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IMFSurvey Magazine: Policy

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Debt Managers Navigate Post-Crisis Risks

Traders at the New York Stock Exchange: officials managing trillions of dollars in debt face anxious financial markets (photo: Spencer Platt/Getty Images)

GOVERNMENT DEBT

Debt Managers Navigate Post-Crisis Risks

IMF Survey online

September 9, 2010

  • Officials steer debt management policies in tough environment
  • Countries strengthen operations, risk management to reassure markets
  • Structure, composition of countries' debt as important as level of debt

Officials who manage trillions of dollars in government debt face anxious financial markets as concerns over sovereign risks and high levels of public debt weigh on investors.

Debt management practices can help manage investor expectations, which is critical to mitigate the buildup of sovereign risk.

In a signal to reassure financial markets, debt managers from around the world met in Stockholm this summer and agreed a set of principles for effective and transparent debt management.

The IMF brought together debt managers from 33 countries as well as central bankers, representatives from the private sector, and other international financial organizations for the 10th Annual Debt Managers’ Forum in Stockholm on July 1–2.

The 10 principles reaffirmed a series of practices and principles already embraced for a number of years by most countries’ debt managers. The principles are organized around three main areas: framework and operations, market communication strategies, and risk management.

Operations—preserve sufficient flexibility to minimize the risk associated with the execution of issuance programs and liability management operations, while accounting for their financial stability implications, and supporting information sharing at the domestic and global levels.

Communications—maintain an open dialogue among debt managers and with other policymakers as well as financial markets, and share any changes that may occur to avoid surprises and support a predictable operational framework.

Risk management—adopt and communicate with investors a strategy to keep a broad range of risks at prudent levels, while minimizing funding costs over the medium to long term.

High levels of debt limit options

High levels of public debt, especially during crises, limit governments' policy options and curtail their ability to absorb additional risks in their balance sheets, according to the IMF.

Role of debt managers

Public debt managers are the officials who decide how best to borrow money for a government and manage the accumulated debt, including its associated financial risks. Their actions also directly impact a country’s bond market, as well as international capital markets. Their primary goal is to minimize government borrowing costs over the medium term, subject to prudent levels of risk. Debt managers can borrow using securities with different characteristics (e.g. short, medium, or long term; domestic or external; issued at fixed or variable rates) typically through auctions or syndications. In managing the financial risks on governments’ balance sheets, debt managers also use derivative products, such as swaps.

In issuing government securities, debt managers interact with a wide range of domestic and external investors, including banks and other financial institutions; institutional investors, such as central banks, pension funds, and sovereign wealth funds; and the general public.

“Managing portfolio vulnerabilities become even more significant in the current environment, and debt managers would require a robust framework for doing this effectively,” said Murillo Portugal, one of the IMF’s Deputy Managing Directors, in his address at the meeting.

Portugal said debt managers must choose strategies that diversify the structure of the debt portfolio in terms of the types of debt instruments, their varying maturities, and the investor base.

Composition of debt

In this challenging environment, the structure and composition of a country's debt and the instruments used to fund a sovereign’s financing needs become as important as the overall level, said José Viñals, Director of the IMF's Monetary and Capital Markets Department.

Governments will need to tailor plans to reduce government deficits and debt accumulation based on their countries’ individual needs and circumstances. All countries face difficult trade-offs between the need to support the economic recovery and the risk of continued financial stress due to rising levels of public debt.

Higher debt levels would result in higher debt servicing cost, typically at the expense of other budget categories, and would be associated with lower economic growth.

According to the IMF, $4 trillion of debt is due to be refinanced in the next two years.

Debt managers agreed that reaffirming a number of best practices would increase confidence in public debt management and send a strong signal to reassure financial markets and investors. These practices outline the objectives, rationale, strategies, and methods of implementation and the outcomes of planned debt operations.

The IMF’s 2011 annual Debt Managers’ Forum will be held in Seoul, Korea, next June, in collaboration with the government of Korea.