Government Debt Management: New Trends and Challenges

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Tuesday 11 September


Introductions and participant discussion
Led by the chairman Rafael Molina, Managing Partner, Newstate Partners

In this introductory session the chairman will lay the foundations for those sessions that follow by discussing the causes of the crisis. Participants will be asked to contribute by providing a summary of the impact on their nation's economy and debt management strategies. Detailed discussion will aim to explore the main obstacles that delegates' organisations are facing, the priorities they have set to negotiate them and the prime objectives they wish to achieve by attending the seminar.

Challenges for debt managers during central bank exit strategies
Hans Blommestein,
Senior Financial Economist and Head of Bond Market and Public Debt Management Programmes, Organisation for Economic Co-operation and Development

As economies struggle to recover from the crisis, debt managers are likely to face a new and complex challenge to maintaining a low funding cost. Many debt managers have undertaken a strategy of increasing their long-term bond issuance to reduce funding costs and maintain demand. But this demand has been driven by low market interest rates, quantitative easing and government asset purchases. As central banks begin to reverse these strategies, debt managers may see demand weaken. The consequences could be unpleasant: In particular increasing rates on long-term securities could be extremely damaging. In this session an expert in debt management will discuss these complex debt management concerns in detail. The group will be invited to consider the relationship between central bank crisis management policies and debt management in their country more broadly

Understanding the pressures of the post-crisis market
Rafael Molina

Debt managers are in a grind. Governments need to borrow, yet, as projections from the OECD Sovereign Borrowing Outlook expect global government debt ratios to further deteriorate, the need to secure funding at a low cost and with adequately low levels of financial risk has rarely been as paramount. The chairman, who boasts considerable experience of advising governments and central banks on how to optimise their debt management strategies, will lead a session on how these challenges can be understood in the context of the post-crisis economy and how best to adapt to the ongoing pressures in the government debt and securities markets.

Wednesday 12 September


Responding to the crisis: a case study of the UK DMO issuance programme
Elisabetta Vangelista, Senior Markets Researcher, UK Debt Management Office

The crisis has heightened competition amongst debt management offices. The speaker, a senior researcher on debt management policy from the UK Debt Management Office, will discuss how the DMO has implemented principles of openness and predictability to minimise cost and risks in this competitive environment. Details will also be given on how the UK is maintaining a liquid gilt market by issuing gilts at key benchmark maturities, a strategy which also minimises funding costs. Increased dialogue with primary dealers and market participants, careful organisation of auction and syndication calendars and analysis of nominal and real yields on domestic and international securities will also be considered. Group discussion will focus on the lessons that can be learned from these approaches and the measures taken by delegates in response to on-going challenges faced.

Understanding and developing effective risk management tools for roll-over risk
Joaquim Cadete
, University FCEE Catolica, former Head of Debt Market Research, Portuguese Treasury

The increased complexity of transactions being undertaken by debt managers trying to differentiate in competitive markets has exacerbated roll-over risk. The analytical tools of a debt management office must be able to assess these risks, facilitating the government's ability to maintain its debt strategy within its risk appetite. In this session, the speaker will explain how her debt management office has developed risk management tools to maintain a sophisticated portfolio risk analysis, with a focus on how to carry out diligent analysis of front office activity. The speaker will also address the importance of spreading out the debt redemption profile across a range of maturities. Discussion will focus on how such procedures can contribute to the debt manager's broader strategy, and the measures being taken in delegates' countries to manage roll-over risk.

Developing liquidity in domestic bond markets and attracting foreign investment
Joaquim Cadete
, University FCEE Catolica, former Head of Debt Market Research, Portuguese Treasury

Both local and global investors have been reluctant to enter markets with poor infrastructure, with a reliance on one industry, or with threats from contagion. This is due to the high levels of risk investors would have to take on. As a result, debt managers in some markets struggle to maintain a sufficient level of liquidity in local bond markets. In this session the speaker, whose government debt has recently been upgraded to investment grade despite possible contagion from neighbouring markets, will discuss how to actively increase investability in local currency bonds for foreign investors.

