"In pace with the percentage of inflation-linked loans having increased and the percentage of foreign currency loans having decreased, the total risk level of the central government debt has been reduced," says Director General of the Debt Office Thomas Franzén. "Since we expect this trend to continue, we have assessed that there is room to lower the duration of the nominal krona and foreign currency debt to 2.5 years. Thereby, the central government is able to lower the expected central government debt cost, while maintaining the aggregate risk at a desirable level."
The background is that the maturity of the inflation-linked loans is very long in relation to the nominal debt. An increased percentage of inflation-linked loans therefore means that the maturity of the aggregate debt increases, which in turn causes the risk level to be reduced. To lower the duration of the nominal debt is thus one way of utilising this risk scope.
In order to avoid unnecessarily high transaction costs, the adaptation of the duration to a new benchmark will be made gradually during next year. In the opinion of the Debt Office, this may be accomplished by offering somewhat lower volumes in the bond issues. Apart from this, the adaption is not expected to lead to any major changes in the borrowing policy presently in force.
As in prior years, the deviation interval within which the Debt Office may decide its own duration benchmark is proposed to be ±0.3 years.
In this year's proposed guidelines, the Debt Office for the first time states percentages of the structure of the central government debt. According to the proposal, the foreign currency debt should in the long term be approximately 15 per cent and the inflation-linked debt approximately 20-25 per cent. "Since the interest spread in relation to foreign countries today is relatively small, I estimate that the potential cost savings of borrowing in foreign currency are low in relation to the risk," says Thomas Franzén. "The percentage of foreign currency debt should therefore be reduced significantly."
As in prior years, the Debt Office is of the opinion that the adaptation to the proposed debt percentages should be made gradually. For 2005-2007, the Debt Office proposes that the foreign currency debt be amortised by SEK 25 billion per year ±15 billion. With respect to the inflation-linked debt, the borrowing should, as before, be weighed against the trend in demand for inflation-linked bonds and the costs of borrowing in other types of debt with due consideration for risk.
The Debt Office finally proposes that the benchmark for the maturity of the inflation-linked debt be removed. This increases the ability of the Debt Office to adapt the inflation-linked issuances to market demands in a more appropriate manner.
Board member Ingemar Hansson dissented against the proposal regarding the percentage and pace of amortisation of the foreign currency debt. He was of the opinion that the percentage of the foreign currency loans should be approximately 20 per cent and that the benchmark for the foreign currency debt amortisation should be fixed at SEK 15 billion.
For more information, please contact:
Thomas Franzén, Director General,
tel: +46-8-613 46 51
Sara Bergström, Deputy Chief Economist,
tel: +46-8-613 47 43
Charlotte Lundberg, Head of Debt Management,
tel: +46-8-613 46 47
The contact persons will be available from 10.30 am.
