Highlights of Government Debt Policy

HIGHLIGHTS
The international financial crisis was the predominant theme in 2008 and
affected government debt management in a number of areas. Highlights of Danish
Government Borrowing and Debt 2008 include: 

• Prospects of a large global increase in the supply of government and
government-guaranteed issuances as a result of lower economic growth and
financial rescue packages 
• Due to its low government debt, Denmark is in a favourable position compared
with other countries 
• The Danish financial rescue packages are to be financed by drawing on the
central government's account rather than by issuing more government bonds 
• In view of the financial crisis, the target for the central government's
foreign borrowing has been increased in order to ensure a sufficiently large
foreign-exchange reserve 
• The crisis has emphasised the importance of having a well-functioning market
for government securities as this facilitates access to the financial market
and contributes to financial stability. 

GOVERNMENT DEBT POLICY IN THE LIGHT OF THE FINANCIAL CRISIS
The turmoil in the financial markets continued in 2008. Large losses in the
financial sector gave rise to uncertainty about the soundness of this sector,
leading to a liquidity shortage among financial institutions. 

In September, the financial turmoil escalated into a financial crisis. The
international money markets froze, and banks began to exercise great restraint
on lending. Subsequently, public authorities in most countries launched
financial rescue packages with a view to kick-starting the extension of credit
by financial institutions so as to avoid a credit crunch. 

Developments in the international financial markets had a major impact on the
market for government securities. The mounting uncertainty in the financial
markets, coupled with growing risk aversion among investors, led to rising
demand for risk-free assets, including government securities, which in turn
caused government yields to fall strongly in most euro area member states in
the last few months of 2008. 

However, in some euro area member states greater risk aversion among investors
caused 10-year yields to rise sharply towards the end of the year. The
underlying factors included concerns about the public finances of these
countries, which also led to downgrading by the rating agencies in some cases. 

Moreover, developments were driven by prospects of a massive increase in the
supply of government securities and government-guaranteed issuances, which made
investors more selective. Against this background several government debt
management offices paid a concession premium in order to attract investors. In
addition, several countries applied more flexible issuance strategies, issuing
in other series than the key on-the-run issues and introducing new borrowing
programmes. 

LOW GOVERNMENT DEBT PLACES DENMARK IN A FAVOURABLE POSITION
The financial crisis has had a significant impact on government debt policy in
Denmark. The low level of government debt and the decision to continue to issue
government securities place Denmark in a favourable position compared with
several other countries. The financial crisis has demonstrated that the costs
of re-establishing a market for government securities are higher than
previously anticipated. Because Denmark continued to issue government
securities in a period with a low borrowing requirement there is still demand
for Danish government securities among international investors. Consequently,
Denmark has been able to issue government securities during the financial
crisis without incurring significant additional costs. 

The financial crisis has also shown that government securities play a special
role in the financial system. Government securities serve as a primary
benchmark for the rest of the fixed-income market and for financial
derivatives, thus contributing to price formation in the entire financial
market. The reason is that the credit risk on government securities is low and
liquidity high compared with other instruments. The period of financial turmoil
saw a considerable widening of the spreads between government bonds and
interest-rate swaps and mortgage bonds. Without government bonds, it would be
difficult to assess price developments in the individual markets. Government
securities have the unique status of a stable benchmark over a longer horizon. 

CONTINUED REDUCTION OF GOVERNMENT DEBT IN 2008
In 2008, the government surplus was DKK 52 billion, corresponding to 3 per cent
of GDP. Recent years have witnessed a pronounced reduction of the
central-government debt, to DKK 195 billion at end-2008, equivalent to 11 per
cent of GDP. Government debt per capita has been reduced from approximately DKK
115,000 in 1997 to approximately DKK 35,000 in 2008. 

On account of the falling debt and lower market interest rates, the central
government's annual interest costs have declined from DKK 44 billion in 1997 to
DKK 12 billion in 2008. 

The central government's borrowing requirement was low in 2008, which provided
room for flexibility in the issuance policy. Due to the financial crisis,
borrowing was limited in the first three quarters. In the 4th quarter, a new
30-year bond was opened in response to strong demand from the pension sector. 

The financial turmoil called attention to the central government's foreign
borrowing. Against that background, three foreign loans were raised with final
exposure in euro. Moreover, in the 4th quarter short-term foreign loans were
raised via the government's Commercial Paper programmes. 

Due to the extraordinary issuances, the central government held substantial
liquid reserves in its account at Danmarks Nationalbank at end-2008, cf. Table
1. 

Table 1. CENTRAL-GOVERNMENT DEBT
DKK billion	                                         End-2008
Domestic debt 		                               430
Foreign debt 		                               133
Government funds 		                              -108
Central government's account at Danmarks Nationalbank   -260
Central-government debt 		                         195
Re-lending 		                                      -51
Central-government debt adjusted for re-lending 	      144

Note: A positive figure indicates a liability, a negative figure an asset.

The insurance and pension sector increased its ownership share of Danish
government securities in 2008, mainly because this sector was the principal
investor in the 30-year bond series. Non-residents' ownership of Danish
government bonds remained at around DKK 125 billion. External demand for Danish
government securities supports the demand for Danish kroner and contributes to
lowering the interest costs on the government debt. Both the domestic and
foreign debt have been given the highest credit rating, triple-A, by Fitch
Ratings, Moody's and Standard & Poor's. 

A FLEXIBLE ISSUANCE STRATEGY FOR 2009
Government finances are expected to balance in 2009, cf. Budget Outlook 4,
December 2008. Because of the financial and economic development, the estimate
of the central government's domestic borrowing requirement in 2009 is subject
to more uncertainty than usual. In 2009, the domestic issuance is expected to
be DKK 40 billion, most of which will be in the newly opened 10-year on-the-run
issue, cf. Box 1. 


Box 1. ISSUANCE STRATEGY, 2009
• Domestic issuance for approximately DKK 40 billion
• 4 per cent bullet loans 2019 to be built up to a final outstanding volume of
around DKK 50 billion 
• Issuance in 4 per cent bullet loans 2010 continues
• 4.5 per cent bullet loans 2039 to be built up to a final outstanding volume
of around DKK 90 billion 
• Issuance in the other bullet loans is possible
• Foreign borrowing in 2009 to be carried out by raising foreign loans with
final exposure in euro 
• All government securities can be bought back, although key on-the-run issues
are as a general rule excepted. 

The foreign debt is issued in order to maintain an adequate foreign-exchange
reserve. As a general rule, the central government raises foreign loans
equivalent to the redemptions on the foreign debt. In the context of the
financial turmoil, the central government's contribution to the
foreign-exchange reserve is increased. 

Low government debt and a large balance of the central government's account
place Denmark in a favourable position compared with other countries since this
provides the basis for a more flexible issuance policy. For example, the
government intends to finance its financial rescue packages by drawing on its
account rather than by issuing more government bonds.