Danish central government debt is the central government’s domestic and foreign debt less the balance on the central government’s account with Danmarks Nationalbank, the assets of the government funds and the cost of purchasing bonds to finance social housing. The central government debt amounts to kr. 323 billion at the end of 2022 corresponding to 12 per cent of GDP. See table to the right.
What does the outstanding debt consist of?
Domestic government debt
The central government primarily issues bonds in kroner to cover its ongoing financing requirements in kroner. In total, approximately 98 per cent of the central government’s outstanding debt has therefore been issued in kroner. By primarily making domestic issuances, the central government ensures that its repayment ability is more robust, as the central government’s revenues, such as taxes, are also paid in kroner.
To enable the central government to issue government bonds on an ongoing basis, it is important to have access to a wide range of financing options. Therefore, the central government maintains diversified on-the-run issues, consisting of both fixed-rate bonds and inflation-linked bonds.
Approximately 90 per cent of the central government’s issuances are domestic fixed-rate bonds in kroner, primarily issued as 2-year, 10-year and 30-year bonds. In addition, a minor share (approx. 8 per cent) of the issuances consists of inflation-linked bonds.
Inflation-linked bonds often attract a different type of investors who needs to ensure a return that follows the development in Danish consumer prices. Such investors include the insurance sector and parts of the pension sector. The issuance of these bonds thus contributes to ensuring that the central government has a broad investor base. The indexed bonds also contribute to spreading the risk on the central government’s debt portfolio.
Foreign debt covers central government loans taken out in foreign currency. Foreign debt is generally not used to finance the government’s domestic expenditures, but is used as the government’s liquidity reserve and can – in extraordinary circumstances – also be used to finance domestic expenditures. In addition, the central government can issue foreign debt to influence the size of the foreign exchange reserve.
The government issues short-term securities in foreign currency via commercial papers as well as bonds denominated in foreign currency via the EMTN programme. The central government’s foreign borrowing contributes to ensuring that the central government has effective access to the international financial markets, which are characterised by being the largest and most liquid. Foreign borrowing can thus be an important source of financing to cover sudden liquidity needs.
This was necessary, for example, in 2020, when the central government had to borrow billions of kroner at short notice as a result of sudden and extraordinary expenses in connection with the covid-19 crisis. The central government’s use of foreign borrowing contributed to making this possible.