“During parts of 2001 and 2002, the krona has been weak. During this period, it has been appropriate to slow down amortisations,” says Thomas Franzén, Director General of the Debt Office. “During the coming year there is no reason to assume that the krona will be extremely weak. The benchmark for amortisations should therefore be set in accordance with the Government’s earlier decision, which aims at reducing foreign currency debt in the long term.”
The other main points in the proposal are the same as in the existing guidelines:
The share of inflation-linked loans in total central government debt should continue to increase in the long term.
The remainder of the government’s gross borrowing requirement should be covered by nominal kronor-denominated loans.
The average maturity (measured as duration) of total nominal krona and foreign currency debt should be kept unchanged at 2.7 (±0.3) years. Inflation-linked borrowing should occur in long maturities.
“In four previous proposed guideline memoranda, the Debt Office has conducted a step-by-step analysis of the debt’s structure and maturity,” Mr Franzén says. “These analyses have led to the conclusion that it is appropriate to reduce the percentage of foreign currency debt in the long term, while the percentage of inflation-linked debt should increase. Nothing has emerged to change these conclusions. This is why we are proposing unchanged guidelines.”
The proposed guidelines have been formulated on the basis of existing currency policy conditions. At the same time, the Debt Office cannot ignore the possibility that a referendum on Swedish membership of the Economic and Monetary Union (EMU) will be organised during 2003. A Yes vote for currency union membership will affect the economic and political prerequisites for central government debt policy to such a great extent that, at least with regard to amortisation of foreign currency debt, the guidelines should be changed. If, however, the referendum results in a No vote for membership, this should not trigger new guidelines.
The Debt Office also proposes that the definition of its foreign currency mandate, i.e. the benchmark for amortisation of foreign currency debt, be changed to include all transactions affecting the central government’s foreign currency exposure. The background is that the existing mandate is defined on the basis of how foreign currency borrowing affects the foreign currency reserve of the Riksbank, Sweden’s central bank. This is no longer appropriate, because since July 1, 2002, the Debt Office has made all exchanges between Swedish kronor and foreign currencies directly in the market, instead of via the Riksbank as earlier.
The Debt Office’s proposal means that currency forward contracts will be included in the mandate. These contracts will thereby affect the pace of amortisation that is measured, right from the transaction date instead of when they expire, as today. “The Debt Office’s proposal does not signify any changes in its currency exchanges, but will only lead to a slight change in the date when the Debt Office’s foreign currency transactions are reflected in the foreign currency mandate,” Mr. Franzén says.
By law, the Debt Office is responsible for managing central government debt in such a way as to minimise the long-term cost of the debt, while taking into account the risk inherent in such management and the constraints imposed by monetary policy.
Read the proposed guidelines and a report on duration at www.rgk.se
For more information, please contact:
Sara Bergström, Deputy Chief Economist, phone: +46 8 613 47 43
Thomas Olofsson, Head of Funding, phone: +46 8 613 47 82
Marja Lång, Head of Communication and Public Affairs, +46 8 613 46 54
The contacts persons will be available after 9 a.m.