CHAPTER 1

Main Principles of Government Debt Management

The central-government debt comprises domestic and foreign debt, the assets of three government funds and the balance of the central government's account. Management of government debt is carried out by Gov ernment Debt Management at Danmarks Nationalbank, which bor rows in the financial markets on behalf of the Ministry of Finance to cover the central government's financing requirement.

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 highlighted the need to facilitate the central government's access to the financial markets in the longer term and to support the domestic financial market.

Government Debt Management Portfolios 1.1

The central-government debt is compiled as the nominal value of do mes tic and foreign debt less the balance of the central government's account at Danmarks Nationalbank and the assets of three government funds¹.

Domestic and foreign debt is defined by the currency exposure. Do mes tic debt is exposed in kroner, while foreign debt is exposed in foreign exchange, predominantly euro.

The assets of the three government funds administered by Government Debt Management are invested in Danish government securities and other listed bonds denominated in kroner. The central government holds liquid funds in an account at Danmarks Nationalbank, where the central government's large receipts and payments are settled.

At end-2009, the central-government debt amounted to DKK 302 bil lion, equivalent to 18 per cent of GDP, cf. Table 1.1.1. Government debt ad justed for re-lending and capital injections into banks and mortgage-credit institutes amounted to DKK 173 billion, equivalent to 10 per cent of GDP.

Government Debt Management Objectives 1.2

The overall objective of Government Debt Management is to cover the cen tral 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 do mestic financial market.

The financial crisis has highlighted the need to facilitate the central gov ernment's access to the financial markets in the longer term and to sup port the domestic financial market.

Responsibilities of Government Debt Management 1.3

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

Calculation of financing requirement and issuance of government securities

• Calculation of the central government's financing requirement on the basis of the government budget forecast from the Ministry of Finance
• Issuance of domestic government securities to cover the central government's financing requirement
• Issuance of foreign loans in order to maintain an adequate foreign-exchange reserve
• Establishment of a framework to support a well-functioning market for gov ernment securities, e.g. through agreemen

Risk management

• Analysis and management of risk on the central-government debt portfolio. The risk on central-government financial assets and liabilities is managed on a consolidated basis
• Credit risk management of currency and interest-rate swaps.

Management of government funds, re-lending and government guarantees

• Management of the assets of the three government funds
• Management of access to re-lending and government guarantees for a number of companies.

Advisory services and international cooperation

• 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
• Advising other government debt management offices
• Participation in international cooperation in the area of government debt management, including the OECD's Working Party on Govern ment Debt Management and the Economic and Financial Committee on EU Government Bonds and Bills Markets.

Contacts with credit rating agencies and investors

• Contacts with credit rating agencies
• Information to investors on the government debt policy and financial and economic conditions.

Government Debt Management Strategy 1.4

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 Gov ern ment Debt Management. The Ministry of Finance authorises Gov ernment Debt Management to implement the agreed strategy, including the central government's issuance strategy and risk management.

In December, the overall strategy for the following year is agreed upon, and at the subsequent three quarterly meetings any adjustments of the overall strategy for the year are adopted. Government Debt Management reports on the implementation of the strategy and also reports on general mat ters at the quarterly meetings. In addition, Government Debt Man age ment is regularly in contact with the Ministry of Finance concerning cur rent aspects of government debt management.

The government debt strategy is announced to the market immediately after the government debt meetings in June and December This sup ports openness and credibility. 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 policy complies with inter national standards formulated by e.g. the IMF, the World Bank and the OECD.

Domestic And Foreign Funding Rules 1.5

The Danish government and Danmarks Nationalbank have agreed on the framework for the distribution 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 for mu lated in the Agreement on the division of work in the area of government debt between Danmarks Nationalbank and the Ministry of Finance².

Domestic borrowing
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 distribution of responsibilities for fiscal and monetary policy is supported.

The central government may continue to issue government securities even though the borrowing requirement for the year has been financed. In that case, these issuances will cover part of the borrowing requirement for the following year.

Under the EU Treaty, the central government's account at Danmarks Nationalbank must never show a deficit. Borrowing is planned to ensure an appropriate balance on the central government's account in order to absorb fluctuations in central-government receipts and payments.

Foreign borrowing
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. If the foreign-exchange reserve decreases by more than what is deemed appropriate, it may be necessary for the central government – out of concern for the exchange-rate policy – to raise extraordinary loans abroad in order to strength en the foreign-exchange reserve. On the other hand, it is possible to reduce the government's foreign debt in situations where the foreign-exchange reserve increases by more than necessary. Borrowing in foreign cur rency 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 Com mercial Paper programmes, which allows rapid build-up of the foreign-exchange reserve or the balance of the central government's account.

Structure of Government Debt Management 1.6

The Minister of Finance is authorised by law to raise government loans, cf. Box 1.1. In addition, the Minister of Finance holds the overall political responsibility for central-government borrowing and debt, including relations with the Folketing (Parliament). The day-to-day management of the central-government debt is conducted by Government Debt Management on behalf of the Ministry of Finance, and in accordance with the government debt strategy agreed with the Ministry of Finance.

In most countries, management of the central-government debt is un der taken by the ministry of finance or a separate government debt man agement office. In Denmark, Government Debt Management is lo cated in Danmarks Nationalbank, but its tasks and organisation cor re spond to those of government debt management offices in other coun tries.

The distribution of responsibilities is specified in the Agreement on the div ision of work in the area of government debt between Danmarks Nation albank and the Ministry of Finance³. The framework for man age ment of the assets of the Social Pension Fund is laid down in the Regulations governing the management of the Social Pension Fund⁴. Tasks un der taken by Government Debt Management in relation to the manage ment of the assets of the other two government funds and the manage ment of re-lending and government guarantees are specified in separate agreements.

The internal structure of Government Debt Management reflects inter nation al standards and recommendations. Government Debt Manage ment is divided into front, middle and back offices with separate func tions, cf. Box 1.2.

Structure of government debt management	Box 1.2

A division of functions and clear 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 under taken 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 lays down monthly guidelines for the front office with regard to issuance, 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 gov ernment guarantees, represents Danmarks Nationalbank on the Com mittee of the Social Pension Fund and has an advisory role re gard ing the financing of subsidised housing.

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

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

Government Debt Management is audited by Danmarks Nationalbank's auditors on behalf of Rigsrevisionen (the national audit office of Den mark). 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 ap plied in the best possible way. The results of its investigations are pub lish ed at www.rigsrevisionen.dk.

Information on the Central-Government Debt 1.7

An important element of government debt policy is to give market par ticipants and the public access to information on the central-government borrowing strategies, borrowing requirement, as well as information of a more general nature on the framework for government debt manage ment. Government Debt Management aims to be clear and unambiguous in its communication of the government debt strategy to market partici pants.

Information about government debt and Government Debt Manage ment is available at www.governmentdebt.dk. In addition, information is published via other sources on an ongoing basis, cf. Box 1.3.

An overview of the information regularly published on central-govern ment borrowing and debt is presented in the Appendix Information on Government Borrowing and Debt.