Debt Management Offices
Annual Meeting of the INTOSAI
Working Group on Public Debt
10.09.2012 | ASF
Helsinki, Finland
September 10-12, 2012
1. Background information
ASF | 2
1. Background information
Public debt allows cost of
current
government
expenditure projects to be
postponed in time.
ASF | 3
1. Background information
These public projects are of
different nature:
1. Public investment
expenditures
2. Increases in
expenditure
3. Countercyclical public
expenditures
ASF | 4
1. Background information
Negative consequences of a poorly managed public debt
Discourage private
investment
Restrict future access
to financial markets
Affect taxpayers of
other countries
Be a source of
financial volatility
Financial crisis,
inflationary expansions
and chronic low growth
ASF | 5
1. Background information
Managers of public debt and
public officers must supervise:
 Level of indebtedness
remains on a
sustainable path.
 Risk management
strategy to avoid
excessive debt levels.
ASF | 6
2. Effective Debt Management
ASF | 7
2. Effective Debt Management
Effective Debt Management
Office Functions are:
1. Executive Debt
Management
2. Operational Debt
Management
ASF | 8
2. Effective Debt Management
Executive Debt Management
Main purpose:
The establishment of the
normative
framework
overseeing any kind of
debt acquired by the
government.
ASF | 9
2. Effective Debt Management
Executive Debt Management
Responsible for the executive
functions:
A group of high-ranking
officials
called
the
Executive Board on Debt
Management (EBDM).
ASF | 10
2. Effective Debt Management
Executive Debt Management
Executive debt management
functions include:
i) Policy function
ii) Regulatory function
iii) Resourcing function
ASF | 11
2. Effective Debt Management
Executive Debt Management
i) Policy function
Involves the formulation of
national debt policies and
strategies in agreement
with a country’s overall
macroeconomic policy.
ASF | 12
2. Effective Debt Management
Executive Debt Management
ii) Regulatory function
The establishment and
review of the administrative
and legal framework, rules
and procedures of the debt
management units.
ASF | 13
2. Effective Debt Management
Executive Debt Management
iii) Resourcing function
Ensure the existence of
qualified personnel.
Supply maintenance and
technical support for the
debt management system.
ASF | 14
2. Effective Debt Management Operational Debt Management
Main purpose:
To perform the operational
functions
within
the
guidelines provided by the
EBDM.
ASF | 15
2. Effective Debt Management Operational Debt Management
Responsible for the operational
functions:
The DMO perform the
basic operational debt
managements functions:
iv) Recording, analyzing
and operating
ASF | 16
2. Effective Debt Management Operational Debt Management
Responsible for the operational
functions:
The DMO’s senior staff
ensures that the guidelines
issued by the EBDM are
applied and followed.
v) Controlling, coordinating
and monitoring functions
ASF | 17
2. Effective Debt Management Operational Debt Management
iv) Recording, analyzing and
operating functions
Recording:
Collect
and
provide
detailed information on
debt on a loan-by-loan
basis.
ASF | 18
2. Effective Debt Management Operational Debt Management
iv) Recording, analyzing and
operating functions
Analyzing:
Macroeconomic analysis to
explore available options
through given economic
and market outlook.
ASF | 19
2. Effective Debt Management Operational Debt Management
iv) Recording, analyzing and
operating functions
Operating:
All activities related to
borrowing,
such
as
negotiating, utilization of
loan proceeds and debt
service.
ASF | 20
2. Effective Debt Management Operational Debt Management
v) Controlling,
coordinating
and monitoring functions
Supply
substantive
feedback to the EBDM for
the
implementation,
evaluation and revision of
the debt strategy.
ASF | 21
3. Location and organizational
structure of DMO
ASF | 22
3. Location and organizational
structure of DMO
Location of the DMO
The
DMO’s
physical
location in the national
organizational set-up is
linked to the role that the
office has been given.
ASF | 23
Location of the DMO
3. Location and organizational
structure of DMO
Most frequent models
location of the DMOs are:
of
i)
Office at the Central
Bank
ii)
Office at the Ministry of
Finance
iii) Autonomous
Office
Debt
ASF | 24
3. Location and organizational
structure of DMO
Location of the DMO
i) Office at the Central Bank
Operational
debt
management
functions
have been located inside
the Central Bank given the
interface
between
monetary policy and debt
management.
ASF | 25
3. Location and organizational
structure of DMO
Location of the DMO
i) Office at the Central Bank
Nevertheless,
literature
suggests a conflict of
interests when the Central
Bank has a dual mandate
for conducting monetary
and debt policy.
ASF | 26
3. Location and organizational
structure of DMO
Location of the DMO
i) Office at the Central Bank
Conflict of interests
The Central Bank may be
reluctant
to
increase
interest rates to control
inflationary pressures since
it would have an adverse
effect on its domestic
liability portfolio.
