Central Government Borrowing in a surplus environment

Transcription

1 Central Government Borrowing in a surplus environment Summary of a speech by Thomas Olofsson, Head of Funding, at the Swedish National Debt Office, at Nordea s Fixed Income Seminar in Copenhagen on Thursday, 18 May Since last year, the Swedish state has a budget surplus. We estimate that the surplus will be SEK 16 billion this year. At present, it does not look like the surplus will be less since the last forecast in February, the forecast has been exceeded by SEK 11 billion, even if it is still too early to make an assessment of the effect this will have for the whole of This is, of course, positive for the Swedish economy. At the same time, the surplus means that the state will be borrowing in a partially different environment than when we have a deficit. I intend to discuss briefly some of the challenges that this entails. Strong central government finances are good for the state as well as for citizens and not least future generations. The budget surplus means that the central government debt will decrease. From the perspective of the Debt Office, I can note that our funding is made easier: the highest credit rating in combination with a scarcity value in our loan instruments contributes to the high level of demand and favourable loan terms. This does not mean that there are no challenges: it is always possible to develop the debt structure, borrowing techniques and market communication aiming to borrow more cheaply and at lower risk. At the same time, new challenges arise since it becomes more difficult to comply with all parts of our loan policy and our undertakings when the supply of government securities decreases in the event of a reduced borrowing requirement. In situations with a high level of demand for, for instance, long bonds, to match assets and liabilities, or short-term government securities for cash management, we cannot always meet all requests. These situations have to be dealt with by price formulation in the market. This does not, of course, mean that the market always manages situations of this kind without friction, but it is not basically a fundamental problem. Scarcity of government securities should be reflected in lower interest rates. It is therefore interesting to discuss whether scarcity situations can arise for government securities, at least periodically, and the

2 effects that this may have on interest rate formation and the efficiency of the market. In order for the market to be able to deal with a low supply of government securities in an efficient way, it is important that the market participants understand our policy and how we deal with small borrowing requirements. We want to avoid situations where the market is surprised by our conduct. Let me say at this point that we have had the reverse situations at least periodically in the spring when demand in our auctions has been at a low level. These problems are probably of a more temporary nature due to the current market situation with rising interest rate levels. One question which is perhaps more important from our horizon is how our undertaking to contribute to liquid and efficient government securities markets is to be dealt with during periods of large surpluses. To start with, I must underline that we can at present succeed with both funding and the undertaking on liquid loans and liquid markets without any major disruptions despite our having a surplus. This is largely confirmed by the survey that Prospera carried out on our behalf about how our funding was perceived by investors and counterparties. This does not prevent the market performing more or less well during different periods, but we substantially succeed in carrying out our policy and our undertakings. Which are these then? Our goal is to borrow as cheaply as possible while taking into account risk. We try to allocate the central government debt to different types of debt and durations precisely with a view to achieving this goal. The balance struck between costs and risks is decided upon by the government. Moreover, we try to make our contribution to an attractive and liquid market for government securities. Our aim is a broad, international investor base and a wellfunctioning market for our loan instruments. To achieve this, we concentrate borrowing on a few liquid benchmark loans. We try to reduce uncertainties by being open and predictable, having an open and clear communication with investors and counterparties and supporting the market with various market maintenance measures. A liquid, efficient market with a broad investor base should contribute to reducing our borrowing costs in the long-term. What effects does the budget surplus have on our ability to achieve this? Somewhat simplified, it can be said that when we have a budget surplus, we can still borrow to finance maturing loans although the whole debt 2

