Sweden
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Page 213
Sweden has had a separate agency, Riksgäldskontoret (the Swedish National Debt Office [SNDO]), for government debt management since 1789. Inevitably, the principles and practices of debt management have changed repeatedly over the years. A major reform of the governance system was enacted in 1998. As a result, debt management decisions are made within a more clearly structured framework. There is also a more structured approach to evaluate the decisions after the fact. The outline of this system and the experiences so far are presented in the first section, which also discusses the organization of the debt office.1
The new governance system has created a framework for more focused analysis of the debt management strategy and the risks involved. The second section discusses the key features of debt management strategy and the analyses undertaken to get a better understanding of the costs of government debt and the associated risks.
The third section discusses measures for developing the government securities markets.
The core principles and rules for central government debt management in Sweden are given in the Act on State Borrowing and Debt Management. 2 The current legislation was enacted by parliament in 1998. The government's right to borrow is based on an annual authorization from parliament, which is given as part of the decision on the state budget for the subsequent fiscal year. There is no fixed limit on the annual amount of borrowing. Instead, the act specifies the purposes for which the government may borrow, in particular, to finance the budget and refinance maturing debt. 3 The government invariably delegates the mandate to borrow to the SNDO.
The objective of debt management is also formulated in the act. It stipulates that the state's debt shall be managed so that the long-term costs are minimized Page 216 while taking risks into account. Debt management shall also respect the demands of monetary policy. This is basically the same rule that governed debt management before the reform in 1998. The difference is that the objective now is stated in a law enacted by parliament, whereas it previously was set out in documents issued by the government.
Finally, the act contains procedural rules. First, it stipulates that the government each year shall decide guidelines for debt management. This decision shall be based on a proposal submitted by the SNDO. The proposal shall be sent to the Riksbank, the central bank for comments, to ensure that the demands of monetary policy are taken into account. Second, the act instructs the government to submit an annual report to parliament in which it makes an evaluation of the management of the debt. The SNDO's proposal, the Riksbank's comments, and the govern- ment's guidelines, as well as the evaluation report, are all public documents.
The statutory rules create a framework for delegation, reporting, and evaluation. Parliament-at the top of the system-has established the objective. On the basis of this objective, the government is mandated to set guidelines. In preparing the guidelines, the SNDO assists the government. This reflects the fact that the SNDO staff work full-time with debt policy, whereas the government (the ministry of finance) has many other obligations and is confronted with debt policy issues infrequently.4
The implementation of debt management on the basis of the guidelines is then delegated to the SNDO. The guidelines define in broad terms how the debt should be structured. They typically include ranges around target values, leaving scope for the SNDO to make more detailed decisions on the management of the debt.5 There are two decision levels within the SNDO. The first level is the board, which is made up of external members (with the exception of the director general).6 For example, it makes strategic decisions on how to use the ranges given in the government guidelines and benchmark portfolios. The second level is the operative management of the debt within the frame set by the board, which is in the hands of the SNDO's staff, led by the director general.
The governance system also puts emphasis on evaluation. Each decision level is evaluated by its immediate superior body. This means that the board monitors and evaluates operative debt management and reports to the government. At the next level, the government evaluates the overall result of the SNDO's decisions. Finally, parliament evaluates debt management as a whole, including the government's guidelines. This evaluation is in the form of an annual written statement, adopted after a debate and vote in parliament. This statement is published in time for the SNDO to consider comments and recommendations from parliament when preparing the next guideline proposal, closing the loop of delegation and monitoring.
This governance framework applies to central government gross debt, or the debt portfolio managed by the SNDO. The Swedish government sector also has financial assets, for example, in funds in the public pension system and in equity holdings. Indeed, at end-2001, the general government net financial debt was negative, despite a central government debt-to-GDP ratio of about 54 percent. There is no debt management strategy at the level of general government, partly because the public pension funds are managed separately from the state budget, based on objectives derived from their role in securing future pensions, and because local authorities have a significant degree of independence. However, attempts are made to broaden the perspective to include the central government's balance sheet in the analysis of risks relevant to central government debt management.
The first guidelines constructed within the new framework were adopted in 1998, covering debt management in 1999. When the guidelines for 2002 were adopted in November 2001, it was thus the fourth time the exercise was repeated. It was recognized when the new system was put in place that the objective was vague and that further analysis was needed to translate it into a practical framework for debt management. In the preparation of the guideline proposals, emphasis has been put on complementing the statutory target with appropriate definitions of costs and risks. In addition, the SNDO has presented analyses of how the composition of the debt portfolio can Page 217 be expected to affect costs and risks. The main conclusions and the resulting debt management strategy are summarized in the second section.
The changes in the way debt policy is governed have not, at least so far, altered the practices of debt management. The most significant effect is perhaps that the time perspective in the guidelines has been extended from one year to include tentative plans for rolling three-year periods, consistent with the time frame used in the budget process. However, the importance of the form and structure of governance should not be underestimated.
First, the new system has increased the attention given to debt policy in both the government and parliament. Considering the size of the annual debt costs, this attention is justified.
Second, the procedure surrounding the annual guideline decision has affected the perception of debt policy. All strategic proposals and decisions must be explained to the public in terms of their impact on costs and risks. The decisions are then evaluated in terms of their impact on costs, and the results are made available to the public. The transparency of the system helps to commit the policymakers to the stated objective of long-term cost minimization with due regard to risks. In particular, borrowing strategies that reduce short-term costs, but also significantly raise medium- or long-term costs or the risk of the debt are difficult to implement.
Third, the system provides a clearer distribution of responsibilities between the parties concerned. The government (the ministry of finance) delegates debt management to the SNDO for one year at a time. The government can change the guidelines during the year if the circumstances underlying the decision have changed materially, but this has to be done in the form of an amended guideline, that is, in a public document.
Similarly, the central bank's views are brought into the process in a formalized way when the Riksbank is invited to comment on the annual proposal. This is in contrast to the situation 10 or 15 years ago, when debt management often was used as an instrument of monetary and exchange rate policy. Now it is clear that monetary policy, at most, acts as a constraint on the cost minimization problem, and it is not part of the objective. An objection from the Riksbank to a proposal from the SNDO must be linked explicitly...
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