ASF | 27
3. Location and organizational
structure of DMO
Location of the DMO
i) Office at the Central Bank
Conflict of interests
It may be tempted to
manipulate
financial
markets to reduce interest
rates
at
which
the
government debt is issued
or to inflate away the value
of nominal debt.
ASF | 28
3. Location and organizational
structure of DMO
Location of the DMO
i) Office at the Central Bank
Conflict of interests
It may be tempted to inject
liquidity in the market prior
to debt refinancing.
ASF | 29
3. Location and organizational
structure of DMO
Location of the DMO
i) Office at the Central Bank
Reasons to separate the DMO
from the Central Bank:
Since the main function of
the Central Bank is to
implement the monetary
policy, debt management
policy could be seen as an
instrument to reinforce the
price stability objective.
ASF | 30
3. Location and organizational
structure of DMO
Location of the DMO
i) Office at the Central Bank
Reasons to separate the DMO
from the Central Bank:
Debt
management
decisions could be seen as
influenced
by
inside
information on interest rate
decisions.
ASF | 31
Location of the DMO
3. Location and organizational
ii) Office at the Ministry of Finance
structure of DMO
This location has a clear
system of delegation of
authority from the Minister
to the Head of the unit in
charge of the debt.
ASF | 32
Location of the DMO
3. Location and organizational
ii) Office at the Ministry of Finance
structure of DMO
Advantages:
Gives an explicit emphasis
to public policy objectives
in public debt management,
including the development
of the domestic debt
market.
ASF | 33
Location of the DMO
3. Location and organizational
ii) Office at the Ministry of Finance
structure of DMO
Risk:
Facing political pressure to
use debt management as a
vehicle for opportunistic
reductions in debt servicing
costs and in the budget
deficit in the short term.
ASF | 34
Location of the DMO
3. Location and organizational
ii) Office at the Ministry of Finance
structure of DMO
Risk control:
Political risk could be
substantially reduced if the
EBDM sets a clear strategy
and
goals
for
the
government’s
debt
management.
ASF | 35
3. Location and organizational
structure of DMO
Location of the DMO
iii) Autonomous Debt Office
Autonomous
Debt
Management
Offices
(ADMO)
are
located
outside the Ministry of
Finance or
the Central
Bank.
ASF | 36
3. Location and organizational
structure of DMO
Location of the DMO
iii) Autonomous Debt Office
Reasons to establish an ADMO:
To
create
better
accountability and greater
transparency.
ASF | 37
3. Location and organizational
structure of DMO
Location of the DMO
iii) Autonomous Debt Office
Reasons to establish an ADMO:
To
achieve
greater
sophistication
of
debt
management, given the
growing emphasis on the
risk control.
ASF | 38
3. Location and organizational
structure of DMO
Location of the DMO
iii) Autonomous Debt Office
Reasons to establish an ADMO:
To overcome problems of
recruiting and retaining
staff with special expertise.
ASF | 39
3. Location and organizational
structure of DMO
Location of the DMO
iii) Autonomous Debt Office
Advantages:
Political risk decreases.
ASF | 40
3. Location and organizational
structure of DMO
Location of the DMO
iii) Autonomous Debt Office
Advantages:
The ADMO will focus only
on debt management.
ASF | 41
3. Location and organizational
structure of DMO
Location of the DMO
iii) Autonomous Debt Office
Advantages:
The ADMO will force the
rationalization of public
debt management and will
set up a clear governance
and report structures.
ASF | 42
3. Location and organizational
structure of DMO
Location of the DMO
iii) Autonomous Debt Office
Advantages:
ADMOs are more efficient
because they follow market
oriented principles and
create
an
appropriate
environment
for
quick
decision-making.
ASF | 43
3. Location and organizational
structure of DMO
Location of the DMO
iii) Autonomous Debt Office
Risks:
The agency risk.
The
risk
of
low
coordination
increases
when the ADMO is further
from the Ministry
of
Finance.
ASF | 44
3. Location and organizational
structure of DMO
Location of the DMO
iii) Autonomous Debt Office
Risks:
In countries with feeble
organizational
structures
within the government, the
ADMO may face problems
with data collection.
ASF | 45
3. Location and organizational
structure of DMO
Location of the DMO
iii) Autonomous Debt Office
Risks:
The ADMO could be too
partial
in
its
debt
management, forgetting it
is part of the government
and thus ignoring some
aspects of the fiscal risk.
ASF | 46
3. Location and organizational
structure of DMO
Location of the DMO
iii) Autonomous Debt Office
Risk control:
Setting up at the ADMO a
board of directors with an
experienced and reliable
chairman.
