads to germany	Chart 3.1.3
Note: Yield spreads adjusted for maturity differences. Source: Bloomberg.

Domestic borrowing 3.2

In 2008, the government surplus was DKK 52 billion corresponding to 3 per cent of GDP. On the basis of the low borrowing requirement in 2008, the overall strategy was to focus issuance in the domestic 10-year maturity segment. The discontinuation of the T-bill programme was an element of this strategy, cf. Box 3.1.

Sales of domestic government bonds
The expected issuance requirement in 2008 amounted to DKK 30 billion. The borrowing requirement was later reduced to DKK 20 billion, cf. Budget Outlook 3, August 2008. In 2008, sales of government bonds totalled DKK 135 billion at market value, cf. Table 3.2.1. The extraordinarily high sales can be attributed to a number of debt-policy measures in the 4th quarter, when most of the issuance in 2008 took place, cf. Chart 3.2.1.

Sales of government bonds to the market in 2008	Chart 3.2.1

The intention was to open a new 10-year government bond 2019 during 2008. On the basis of indications from primary dealers, Government Debt Management concluded that there was limited investor interest in a 10-year government bond. The low borrowing requirement, combined with a large balance of the central government's account, provided flexibility in the strategy, so the opening of this bond was postponed to the beginning of 2009.

In response to strong investor interest from the insurance and pension sector, a new 30-year government bond was opened on 11 November with a coupon of 4.5 per cent and maturity on 15 November 2039.

As Danish pension companies have long-term nominal commitments in Danish kroner, they have a natural interest in long-term issuance denominated in Danish kroner. Previously, the pension companies invested in foreign long-term bonds and hedged risk by means of derivatives. The financial turmoil increased demand for a long-term Danish government security.

The long-term government bond supports a well-functioning domestic financial market and facilitates the central government's access to the financial markets in the longer term, in view of the structural demand for Danish government bonds on account of the pension sector's commitments in Danish kroner. Moreover, in the short term, issuance in the 30-year segment contributed to supporting the demand for krone-denominated assets to the extent that pension companies sold other European bonds to buy the Danish series.

At the opening auction, securities for a nominal amount of DKK 29 billion were allocated, while the bids totalled DKK 43 billion. Indications from market participants pointed to continued strong demand for this segment. As a result of the great demand, most of the subsequent sales took place via auctions, cf. Table 3.2.2.

At the opening, it was announced that the series would be built up to an outstanding volume of around DKK 60 billion. This had been achieved by the end of November. Against the background of continued strong demand, it was decided to raise the target for the outstanding volume to around DKK 90 billion. The total outstanding was DKK 88 billion at end-2008. The 30-year government bond was priced with a yield spread to Germany that was in line with those of comparable European countries.

The insurance and pension sector was the main investor in the 30-year series and by end-2008 the ownership share of the insurance and pension sector was around 90 per cent, cf. Table 3.2.3.

The Treasury bill programme
The T-bill programme has been reduced over the last three years, and issuance stopped at the end of 2008. During the year, issuance of T-bills at market value amounted to DKK 13 billion, while redemptions totalled DKK 33 billion. The net financing contribution from the T-bill programme was thus DKK -20 billion in 2008.

In September, market participants indicated a shortage of dollar liquidity and thus of safe short-term money-market instruments eligible as collateral for borrowing from the Federal Reserve. This prompted an extraordinary auction of T-bill 2008-II. Sales at the auction amounted to DKK 300 million. The limited issuance should be viewed in the light of the establishment of a swap facility with the Federal Reserve after the publication of the extraordinary T-bill auction, but before it took place. The swap facility enabled Danish banks to raise dollar-denominated loans directly via Danmarks Nationalbank.

Extraordinary issuance
As a consequence of the mounting financial turmoil and in order to accommodate specific demand in the market, extraordinary issuance took place for a nominal amount of DKK 430 million in 6 per cent bullet loans 2009 in September and a nominal amount of DKK 12 billion in 4 per cent bullet loans 2010 in October. For the same reason, in November a nominal amount of DKK 16.5 billion in 6 per cent bullet loans 2011 was sold from the Social Pension Fund's portfolio.

Buy-backs 3.3

Buy-backs of government securities from the market are primarily motivated by the investment of the government funds and to smooth the domestic redemption profile.

In March 2008, the liquidity crisis prompted a market participant to approach Government Debt Management with a view to selling a large position in 7 per cent bullet loans 2024. Government Debt Management decided to buy back the securities as they would otherwise have been sold in the market, with a considerable impact on the pricing of Danish government securities.

In 2008, the central government and the government funds bought back domestic government securities maturing after 2008 at market value for a total amount of DKK 12 billion, cf. Table 3.3.1.

Foreign borrowing 3.4

The central government raises foreign loans in order to maintain the foreign-exchange reserve. Under the foreign funding rules, the central government, as a general rule, raises foreign loans corresponding to the redemptions on the foreign debt, whereby the foreign-exchange reserve is maintained. In 2008, foreign borrowing (excluding Commercial Paper) amounted to DKK 23 billion, largely corresponding to the redemptions on the foreign debt, i.e. DKK 22 billion.

