Debt management objectives
The minimisation of debt cost was already an implicit objective of debt management before the approval of the Public Debt Law. Its publication, nevertheless, has been an important step as it formalised these objectives, clarified that the minimisation of cost should be pursued on a long-term perspective and introduced an explicit reference to risk limitation, namely in what concerns refinancing risk and the volatility of debt cost over time. The scope of debt management activity There is no limitation in the Law as to the nature of the financing instruments that can be used for the funding. However, concerns with the liquidity of the government debt led to a progressive concentration of the financing activity into the issuance of a restricted number of standard fixed rate Treasury bonds (OT). The issuance of Treasury Bills (BT) is, since 2003, another important structural funding source. In order to adjust the redemption profile of the government debt, the Law includes within the scope of the operations allowed to debt managers the early redemption and buy-back of existing debt and the direct exchange of securities. Since 2000 this kind of operations has been used more intensively, also with the purpose of promoting liquidity in the Treasury bond market through the concentration of existing debt into larger and more liquid issues. Specific short-term cash needs are satisfied with financing repo transactions (temporarily sell of securities with the agreement for the repurchase of those securities at a specified time and price). Other repo transactions are carried out under a window facility of last resort created, in August 2000 for OT and in July 2003 for BT, aiming to support the market-making activity of the primary dealers in public debt market. The Law also includes within the scope of debt management the trading of derivatives, namely interest rate swaps, currency swaps, forwards, futures and options. Those transactions must be hedging existing risks and hence be linked to the underlying instrument in the debt portfolio. Legal framework The Public Debt Law states that the State financing has to be authorized by the Parliament. The annual Budget Law establishes limits for the amounts that the Government is authorized to borrow during the year (in terms of net borrowing) and may also define maximum terms for the floating debt to be issued – debt issued to be fully redeemed until the end of the fiscal year in which it was issued – and limits to the currency exposure and to the floating rate debt. The decisions on the debt instruments to be used in State financing each year and their respective gross borrowing limits are approved by the Government through a Council of Ministers’ Resolution. The Minister of Finance is empowered to define specific guidelines to be followed by the IGCP, E.P.E. in the execution of the financing policy approved by the Government and in the completion of other transactions concerning the buy-back of securities and the active management of the debt portfolio. Permanent guidelines from the Minister of Finance were formalised through the adoption of a long-term benchmark structure for the composition of the debt portfolio, which reflects selected targets concerning the duration and the profile of redemptions and refixings. This benchmark was set as the reference for the evaluation of the cost/performance of the actual debt portfolio and for the definition of limits to the interest rate risk, currency risk and refinancing risk that it may undertake. |