CHAPTER 5

Government Debt
and Interest Costs

In 2009, the central-government debt increased by DKK 105 billion after a number of years with large government surpluses and declining debt. At year-end, the central-government debt amounted to DKK 302 billion, corresponding to 18 per cent of GDP.

Most of the increase in 2009 can be attributed to central-government lending to support financial stability. Adjusted for capital injections into banks and mortgage-credit institutes and re-lending, the central-govern ment debt rose by DKK 27 billion, to DKK 173 billion at year-end, equiva lent to a debt of 10 per cent of GDP. Despite the rise in 2009, the debt remains low in an international context.

In 2009, interest costs on the central-government debt increased by DKK 1.8 billion to DKK 13.5 billion. Adjusted for interest income from re-lending and capital injections into banks and mortgage-credit institutes, the central government's interest costs declined by DKK 0.6 billion.

Government Debt Rose in 2009 5.1

The central-government debt is compiled as the nominal value of do mestic and foreign debt less the balance of the central government's ac count at Danmarks Nationalbank and the assets of three government funds.

In 2009, the central-government debt increased by DKK 105 billion. At year-end, the central-government debt amounted to DKK 302 billion, cor responding to 18 per cent of GDP, cf. Chart 5.1.1. At end-2009, the central-government debt was approximately DKK 55,000 per capita, com pared with approximately DKK 35,000 per capita in 2008.

central-government debt, 1975-2009	Chart 5.1.1

Most of the increase in 2009 can be attributed to central-government lending to support financial stability, cf. Table 5.1.1. Adjusted for capital injections into banks and mortgage-credit institutes and re-lending, the debt rose by DKK 27 billion to DKK 173 billion, corresponding to a debt of 10 per cent of GDP.

The central-government debt at market value was DKK 326 billion at end-2009, i.e. an increase of DKK 97 billion on the previous year, cf. Table 5.1.2. Central-government debt at market value rose less than that compiled at nominal value. This can be attributed to the price of the 30-year government bond being lower at end-2009 than at end-2008.

Compilation at market value is especially relevant if asset portfolios are being built up on a large scale, debt is bought back before maturity, or derivatives are used in government debt management.

Rising Government Debt Has Led to Higher Interest Costs 5.2

In 2009, interest costs on the central-government debt rose by DKK 1.8 bil lion. The interest costs were DKK 13.5 billion, equivalent to 0.8 per cent of GDP. The increase in inter est costs came after more than 10 years of declining interest costs due to debt reduction and falling market interest rates, cf. Chart 5.2.1.

Interest costs	Chart 5.2.1

The central government's costs for financing of re-lending and capital injections into banks and mortgage-credit institutes are offset by interest payments from the companies. The interest payable on the capital in jections averages 10.1 per cent, reflecting the risk incurred by the central gov ernment in this context. Adjusted for interest income from re-lending and capital injections, interest costs on the central-government debt declined by DKK 0.6 billion in 2009, cf. Table 5.2.1.

Public Debt Measures 5.3

EMU debt remains low in an international context
The European Commission and the Ecofin Council monitor the de vel op ment in the budgetary situation of the EU member states in order to as sess whether budgetary discipline is maintained. This assessment is based on the criteria set out in the EU Treaty and in the Stability and Growth Pact. As a general rule, the general-government deficit may not exceed 3 per cent of GDP, and the EMU debt may not exceed 60 per cent of GDP.

EMU debt is a gross debt measure comprising major debt items for general government compiled on a consolidated basis, cf. Box 5.1.

The EMU debt was approximately DKK 643 billion at end-2009, cor re spond ing to 39 per cent of GDP, compared to 33 per cent of GDP in 2008, cf. Budget Outlook 3, December 2009. The increase in the EMU debt is mainly attributable to the general-government deficit and the restructuring of the Social Pension Fund's portfolio from government bonds to mortgage-credit bonds, which are not offset in the EMU debt. The central gov ern ment's capital injections and most of the re-lending to the Financial Stability Company have been financed by drawings on the central government's account and therefore do not influence the EMU debt.

Despite increasing EMU debt, Denmark's debt remains low compared with that of other EU member states, cf. Chart 5.3.1.

General-government balance and EMu debt, 2009	Chart 5.3.1
Note: EMU debt includes the general government's gross debt. Since the European Commission's autumn forecast a majority of general-government budget balances have deteriorated further. The European Commission will publish a new forecast in the spring of 2010. Source: European Commission's autumn forecast, August 2009.

The general government's net worth remains positive
The general government's net debt became net worth at the end of 2007, cf. Chart 5.3.2. The net worth is expected to be close to zero at the end of 2009 as a result of the general-government deficit. The central govern ment's re-lending and capital injections into banks and mortgage-credit institutes have no immediate impact on the net debt due to the parallel increase in the central government's assets and liabilities.

Net general-government debt	Chart 5.3.2
Note: The 2009 figure is an estimate from Budget Outlook 3, December 2009. Source: Statistics Denmark and Ministry of Finance.

The capital injections do, however, influence the expected return on the total portfolio of assets and liabilities in favour of the central government, reflecting the higher risk on the portfolio.