Chapter 4

Strategy 2009

In 2009, the domestic issuance is expected to be DKK 40 billion, most of which will be in the 10-year on-the-run issue, 4 per cent bullet loans 2019, which was opened in January. This series will be built up over a two-year period to a final outstanding volume of around DKK 50 billion.

The foreign debt is issued in order to maintain an adequate foreign-exchange reserve. As a general rule, the central government raises foreign loans equivalent to the redemptions on the foreign debt. As an element of the central government's foreign borrowing, a syndicated 3-year loan of USD 3 billion (DKK 16 billion) was raised in January 2009 and subsequently swapped to euro. In the context of the financial turmoil, the central government's contribution to the foreign-exchange reserve is increased.

Government Debt Management emphasises the importance of clear and transparent communication on issues related to the government debt policy. In view of the continued financial and economic uncertainty, a more flexible issuance policy may, however, be required.

issuance strategy in the coming years 4.1

Recent years have witnessed a significant reduction of the central-government debt, from DKK 600 billion at end-1997 to DKK 195 billion at end-2008, corresponding to a decline from 53 per cent of GDP to 11 per cent of GDP.

The debt reduction reflects government surpluses almost every year since 1997. Especially the last four years have seen extraordinarily large surpluses which, among other factors, reflect strong economic conditions and substantial revenue from energy extraction in the North Sea, cf. Chart 4.1.1.

Government finances are expected to balance in 2009, while a small deficit is expected in 2010, cf. Budget Outlook 4, December 2008. The development in public finances should be viewed in the context of an economic slowdown and lower-than-expected income from capital gains and energy extraction from the North Sea. In line with the normalisation of the economy, the government budget is expected to almost balance towards 2015, cf. Denmark's Convergence Programme 2008, December 2008.

Continued focus on issuance in the 10-year maturity segment
In recent years, the strategy of government debt policy has been to build up liquid securities in the 10-year maturity segment. In a period with large government surpluses and a low borrowing requirement, concentration of issuance has contributed to ensuring liquidity in the key on-the-run issues.

breakdown of the central-government surplus	Chart 4.1.1
Note: Surplus calculated as the central government's net cash balance. The adjusted primary surplus is adjusted for North Sea revenue, extraordinary factors and net interest payments. Only surplus and net interest payments have been compiled for 2008. Source: Budget Outlook 4, December 2008 and the Central-government accounts.

The intention is that most of the domestic issuance in the coming years will be concentrated in 10-year government bonds. The issuance strategy is to open a new 10-year government bond series approximately every second year and build it up to a final outstanding volume of around DKK 50 billion, cf. Danish Government Borrowing and Debt 2007. The 10-year maturity segment has been selected as it is regarded internationally as the most important segment. In addition, market participants have expressed a strong preference for a liquid 10-year point on the government yield curve.

Possibility of building up shorter government securities
Weaker-than-expected development in government finances may require adjustment of the issuance strategy of building up the 10-year maturity segment, so as to match a higher borrowing requirement. If the borrowing requirement is sufficiently large, a security with shorter maturity will be built up in order to fill out the gaps in the central government’s redemption profile. For instance, government securities maturing in 2012, 2014 and 2016 might be issued, cf. Chart 4.1.2.

central government redemption profile, 2009-2017	Chart 4.1.2
Note: Redemption profile at end-2008 excluding currency swaps, domestic redemptions of DKK 24 billion in 2024 and DKK 88 billion in 2039. Furthermore, a foreign loan of DKK 16 billion was raised in January 2009, maturing in 2012 and domestic redemptions in 2019 due to issuance in the new 10-year government bond.

Issuance in shorter maturity segments can contribute to smoothing the central government's redemption profile. This supports a stable issuance policy and reduces the central government's refinancing risk. In addition, issuance in a shorter maturity segment contributes to enhancing liquidity and to efficient pricing at the short end of the yield curve. The financial turbulence has emphasised the importance for the financial markets of a risk-free short-term asset, cf. Chapter 10.

30-year bonds as a risk-management instrument for pension funds
In 2008, Government Debt Management opened a 30-year government bond, cf. Chapter 3. This enabled pension funds in particular to hedge their long-term commitments in a krone-denominated asset.

There is considerable market interest in a long-term Danish government security, as evidenced by demand in 2008. As the maturity of the bond is reduced, switching to a new 30-year government bond may be offered in the future. The series will thus still serve the purpose of being useful in the pension funds' risk management. Switches will be used to the extent that market prices are deemed to be fair on the basis of an overall government debt policy assessment.

