Targets and Criteria

Basic Targets of State Debt Management

The main target of the policy of state debt management pursued by the Ministry of Finance is the coverage of the borrowing requirements and payment obligations of the central government while reaching the lowest possible debt service costs in the medium-term and long-term horizon and at a considerate level of accepted risk. The realization of the main target is connected with derived targets lying in an active role in the development of all components of market infrastructure ensuring the development of domestic financial sources, unless at variance with the main target. Like in most of the advanced countries, the targets of debt policy do not include, e.g., support of monetary policy or household savings.

The support to the effectiveness of domestic financial market is reflected, above all, in the efforts of the Ministry of Finance to build up, through issuance activities, liquid benchmark issues with the aim of constituting a complete yield curve of Treasury bonds in the period before the accession of the Czech Republic to the Eurozone.

To serve the needs of practical implementation of the described generally defined targets, it is necessary to develop communication with the public and with financial market. Thereafter, the Ministry proceeds to the concrete formulation of the targets as above. The result includes the basic quantitative criteria formulated in the framework of debt strategy and reflecting the comparison of the risks and the expected debt portfolio costs.

The first criteria were published in 2000 in connection with the announcement of a new issuance strategy of the Ministry of Finance. Above all, the aim was to reach gradual reduction in the share of Treasury bills in marketable debt from the margin exceeding 60 % towards a one-third margin, i.e., in other words, the increase in the portion of the ratio of the nominal amount of medium-term and long-term bonds to the volume of treasury bills towards the 2 : 1 level. At the same time, an intention was announced to continue in reducing of the share of non-marketable state debt that reached approximately 9% of the total state debt at the end of 1999. Also, an intention to prolong time to maturity and duration of state debt was announced without closer quantification, which was a logical consequence of the reduction in the share of treasury bills in the debt portfolio.

In connection with the launch of derivate operations in the fourth quarter of 2002, a decision was adopted to publish the target range for the modified duration of debt portfolio for each consecutive year. The first such range was announced in November 2002 for the year 2003 extending from 3 to 4 years. The Ministry of Finance sets down and publishes the boundaries of the range each time for each following calendar year with the aim of further increasing the transparency and responsibility of the debt management policy.

The communication carried out by the Ministry of Finance in the field of strategic aims develops constantly and it is considered to be a key means for the strengthening of the debt management credibility. Further intensification and more explicit formalization is one of the main aims of Debt and Financial Assets Department, and the implementation of that aim will depend, above all, on the gradual build-up of capacities in the field of the quantitative model framework and on the possibilities to formulate a benchmark system of active debt portfolio management.

At present, the Ministry monitors an array of principals and strategic risk indicators. The Ministry actively responds to the situation on global money and capital markets by the adjustment of issuance calendars and flexible management of the cash reserve. At the same time the risks of state debt portfolio are diversified by the increase in variety of instruments used, e.g. retail bonds.

Methods of Debt Management

Practical management of state debt is carried out since 2004 through strategic targets set down by the Ministry of Finance on the basis of the best experience of the OECD countries and on the basis of its own financial analyses of debt portfolio. Through individual implementation of the above targets, room is made for the management of the state debt portfolio in long-term horizon. The core of the concepts of alternative debt strategies is the management of risks and determination of the quantitative criteria and limits thereof. The risk management ensures that the minimization of costs is realized within long-term sustainable limits. The task of such limits is to minimize negative economic impacts of the debt portfolio structure in case of a crisis development of the economy and of extreme turbulences in financial market. The Ministry sets all the limits in compliance with the international practice. Consequently, the chosen debt strategy must in no case become the primary cause of a financial and economic crisis of the country.

Basic Medium-Term Targets:

• Active promotion of effectiveness and liquidity of domestic financial market by issuing the least possible number of issues and maturities while increasing the volumes of issues through re-opening, with the aim of the introduction of the benchmark issues.
• Stabilization of refinancing risk, which lies above all in the reduction of the share of short-term debt and in modulating the maturity of state debt in the framework of the individual years.
• Stabilization of market risk, especially interest risk through targeting the duration of the debt portfollio.
• Institutional (treasury bonds according to the type of holder) and geographical diversification of investor basis.
• Increase in the transparency and flexibility of state debt management.