ASF | 47
3. Location and organizational
structure of DMO
Location of the DMO
iii) Autonomous Debt Office
Risk control:
Create an independent risk
control department and an
internal
auditing
department
within
the
ADMO, which are reporting
directly to the board.
ASF | 48
3. Location and organizational
structure of DMO
DMO’s organizational structure
Issues concerning DMO
organization are whether if
it is a centralized or a
decentralized system and
its organizational chart.
ASF | 49
3. Location and organizational
structure of DMO
DMO’s organizational structure
i) Centralized and decentralized
Centralized system
When the functions are
performed either by the
Ministry of Finance, or by
an autonomous body.
ASF | 50
3. Location and organizational
structure of DMO
DMO’s organizational structure
i) Centralized and decentralized
Decentralized system
When a central DMO
gathers information from all
decentralized participants
of the system.
ASF | 51
3. Location and organizational
structure of DMO
DMO’s organizational structure
i) Centralized and decentralized
Decentralized system
In a decentralized system,
a wide range of control/
coordination problems will
need to be resolved
concerning to the collection
and recording of data.
ASF | 52
3. Location and organizational
structure of DMO
DMO’s organizational structure
ii) Organizational charts
The debt office can be
organized by geographical
units, loan sources, or
specific tasks.
ASF | 53
3. Location and organizational
structure of DMO
DMO’s organizational structure
ii) Organizational charts
Geographical units
Officers are responsible for
all creditors within an
assigned country or region,
while other staff members
are
responsible
for
multilateral organizations.
ASF | 54
3. Location and organizational
structure of DMO
DMO’s organizational structure
ii) Organizational charts
Geographical units
One problem with this
organizational chart is that
the strategy and actions to
reduce risks or costs for
one sub-portfolio conflict
with those of another.
ASF | 55
3. Location and organizational
structure of DMO
DMO’s organizational structure
ii) Organizational charts
Loan sources
The reasoning behind this
structure is that different
types of financing have
different
characteristics,
especially in the way they
are
negotiated
and
monitored.
ASF | 56
3. Location and organizational
structure of DMO
DMO’s organizational structure
ii) Organizational charts
Loan sources
The organizational chart
for this kind of model is
divided into various offices
specialized in the different
types of loans.
ASF | 57
3. Location and organizational
structure of DMO
DMO’s organizational structure
ii) Organizational charts
Loan sources
The lack of a correct
coordination among the
different units may conflict
the actions to comply with
an overall debt portfolio
benchmark.
ASF | 58
3. Location and organizational
structure of DMO
DMO’s organizational structure
ii) Organizational charts
Specific tasks
The task oriented set up
might be necessary when
debt information is located
in different institutions and
ministries.
ASF | 59
3. Location and organizational
structure of DMO
DMO’s organizational structure
ii) Organizational charts
Specific tasks
According
to
this
organizational chart, one
section of the DMO is
focused on disbursements
and
the
others
on
repayments, loan contracts
and reporting.
ASF | 60
3. Location and organizational
structure of DMO
DMO’s organizational structure
ii) Organizational charts
Specific tasks
The risks involved in this
structure are: dispersion of
responsibilities that can
lead to bottlenecks and
excessive specialization of
the employees.
ASF | 61
3. Location and organizational
structure of DMO
DMO’s organizational structure
iii) Organization Structure of the DMO
All the operative processes
should be integrated in a
vertical manner that clearly
define
roles,
responsibilities,
and
reporting channels.
ASF | 62
3. Location and organizational
structure of DMO
DMO’s organizational structure
iii) Organization Structure of the DMO
The organization of a DMO
Front-Office
EBDM
Executive Debt Management
DMO
Operational Debt Management
Middle-Office
Back-Office
ASF | 63
3. Location and organizational
structure of DMO
DMO’s organizational structure
iii) Organization Structure of the DMO
The Front-Office
Is responsible for funding
transactions and relations
with investors, underwriters
and banks.
ASF | 64
3. Location and organizational
structure of DMO
DMO’s organizational structure
iii) Organization Structure of the DMO
The Front-Office
Implements
the
debt
strategy, helps designing
funding
plans
and
manages
the
portfolio
within
benchmark
parameters.
ASF | 65
3. Location and organizational
structure of DMO
DMO’s organizational structure
iii) Organization Structure of the DMO
The Middle-Office
The middle office performs
two functions: analytical
and risk analysis.
ASF | 66
3. Location and organizational
structure of DMO
DMO’s organizational structure
iii) Organization Structure of the DMO
The Middle Office/
Analytical function
Perform projections of the
Debt-servicing
cash-flow
on existing loans and new
financing.
ASF | 67
3. Location and organizational
structure of DMO
DMO’s organizational structure
iii) Organization Structure of the DMO
The Middle Office/
Analytical function
Evaluate the budgetary
burden
of
public
indebtedness.
