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

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 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

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

Developing a Public Debt Management Strategy Debt Management Strategy Development Cost/Risk Analysis Macroeconomic Framework Debt Market Development Information on cost and risk Constraints Initiatives Demand constraints Consistency/ Constraints Information on cost and risk

Turkey Has Developed an Explicit Strategy for 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%.

Turkey – Significant Improvements in Debt Indicators Public Debt Level % GNP Foreign currency debt as % of total debt Average maturity of domestic debt at issuance 5 months27.4 months

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).

Stylized view of sound arrangements Delegations in laws: power to borrow, transact Accountability: reporting and oversight, external audit Operational risk: large transactions, strong control environment required Advisory Committee Front Office Middle Office Back Office Head of DMO Minister/Treasurer Parliament/National Assembly Audit Accountability Delegate Authority

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

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