Government Debt Management and Financial Stability

1. Government Debt Management and Financial Stability Phillip Anderson Banking and Debt Management Group The World Bank Treasury

2. 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

3. 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

4. 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

5. 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%.

6. Turkey – Significant Improvements in Debt Indicators

7. 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).

8. 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

9. 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

10. 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