Stockholm Principles

Guiding Principles for Managing Sovereign Risk and High Levels of Public Debt

Last Updated: July 28, 2017

Framework and operations

1.The scope of debt management should be defined in a way that also accounts for any relevant interactions between the nature of financial assets, explicit and implicit contingent liabilities, and the structure of the debt portfolio

The crisis-related interventions have involved a wide range of debt management operations. In some instances, changes have taken place in the structure and the composition of the debt portfolio. It is important that the debt management strategy takes into account the relevant variables and the policy and financial risk implications.

2. Strategic and operational debt management decisions should be supported by relevant information sharing at the domestic, regional, and global levels.

The crisis has raised the risk of financial stability spillovers, including systemic cross-border contagion. Therefore, the need for information sharing on materially important aspects, at both the regional and global levels, takes on greater significance. This aspect becomes especially important when the investor base comprises both domestic and foreign participants. Information sharing should take place among relevant public authorities, and where appropriate, also with the private sector.

3. Flexibility in market operations should be maintained to minimize execution risk, improve price discovery, relieve market dislocations, and support secondary market liquidity.

In light of the challenges of issuing and managing increased amounts of debt, debt managers should retain sufficient flexibility to adapt the debt issuance format and/or adopt different issuance techniques. They should also be prepared to make timely use of liability management operations to alleviate secondary market impairments. In such cases, the following Principle 5 should also be taken into consideration.

Communication

4. Proactive and timely market communication strategies strategies should be maintained to support a transparent and predictable operational framework for debt management.

Effective communication helps minimize uncertainty and contain costs by providing investors with the necessary information required to form expectations and manage investment decisions. This also facilitates the smooth undertaking of debt management operations, including primary market issuance.

5. Modifications to the operational toolkits of debt managers should be properly explained.

As changes are made, debt managers should communicate them to the public clearly and in a timely fashion. Where appropriate, prior consultation with investors and other stakeholders should be undertaken to garner feedback and support for the planned changes, such as the introduction of a new debt instrument or an adjustment to an existing debt issuance mechanism.

6. Communication among debt managers and monetary, fiscal, and financial regulatory authorities should be promoted, given greater inter-linkages across objectives, yet with each agency maintaining independence and accountability for its respective role.

The higher levels of debt and increased uncertainties regarding fiscal, monetary, and regulatory policies imply the need for close communication among different agencies on all relevant aspects. However, it is important that these agencies retain their functional and operational independence in areas for which they are accountable.

7. A close and continuing dialogue with the investor base should be promoted to keep abreast of its characteristics and preferences.

Understanding the nature of the investor base and shifts in the investment philosophy enables debt managers to identify potential vulnerabilities and new opportunities, and to offer instruments that better match investors’ needs. This can have important positive effects in limiting funding disruptions, mitigating adverse funding conditions, and reassuring that investors are being treated equitably.

Risk management

8. Debt portfolio risks should be kept at prudent levels, while funding costs are minimized over the medium to long term.

Given the increased exposure to macroeconomic and financial risks, a stronger emphasis should be placed on risk mitigation than that implied by traditional policy objectives of public debt management. The debt manager should have a framework that helps identify, assess, and monitor the risks associated with debt management operations.

9. When determining medium-term debt management strategies, the range of risk factors considered should be consistent with the broadest definition of the debt portfolio and the associated range of potential scenarios.

The main sources of the risks to which the sovereign balance sheet is exposed should be identified and a clear framework on how these risks are managed should be established. A careful analysis of the debt portfolio should be carried out on the basis of relevant economic and financial stress scenarios, including the costs and risks of alternative strategies.

10. Prudent risk management strategies covering the full range of risks facing sovereign debt managers should be adopted and communicated to investors.

In many cases, the high level of debt is constraining governments’ ability to absorb additional risk on their balance sheets. It is important to maintain debt portfolios that reduce the sovereign exposure to a variety of financial risks, including refinancing risk and exposure to contingent liabilities. Debt managers should clearly set out the strategies being adopted to limit these risks and communicate them to the public.

• Stockholm Principles” to Help Manage Sovereign Risk and High Levels of Public Debt in an Environment of Elevated Uncertainty
• Debt Managers Navigate Post-Crisis Risks