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Government Debt Management and Financial Stability. Phillip Anderson Banking and Debt Management Group The World Bank Treasury. What Do We Mean By Government Debt Management?.

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Government Debt Management and Financial Stability

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Government Debt Management and Financial Stability

Phillip Anderson

Banking and Debt Management Group

The World Bank Treasury


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What Do We Mean By Government Debt Management?

“Public debt management is the process of establishing and implementing a strategy for managing debt to achieve the government’s financing, risk and cost objectives and other goals, such as developing the domestic debt market”

Guidelines for Public Debt Management, 2001

  • Fiscal Policy – Aggregate government spending and taxation, micro-economic impacts of individual tax and spending policies. Determines the level of debt

  • Debt Management – Structure of the debt, cost and risk of the debt portfolio within acceptable tolerances. Determines the composition of the debt


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Origins of “Modern” Debt Management

During the 1980s in smaller OECD countries:

  • High debt levels, with significant risks

  • Financial market innovation created opportunities

    Momentum for reform boosted by the crises of the 1990s and 2000s

  • Risky public debt structures exacerbated impact of crises

  • Turkey saw a significant increase in debt in 2000/2001


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Developing a Public Debt Management Strategy

Cost/Risk

Analysis

Information on cost and risk

Constraints

Debt Management

Strategy Development

Consistency/

Constraints

Demand

constraints

Initiatives

Debt Market

Development

Information on cost and risk

Macroeconomic

Framework


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Turkey Has Developed an Explicit Strategy for 2006 - 2008

  • Raise funds mainly in TRL by issuing fixed-rate bonds; limit the use of floating rate notes;

  • Increase average maturity of domestic borrowing by using 5 year bonds, subject to market conditions;

  • Maintain a strong cash reserve at the Central Bank;

  • Full redemption of foreign-currency indexed domestic borrowing;

  • Limit rollover of foreign-currency denominated domestic borrowing to 80%.


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Turkey – Significant Improvements in Debt Indicators


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Organizational arrangements to support effective debt management

Many countries have reformed arrangements over the last 20 years – wide variety of outcomes:

  • Offices or departments within ministries (e.g. Italy, Japan, Brazil, Czech Republic, Spain, and New Zealand);

  • Agency within the central bank (e.g. Denmark);

  • Agencies established by executive decision (e.g. UK, France, and Australia;

  • Agencies established under specific laws (e.g. Ireland, Iceland, Austria, Portugal, Slovak Republic, and Sweden);

  • Agencies that are established under general company law (e.g. Germany, Hungary).


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Stylized view of sound arrangements

Parliament/National Assembly

Delegate Authority

Accountability

Minister/Treasurer

Advisory Committee

Audit

Head of DMO

Front Office

Middle Office

Back Office

  • Delegations in laws: power to borrow, transact

  • Accountability: reporting and oversight, external audit

  • Operational risk: large transactions, strong control environment required


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Coordination with macroeconomic policies

  • Debt managers, fiscal policy advisors, and central bankers should share an understanding of the objectives of each others’ policies given the interdependencies between their different instruments

  • Degree of coordination required will depend on levels of debt market development and macroeconomic stability

  • Significant policy tensions may arise when instruments are shared or choices constrained


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Conclusions

  • A public debt management office has two roles in contributing to overall financial stability:

    • managing the financial risks that the government faces; and

    • assisting to develop the fixed income markets.

  • Effective organizational arrangements and coordination are critical to support effective debt management

  • Turkey has reduced vulnerability in the last five years through prudent macroeconomic and debt management policies


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