Management of Guarantees and Re-lending in Denmark World Bank, 27 October 2010 Lars Mayland Nielsen Danish DMO
Mainly infrastructure projects Political intention to support financing of certain projects Only government-owned companies have access to re-lending/guarantees Ministries conduct cost-benefit analysis of each project Use long-term average of government real yield + 1 per cent Amount of borrowing specified in law or acts LOAN GUARANTEES AND RE-LENDING BY THE DMO, END-2009 Table 1 DKK billion, nominal value Re-lending Loan Guarantees CPH City & Port Development... 10.5 Danish Broadcasting Corporation. 3.8 0.9 Danish North Sea Fund... 0.2 Danish Ship Finance... 10.6 Danish State Railways... 8.2 Export Credit Fund... 2.6 Energinet.dk... 5.0 Financial Stability Company... 29.0 0 Great Belt Bridge... 12.7 17.9 Lending to Iceland... 0.6 Metro Company... 0 Danish Serum Institute... 0.1 Sund & Belt Holding... 0.4 0 Øresund Bridge... 19.3 Øresund Landworks... 7.0 3.2 Total... 82.3 49.6 Total, per cent of GDP... 5 3 Note: Indicates no access 26-10-2010 DANMARKS NATIONALBANK 2
Managing the risks of companies Risks of the companies should be parallel to those of the DMO 1. Signed agreement between ministries, company and DMO Transactions may not be unethical or conflict with monetary policy Prudent risk management including credit risk on swaps and assets Companies are responsible for complying with the guidelines ( arms-length principle ) Transaction types governed in List of acceptable loan types 2. List of acceptable loan types (tailored to each company) Re-lending mirrors loans in existing bullet loans (2-10 year segment) Low debt => re-lending in synthetic bullet loans Export credit + ship finance => annuities, series loans Other maturities may be granted on request Price based on observable market prices or the yield curve Companies may transact swaps on its own in the private marked 26-10-2010 DANMARKS NATIONALBANK 3
Bias towards re-lending Financial exposure for guarantees and re-lending are identical Guarantees mainly when debt level was higher (off balance sheet) Re-lending typically cheaper due to liquidity premium (on balance sheet) Falling debt => new companies only access to re-lending DKK billion 100 75 50 25 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Re-lending Guarant ees managed by DM O 26-10-2010 DANMARKS NATIONALBANK 4
Treatment in the budget and debt Re-lending affects debt and borrowing directly Guaranties published in DMO report and public accounts The key is transparency Cent ral-government debt % GDP % GDP 50 50 40 40 30 30 20 20 10 10 0 0 2000 2002 2004 2006 2008 Debt Debt adjusted for re-lending and capital injections The budget includes: Revenue: commission fee of 15 basis points Expenditure: No estimates of expected losses In theory, expected losses equals savings on financing costs Savings are used to reduce debt rather than put aside as an asset 26-10-2010 DANMARKS NATIONALBANK 5
Impact on DMO risk management Credit risk due to re-lending/guarantees: stress tests of the budget Interest-rate risk management: re-lending is included as an asset DURATION TARGET, DMO DEBT PORTFOLIO Table 2 Debt (DKK billion) Duration (years) Liabilities (domestic and foreign)... 628 5.4 Assets (cash and bonds in funds)... -326 1.7 Central-government debt... 302 9.2 Re-lending... -82 3.6 Debt adjusted for re-lending... 220 11.3 26-10-2010 DANMARKS NATIONALBANK 6
Financial rescue packages Act ion Scope Privat e sect or Expiry General guarantee Financial sector Cover losses up to 2 % of GDP 30 Sep. 2010 Individual guarantee 12 % of GDP Pay fee 100-135 basis points Before 31 Dec. 2013 Capital injections 2.8 % of GDP Pay 10 % interest on average Step up clause after 3-5 years Financial Stability Company manages guarantees and capital injections into banking sector DMO provides financing to the Financial Stability Company via re-lending and will finance any losses Explicit bank guarantees and capital injections => Advantage: banks pay a fee to the government Larger risk => bias towards higher duration target on regular portfolio focus on frontloading, pre-funding and cash buffer 26-10-2010 DANMARKS NATIONALBANK 7