3 cannot be refinanced. Part of the maturities will be financed by the budget surplus. If we assume that the budget surplus is sufficiently large as to suffice to pay all maturing bond loans, the gross borrowing requirement will also be negative. This does not mean that we stop issuing bonds. Scope for this will then be created by a reduction in the outstanding stock of T-bills. We need to borrow the whole time in bonds regardless of the size of the surplus since the duration of the debt would otherwise be too short. It is unavoidable that aggregate borrowing in all instruments will be less and the outstanding central government debt and outstanding loan stocks will also be less in the event of large surpluses. This can, of course, mean that liquidity on the margin suffers. Our task will then be to do what we can to minimise the effects on liquidity and markets. This is also what we have in fact already done in the light of our already having a surplus in the budget. If the surplus were to become significantly greater, there are several possibilities for dealing with this. Let me give five examples. It will become even more important to concentrate funding to new loans to build up sufficient liquidity. We can, for instance, place even more of our auctions in the maturities that are new or which need additional liquidity. At present, we make approximately half of our auctions in the ten-year maturity. It is fully possible to increase this share more. Today, we issue a new ten-year bond ever year. This has been possible since the borrowing requirements have been sufficiently large to build up a good liquidity in these loans every year. It is, of course, possible to make new issues rather less frequently, as we have done in the past. An issue pattern of this kind provides more opportunity to successively build up larger volumes in our benchmark loans. We use derivatives such as swaps to be able to issue our ten-year bonds with sufficiently large volumes. Swaps make it possible to issue bonds without the average time to maturity becoming too long. We can use our relative strength as a borrower in bonds without needing to pay the higher interest rate that long bond borrowing normally entails. Swaps can accordingly be used in situations when the borrowing requirement is small to keep up bond borrowing. An important way of building up new liquid loans with a limited borrowing requirement is to exchange new loans for old. We repurchase older shorter loans at the same time as we sell new longer 3

4 loans, normally a new ten-year loan. If necessary, one can, of course, consider making exchanges on a larger scale than is the case at present. Buybacks as a method of creating scope for new borrowing is in other words an important part of our method for borrowing and can be used without being directly linked to exchanges. Our Finnish equivalent is an example of a debt office which uses buybacks to make it possible to issue new bonds. When I am talking about buybacks here, it is important to point out that this concerns buybacks based on interest on the part of investors, which are carried out without any real impact on prices. In the more speculative discussions in the market on future borrowing requirements and funding, possible privatisations are mentioned. I do not intend to provide any kind of decision here about how such decisions will be dealt with. It is difficult in advance to describe how income from privatisation could be dealt with: the prerequisites can look different from case to case and will thus also be dealt with differently. We will none the less provide more concrete information on a later occasion about how we can act in the event of major privatisations, at least to state some principles that can provide some guidance for the market. I intend here to restrict myself to some general reflections. From our perspective, income from privatisations does not differ from tax revenue in principle. Unexpectedly large income, regardless of whether this is tax revenue or from privatisations does not make any difference. Last year the budget balance was SEK 52 billion better compared with the forecast at the start of While discrepancies of this size mean that we have to revise our loan plans, we can manage to do this without great strains. With good planning in advance, it is possible to adapt funding in such a way as to avoid large fluctuations in borrowing: this is the case for both tax revenue and income from privatisations. However, one difference, in the case of privatisations, can be that there may be large incomes on one and the same day. Income that needs to be dealt with in the framework of our liquidity management. During 2000, the Debt Office bought back bonds for approximately SEK 40 billion in connection with partial privatisation of Telia. These buybacks were carried out to obtain scope to continue issues without exceeding the credit limits that we have set for ourselves. In this case, it was accordingly our liquidity management that was the primary cause of the buybacks. These buybacks were not experienced as very positive. They were criticised by players in the market and both we and the government drew the conclusion that there were important lessons to be drawn from the procedure adopted. The government points out, among other things, that 4

5 we could have considered a rather more flexible management of the credit limits. It may be worth pointing out here that, compared with five years ago, we now have greater possibilities for investing large surpluses within the framework of liquidity management. Among other things we now have access to cash management in foreign currencies. One of the questions we have reason to think about is, inter alia, our ability to manage large income in cash. As I have already said, we intend, on a later occasion, and rather more concretely, to return to the issue of how any future privatisations and large surpluses can be dealt with. What I have said may be regarded as rather more general reflections. To conclude, I would like to underline that we despite having a budget surplus at present are able to maintain a relatively normal borrowing pattern with issues in different maturities and instruments that are sufficient to successfully comply with our policy undertakings. 5