The central government's account
The balance of the central government's account has risen considerably, primarily due to the proceeds from 30-year issuance. A large balance of the central government's account places the government in a favourable position since it provides the basis for a more flexible issuance policy. For example, the government intends to finance the credit package for Danish banks and mortgage-credit institutes by drawing on its account rather than by issuing more government bonds. The credit package is described more thoroughly in Chapter 10.

issuance strategy in 2009 4.2

Government Debt Management emphasises the importance of clear and transparent communication on issues related to the government debt policy. The continued high degree of uncertainty in the financial markets may, however, give rise to situations that would require a flexible issuance strategy in 2009. The strategy presented for 2009 should therefore be viewed in the light of the uncertain market conditions.

Domestic borrowing
Because of the financial and economic development, the estimate of the central government's domestic borrowing requirement in 2009 is subject to more uncertainty than usual. One underlying factor is Denmark's strong automatic stabilisers, cf. IMF Country Report, December 2008. During an economic slowdown, higher unemployment causes social benefit costs to increase and tax revenue to decrease. In addition, certain major items of public revenue are very sensitive to oil-price fluctuations and movements in the financial markets.

Domestic issuance in 2009 is expected to be DKK 40 billion. In 2009, key on-the-run issues are securities in the 2-year, 10-year and 30-year maturity segments, cf. Table 4.2.1. In addition, the central government may issue for small amounts in the other bullet loans. The targets for key on-the-run issues in 2009 are:

• Most of the domestic issuance will be covered by issuance in the new 10-year on-the-run issue, 4 per cent bullet loans 2019, which was opened on 20 January 2009. The series will be built up over a two-year period to a final outstanding volume of around DKK 50 billion
• Issuance in 4 per cent bullet loans 2010 will continue
• 4.5 per cent bullet loans 2039 will be built up to a final outstanding volume of approximately DKK 90 billion.

Foreign borrowing
The foreign debt is issued in order to maintain an adequate foreign-exchange reserve. In 2009, the initial strategy was to raise foreign loans of DKK 20 billion, equivalent to redemptions on the foreign debt, cf. Danish Government Debt Management Strategy 2009, December 2008. In the context of the financial turmoil, it is found to be appropriate to increase the central government's contribution to the foreign-exchange reserve, and consequently Government Debt Management has raised the target for foreign borrowing in 2009.

Foreign borrowing in 2009 will be carried out by raising foreign loans with final exposure in euro. The central government's issuance of foreign debt involves comparison of the borrowing costs with e.g. equivalent German issuance and issuance by a peer group of other countries with high ratings, e.g. Austria, Finland and the Netherlands. The issuance may be conducted in another currency than euro if the market conditions for such issuance, combined with swaps to euro, are considerably more attractive than for direct issuance in euro.

In addition, the central government's two foreign Commercial Paper programmes will be used in order to ensure access for the central government to short-term foreign borrowing. Furthermore, currency swaps can be used as an element of the central government's foreign borrowing, provided the liquidity in the currency swap market between kroner and euro improves.

On 8 January 2009, the central government raised a syndicated 3-year loan of USD 3 billion (DKK 16 billion), which was subsequently swapped to euro, cf. Box 4.1. The final exposure for the central government was a fixed interest rate of 2.85 per cent, which was flat to the euro swap curve and at the same level as the peer group. There was participation from a broad group of investors.

Kingdom of Denmark, dollar loan 1.875 per cent 2012	Box 4.1
Date of issuance: 8 January 2009 Maturity date: 16 March 2012 Size: USD 3 billion (bids received: USD 3.8 billion) Rating: AAA/Aaa Fee: 0.10 per cent Lead managers: Barclays, JP Morgan and Morgan Stanley.
Investor and geograhical distribution

Buy-backs
Buy-backs from the market can be conducted in all government securities, although key on-the-run issues are as a general rule excepted. Government Debt Management will buy back securities to the extent that market prices are deemed to be fair compared, inter alia, to market prices in the key on-the-run issues. Buy-backs can support the build-up of the new 10-year on-the-run issue and contribute to concentrating liquidity in fewer series of government securities, e.g. via buy-backs in 7 per cent bullet loans 2024, which were shifted to voluntary market making in 2008.

Box 4.2 summarises the overall issuance and liquidity strategy in 2009.