Portugal
| Pages | 179-189 |
Page 179
As a result of Portugal's entry into the European Economic and Monetary Union (EMU), the environment underlying the management of the Portuguese government debt has gone through very important changes in the last few years. By adopting the euro as its currency, the country now benefits from both the credibility of a monetary policy that is defined at the level of the European Union (EU) and the fiscal discipline that EU members have to comply with. Furthermore, the constraints on government debt management resulting from the execution of the monetary policy have been greatly diminished with EU membership, because Portugal has gained access to a much larger "domestic" financial market-the euro debt market. The challenge the country faces with this new position is the loss of being the reference issuer of the Portuguese escudo and becoming a small borrower in a large market, where one has to compete with other sovereign issuers for the same base of investors.1
In the second half of the 1990s, and in anticipation of these changes, a series of important reforms took place that aimed to develop conditions for a more efficient management of public debt in this new environment. These reforms included, at the institutional level, the creation of an autonomous debt agency, the Instituto de Gestão do Credito Publico ([IGCP] Portuguese Government Debt Agency), in 1996; the publication of a new Public Debt Law approved by parliament in 1998, and government approval of formal guidelines for debt management in 1999.
The strategic objectives to be pursued in government debt management and state financing were made explicit by the new Public Debt Law, which states that these activities should aim to guarantee the financial resources required for the execution of the state budget and be conducted in such a way as to
- minimize the direct and indirect cost of public debt in a long-term perspective,
- guarantee a balanced distribution of debt costs through the several annual budgets, Page 180
- prevent an excessive temporal concentration of redemptions,
- avoid excessive risks, and
- promote an efficient and balanced functioning of financial markets.
Minimizing the cost of debt was already an implicit objective of debt management before the approval of the new Public Debt Law. Nevertheless, its enactment has been an important step in that it has formalized these objectives, clarifying the issue of the minimization of cost so that it would be pursued in a long-term perspective and introducing an explicit reference to risk limitation, that is, how to reduce refinancing risk and the volatility of debt cost over time.
The objective of promoting an efficient and balanced functioning of the domestic financial market was particularly important before the creation of the EMU, in a context where most of the debt was denominated in escudos and placed on the domestic market. The relevance of creating and maintaining a benchmark yield curve to support the escudo capital market vanished as the escudo was integrated into the euro.
The guidelines for debt management, approved by the minister of finance in late 1998 and in force since 1999, adopted a model for risk management and translated the strategic objective of minimizing debt costs into the definition of a benchmark that, since then, has been the reference point for debt management. The risk management approach has four basic components:
- adoption of a consistent model for the development of primary and secondary markets for Portuguese public debt;
- development and implementation of clear debt management guidelines and risk/performance evaluation (benchmark);
- investment in information technology (IT) systems to support well-informed management decisions, reduce operational risk, and increase transparency by improving availability and quality of all transaction data; and
- development and implementation of a comprehensive manual of operational procedures to reduce operational risk and support external and internal auditing.
Debt management includes the issuing of debt instruments, the execution of repo transactions, and the completion of other financial transactions with the purpose of adjusting the structure of the debt portfolio.
There is no limitation in the Public Debt Law as to the nature of the financing instruments that can be used for funding. However, concerns about the liquidity of the government debt led to a progressive concentration of the financing activity into the issuance of a restricted number of standard fixed-rate treasury bonds ( obrigações do tesouro [OTs]) and euro commercial paper (ECP). The issuance of savings certificates, a retail instrument sold to individuals on a continuous basis, remains an important funding source.
As a facility of last resort, repo transactions are made available to market makers. The objective is to support the market-making obligations of the primary dealers in the secondary market of the OTs. Repos are provided in a range of amounts for each security. Taking into account market conditions, the price is fixed at a rate below the average posted euro overnight interest rate (euro overnight index average [EONIA]).
To adjust the redemption profile of the government debt, the Public Debt Law includes the early redemption and buyback of existing debt and the direct exchange of securities within the scope of operations allowed to debt managers. Since 2001, this practice has also been used more intensively for the purpose of promoting liquidity in the treasury bond market through the concentration of existing debt into larger and more liquid issues.
The Public Debt Law also includes within the scope of debt management the trading of derivatives, namely interest rate and currency swaps, forwards, futures, and options. Those transactions must be linked to the underlying instrument in the debt portfolio. Swaps and foreign currency forwards have been the instruments most used for this purpose.
Although contingent liabilities are not now taken into account in debt management decisions, it is planned to analyze them in the future with a view to including them in the risk management framework. The debt agency, IGCP, is responsible only for the management of the direct public debt of the central Page 181 government, even though it is required to appraise the financial terms of guaranteed debt and debt issued by (public sector) services and funds with administrative and financial autonomy.2 Within the ministry of finance, the treasury department follows, quantifies, and reports explicit contingent liabilities in a systematic way.
For the time being, the scope of the IGCP's activity does not include the investment of surpluses that may exist in the state central cash accounts, which are also under the responsibility of the treasury department.3 The permanent exchange of information on policies and forecasted treasury flows between the two entities is carried out to coordinate funding and surplus investment effectively.
The main legal framework that regulates the issuance of central government debt and the management of public debt includes
- the Public Debt Law, which states that state financing has to be authorized by parliament;
- the annual Budget Law, which establishes limits for the amounts that the government is authorized to borrow during the year in terms of net borrowing (The annual Budget Law may also define maximum terms for the debt to be issued and limits to the currency exposure and to the floating rate debt.); and
- the decree-law that regulates the activity of the IGCP.
According to the legal framework, the IGCP's responsibility is to negotiate and execute all financial transactions related to the issuing of central government debt and the management of the debt. The minister of finance is empowered to define specific guidelines to be followed by the IGCP in the execution of the financing policy.
Permanent guidelines from the minister of finance were formalized through the adoption of a long-term benchmark structure for the composition of the debt portfolio. The benchmark reflects selected targets concerning the duration, interest rate risk, currency risk, and refinancing risk and sets the reference for the evaluation of the cost and performance of the actual debt portfolio.
The government approves annually, through a council of ministers resolution, the debt instruments that should to be used in state financing for the year and their respective gross borrowing limits. The minister of finance annually approves specific guidelines for the IGCP. The guidelines include broad lines for the management of the debt portfolio (e.g., buyback of debt and repo transactions) and the issuing strategy in terms of instruments, maturities, timing, and placement procedures. The guidelines also cover measures to be implemented regarding the marketing of the debt and the relationship with the primary dealers and other financial intermediaries. These guidelines are made public.
Previously, two departments inside the ministry of finance were in charge of central government debt management. The treasury department was responsible for the external debt and the...
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