In recent years, the strategy for foreign borrowing has been to transact currency swaps between Danish kroner and euro, cf. Danish Government Borrowing and Debt 2007. However, Government Debt Management could not follow this strategy due to insufficient liquidity in the currency swap market as a result of the financial crisis. The strategy was therefore adjusted in September to the effect that redemptions on foreign loans were financed through issuance of foreign debt with final exposure in euro. In this connection, the central government's EMTN programme was revised.

In October, the central government raised a syndicated 3-year loan of USD 1.5 billion (DKK 8.2 billion), which was subsequently swapped to euro, cf. Table 3.4.1. The loan was issued in US dollars combined with currency swaps as this structure was considerably more advantageous than direct issuance in euro. The central government's final exposure is a fixed 3-year euro yield of 3.46 per cent.

Subsequently, a private placement with one investor resulted in issuance of an additional amount of USD 1 billion (DKK 5.9 billion) in the existing dollar loan at a floating interest rate equivalent to 6-month Euribor minus 38 basis points. In November, the central government issued a 3-year syndicated euro-denominated loan of EUR 1.25 billion (DKK 9.3 billion) at a fixed interest rate of 3.20 per cent.

The issuance of several foreign loans in 2008 reflects changing market conditions. Syndicated loans were generally smaller as a result of the financial turmoil. In addition, the number of investors was considerably lower than issuance in previous years. However, it was still possible to achieve good investor diversification for the foreign issuance, although the investors were mainly banks and central banks, cf. Chart 3.4.1.

Investor distribution of USD loans and euro loans raised in 2008	Chart 3.4.1

The Commercial Paper programmes
The Danish government has two Commercial Paper (CP) programmes for short-term borrowing in the international money markets. The two programmes are aimed at the European market (ECP programme) and the US market (USCP programme), respectively. Under the USCP programme, all issuances are in dollars, while it is possible to issue in a number of currencies, including dollars and euro, under the ECP programme. The maximum outstanding volume of the USCP programme is USD 6 billion, while the maximum outstanding volume of the ECP programme was raised in November, from USD 6 billion to USD 12 billion.

The objective of the CP programmes is to ensure a liquidity contingency for rapid adjustment of the level of the foreign-exchange reserve or the central government's account at Danmarks Nationalbank. When issuing CP in USD, the central government simultaneously carries out forward agreements between dollar and euro with Danmarks Nationalbank.

From October, the central government's two CP programmes were used as elements of foreign borrowing. Issuance took place mainly under the ECP programme, where investor interest was highest. The market value of the total outstanding under the central government's two CP programmes was DKK 56 billion at end-2008.

The central government's account 3.5

The central government holds liquid funds on its account at Danmarks Nationalbank. The balance of the central government's account has increased in recent years, primarily because the central government's issuance has exceeded the borrowing requirement. This should be viewed in the context of Government Debt Management's strategy of maintaining a liquid market for government securities in a period with low borrowing requirements. The balance of the central government's account increased significantly at the end of 2008, cf. Chart 3.5.1. This is primarily attributable to issuance in the 30-year government bond and foreign borrowing. In addition, SPF's purchase of fixed-rate bullet bonds, amounting to DKK 26 billion, was not settled until the beginning of 2009.

the central government's account, 2008	Chart 3.5.1

ownership distribution of Danish Government Securities 3.6

Non-residents' ownership share of Danish government securities diminished at the end of 2008, cf. Chart 3.6.1. This is mainly due to the phasing out of the T-bill programme and the opening of a new 30-year government bond. Non-residents accounted for a large ownership share of T-bills, and 4.5 per cent bullet loans 2039 were predominantly owned by the Danish pension sector, cf. Table 3.2.3. Against this background, the ownership share of the pension sector rose towards the end of the year to approximately 50 per cent, while non-residents' ownership share of Danish government bonds remained at around DKK 125 billion in absolute terms.

ownership shares of domestic securities, 2008	Chart 3.6.1
Note: Adjusted for the government bond portfolios of the government funds. Source: Danmarks Nationalbank, Securities Statistics.

Evaluation of government transactions 3.7

In 2006, a systematic framework was introduced for quantitative evaluation of government transactions, cf. Danish Government Borrowing and Debt 2006. The purpose is to assess the timing of the central government's transactions within the year. The transactions are compared with a reference whereby the transactions within each month are distributed evenly on all trading days.

By comparing the actual transactions with the reference, it is possible to assess whether the central government has conducted issuance and buy-back transactions on appropriate days. The evaluation for 2008 shows that the value of the actual transactions compared to the reference was approximately DKK 54 million, cf. Table 3.7.1. The evaluation does not include issuance in the 30-year government bond or the extraordinary issuance in the 4th quarter, cf. section 3.2.