Workshop: effectively diversifying your investor base
Jill Dauchy, Managing Partner, Newstate Partners

Innovations in issuance programmes, such as the use of more opportunistic and flexible auctions to capitalise on favourable conditions, while appealing, may come with some unintended risks. DMOs must be careful to maintain a clearly communicated and transparent issuance programme in the long term so as not to become too unpredictable for existing or potential investors. In this session the chairman will invite the group to compare the strategies in place within their jurisdiction to attract foreign investors such as insurers, pension funds and institutional investors. The group will be encouraged to compare their experiences with major primary dealers, discussing what they believe can be done to improve communication with the markets.

Thursday 13 September


Effective risk governance and handling the pressures of independence
Speaker to be confirmed

Debt managers take on significant risks in their day-to-day market transactions. Financial risks are inherent in borrowing, the greatest of which is the inability for the government to refinance its debts, becoming technically insolvent. The complexity of market transactions and the very public nature of government debt levels also mean there are significant operational risks linked with IT and payment systems and the reputation of the government as a reliable debtor. In this session, the speaker will discuss these issues in the context of how to organise a risk management function. The session will assess the particular importance of maintaining a robust risk management framework throughout the unit, and communicating this effectively. In addition the speaker will evaluate how the location of the debt and cash management functions in relation to the central bank and treasury affect the DMO's mandated responsibilities, including risk management, and under what circumstances it is desirous to establish a separate entity.

Debt Market Development and the Challenges of the Financial Crisis
Mike Williams,
Former Chief Executive, UK Debt Management Office

The need to develop the domestic government bond market and related financial markets has long been recognised. It potentially reduces both cost and risk for the debt manager, providing resilience at times of crisis, as well as bringing wider benefits to the economy. But is the traditional approach to this challenge still robust at a time of market turbulence? What does the financial crisis mean for domestic issuance strategies and techniques; for market development priorities; for the handling of foreign investors; and for the roles and skills of debt managers? The speaker will set out a framework for the group to exchange their own experience and develop some pointers for the future.

Effectively coordinating cash management and debt management
Mike Williams

As the number of debt managers being handed responsibility for managing the central government's cash increases, it is important that DMOs recognise that there are significant benefits of being able to combine cost effectively debt and cash management operations. The speaker will discuss how debt an cash managers can work together; an also alongside treasuries to forecast daily net cash flows in the government accounts, providing details on how to ensure these are both timely and accurate. The group will discuss how the DMO can balance or place these net positions cost effectively by using their knowledge of debt markets and instruments, including repos, reverse repos, and more traditional government securities; and the cash buffer needed in today's market.


Friday 14 September


Sovereign risk: the market perspective
David Riley, Head of Sovereign Risk Fitch Ratings

It is no secret that markets in the past have been strongly influenced by the opinions of ratings agencies. Indeed, it is considered international news when a major agency changes the grade of a sovereign state. In this session, the Head of Sovereign Risk from a major ratings agency will lift the lid on how government debt is assessed and rated in today's market, providing guidance on particular aspects that debt managers can improve on to enhance their chances of favourable ratings. Discussion amongst the group will aim to define how these areas can be improved.

Freeing up resources through alternative debt management strategies
Robert Weary, Senior Conservation Finance and Policy Advisor, Global Environment Fund

A debt manager's primary focus remains to minimise borrowing costs and mitigate risks as well as enhance a sovereign's credit profile. Above and beyond these, however, alternative debt management strategies may be considered to further achieve these goals, particularly in the case of countries with less market access. An example of these strategies is the utilisation of debt conversion schemes which have allowed a number of sovereigns, including Ecuador, Indonesia, Philippines, Chile and others, to successfully complement efforts to lower overall indebtedness, reduce inherent market risks and divert debt service resources to other development or conservation initiatives. In this session the speaker will provide case studies detailing how such debt conversions work in practice.

Course lessons and roundtable
Led by the chairman

To conclude the course, the chairman will review the sessions that have taken place, inviting the group to share what they believe they have learnt from each of the sessions and to suggest how these lessons will improve their future approach and inform their role at their home institution moving forward.