Denmark

Pages55-65

Page 55

Developing a Sound Governance and Institutional Framework
Objectives

The overall objective of Denmark's government debt policy is to achieve the lowest possible long-term borrowing costs, consistently with a prudent degree of risk. The authorities pursue this objective while taking various factors into account, including the objective of a well-functioning domestic financial market. Recently, more emphasis has been placed on the discipline of risk management.1

Scope of debt management

The debt of the central government is compiled as the nominal value of domestic and foreign debt minus the central government's account with the central bank, Danmarks Nationalbank (DNB), and the assets of the Social Pension Fund (SPF). All administrative functions related to government debt management are undertaken by the DNB.

Two conditions establish a dividing line between fiscal and monetary policy in Denmark. First, government borrowing is subject to a set of funding rules based on an agreement between the government and the DNB. Second, the prohibition on monetary financing in the Maastricht Treaty regulates the central bank's role as a fiscal agent and bank to the government.

Since the early 1980s, central government borrowing has been subject to funding rules for both domestic and foreign borrowing. The present funding rules were stipulated in a 1993 agreement between the government and the central bank, which replaced the informal agreement from the early 1980s, when the Danish fixed exchange rate regime was implemented.

In overall terms, the domestic rule ensures that domestic borrowing in Danish kroner matches the central government's gross domestic financing requirement for the year. Thus, the domestic rule sterilizes the liquidity impact from government payments for the year as a whole. The rule for foreign borrowing states that new foreign loans are normally raised to refinance the redemptions on the foreign debt. If the level of foreign exchange reserves is considered inap- Page 56 propriate, a decision can be made to reduce or increase the level of foreign debt. Foreign exchange reserves are owned by the DNB, and the central government's DNB account provides the link between government foreign debt and foreign exchange reserves.

In accordance with the Maastricht Treaty's prohibition of monetary financing, the central govern- ment's account with the DNB may not show a deficit. The government's borrowing is therefore planned to ensure an appropriate balance on its account.

The central government receives interest on its account with the DNB. This interest rate is equal to the discount rate set by the central bank. The discount rate is equivalent to the current-account rate (folio rate), which is the interest rate for the banks' and mortgage-credit institutions' current-account deposits with the DNB. This arrangement implies, together with the fact that the surplus of the central bank after reserve allocations is transferred to the government, that the government receives an interest rate on the account that is comparable to what would be obtained if the account were placed in a commercial bank.

Legislative basis for central government borrowing

The legal authority for the central government to borrow is stipulated in legislation enacted in 1993. It allows the minister of finance to borrow in the name of the government. It also empowers the minister of finance to raise loans on behalf of the central government, up to a maximum of DKr 950 billion, which is the limit for the total domestic and foreign government debt. Moreover, it empowers the minister of finance to transact swaps and other kinds of financial instruments.

Before the beginning of a new fiscal year, a finance bill is adopted by parliament. It authorizes the minister of finance to raise loans to finance the central government's projected gross financing requirement, which is the sum of the current central government deficit plus redemptions on domestic and foreign debt. The borrowing is obtained according to the domestic and foreign norm. During a fiscal year, changes may occur in the gross financing requirement. This happens primarily because of changes in the central government deficit or because of buybacks that increase the amount of redemptions. Changes in the gross financing requirement are similarly financed by government loans. These loans are authorized by an act of supplementary appropriation of the finance bill at the end of the year or by the Financial Committee of the Parliament during the year.

Besides the government debt, the central government guarantees the borrowing and financial transactions related to the borrowing of a number of public entities. The entities are mainly related to infrastructure projects, for example, the Great Belt Bridge and subway construction in Copenhagen. The board of directors and the management of the individual entity are responsible for the financial transactions of the entity, but the central government establishes borrowing limits and guidelines for the borrowing activities. The guidelines are determined in a set of agreements between the DNB and the ministry of finance or the ministry of transport and between the relevant ministry and the individual entity. The agreement between the central bank and the relevant ministry sets out the main tasks and responsibilities of the parties involved. The set of agreements also includes a list of acceptable types of loans. The list describes which kind of financial transactions and currency exposure the entity is allowed to incur.

The entities publish their own annual report and are covered by the general legislation applied to private firms.

The Danish debt office is placed within the central bank

The responsibility to parliament for central government borrowing rests with the ministry of finance. Since 1991, the central bank has undertaken all administrative functions related to government debt management. The division of responsibility is set forth in an agreement between the ministry of finance and the DNB. By power of attorney, DNB officials are authorized to sign loan documents on behalf of the minister of finance.

Before 1991, the debt office was part of the ministry of finance. In 1991, the debt office was moved to the central bank-the structural change occurring Page 57 partly as a consequence of a report prepared by the public auditors. The report indicated that most of the assignments related to the central government debt were already carried out by the DNB, but duplication of assignments occurred between the central bank and the ministry of finance. Furthermore, the report suggested that a stronger coordination between the management of the foreign exchange reserve in the DNB and the central government's foreign debt would be beneficial. Finally, it suggested that attracting and maintaining staff with the relevant skills for the debt office would be easier if the debt office were placed in the central bank. The move to the central bank has helped to centralize the retention of knowledge of most aspects of financial markets within a single authority.

The relation between the debt office and the ministry of finance

At quarterly meetings, the ministry of finance and the DNB determine the overall strategy for government borrowing on the basis of written proposals from the DNB. The adopted strategy is authorized and signed by the ministry of finance. In December each year, the overall strategy for the next year is determined, as well as the detailed strategy for the first quarter of the next year. At the following quarterly meetings, amendments to and specifications of the main strategy for the subsequent quarter are decided.

The strategy specifies the expected domestic and foreign borrowing requirements and includes a set of decisions for the next year. Among the decisions are

- bands for duration of the central government debt,

- a list of on-the-run issues for the domestic debt,

- the borrowing strategy for foreign debt,

- a list of government securities eligible for buy- backs or switch operations,

- a list of government securities in the securities lending facility, and

- maximum amounts of buybacks and use of interest rate swaps.

The first four items are published after the meeting in December. If changes in these decisions occur during the year, these are published as well. Maximum amounts of buybacks and use of interest rate swaps are not made public.

On the basis of these conclusions, the central bank handles the necessary borrowing transactions and the ongoing management...

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