ASF | 68
3. Location and organizational
structure of DMO
DMO’s organizational structure
iii) Organization Structure of the DMO
The Middle Office/
Analytical function
Analyze the total stock of
domestic and external
public debt.
ASF | 69
3. Location and organizational
structure of DMO
DMO’s organizational structure
iii) Organization Structure of the DMO
The Middle Office/
Analytical function
Evaluate
the
debt
composition on currencies
and interest rates.
ASF | 70
3. Location and organizational
structure of DMO
DMO’s organizational structure
iii) Organization Structure of the DMO
The Middle Office/
Risk analysis function
Assess
the
portfolio
behavior against a given
prudential
trade-off
benchmark.
ASF | 71
3. Location and organizational
structure of DMO
DMO’s organizational structure
iii) Organization Structure of the DMO
The Middle Office/
Risk analysis function
Determine the proper mix
between external-domestic
debt, the maturity profile, the
desired currency and the
interest rate composition.
ASF | 72
3. Location and organizational
structure of DMO
DMO’s organizational structure
iii) Organization Structure of the DMO
The Middle Office/
Risk analysis function
Foresee the ways and
means to minimize the risk
that contingent liabilities
represent for fiscal stability.
ASF | 73
3. Location and organizational
structure of DMO
DMO’s organizational structure
iii) Organization Structure of the DMO
The Back-Office
Back office’s objective is to
create and maintain a highquality up-to-date database
of the debt portfolio.
ASF | 74
3. Location and organizational
structure of DMO
DMO’s organizational structure
iii) Organization Structure of the DMO
The Back-Office
The Back-Office functions
operates
through
two
functions: recording and
operating.
ASF | 75
3. Location and organizational
structure of DMO
DMO’s organizational structure
iii) Organization Structure of the DMO
The Back-Office/
Recording function
Includes
activities
of
collecting,
storing,
processing, validating, and
disseminating debt data.
ASF | 76
3. Location and organizational
structure of DMO
DMO’s organizational structure
iii) Organization Structure of the DMO
The Back-Office/
Operating function
Is the basic dynamics of
debt:
to
trigger
the
disbursements in due time
or to pay without falling into
arrears, among others.
ASF | 77
4. Main issues and problems
related to DMOs
ASF | 78
4. Main issues and problems
related to DMOs
The principal- agent problem
and the governance on DMO
The principal-agent problem
The interests of the principal
(Ministry of Finance) and the
agent (DMO) diverge, and it
is either too expensive or
too difficult to effectively
monitor the behavior of the
agent.
ASF | 79
4. Main issues and problems
related to DMOs
The principal- agent problem
and the governance on DMO
The principal-agent problem
could be solved with:




Benchmarks
Incentives
Monitoring and control
Audits
ASF | 80
4. Main issues and problems
related to DMOs
The principal- agent problem
and the governance on DMO
Benchmarks
They have two key roles:
1. Provide guidance for the
management of costs
and risk.
2. Define a framework for
assessing
portfolio
performance in relation
to cost, return, and risk.
ASF | 81
4. Main issues and problems
related to DMOs
The principal- agent problem
and the governance on DMO
Incentives
The principal establish an
incentive-compatible
contract so that the agent
will make the necessary
efforts and perform well.
ASF | 82
4. Main issues and problems
related to DMOs
The principal- agent problem
and the governance on DMO
Monitoring and control
The principal set up an
independent risk control
department and internal
auditing
department
reporting directly to the
EBDM within the DMO.
ASF | 83
4. Main issues and problems
related to DMOs
The principal- agent problem
and the governance on DMO
The Role of Audits
The role of the Supreme
Audit Institutions is to go
from routine practices to
best practices, but this
process cannot be isolated
from the macroeconomic
framework of each country.
ASF | 84
The principal- agent problem
and the governance on DMO
4. Main issues and problems
related to DMOs
Audits performed by Superior
Audit Institutions are:
i)
Regularity Audits
ii)
Management Audits
iii) Human resources audits
iv) Information systems audits
v) Performance audits
ASF | 85
5. Best practices in the DMO
ASF | 86
5. Best practices in the DMO
The practices contributing
to a sensible sovereign
debt management include:
ASF | 87
5. Best practices in the DMO
Establishing
management
objectives.
debt
clear
ASF | 88
5. Best practices in the DMO
Balancing costs
faced risks.
versus
ASF | 89
5. Best practices in the DMO
Separating
goals
and
responsibilities of fiscal and
monetary
policies
managers.
ASF | 90
5. Best practices in the DMO
Establishing limits to debt
expansion.
ASF | 91
5. Best practices in the DMO
Creating an institutional
structure in order to reduce
operative risk.
ASF | 92
5. Best practices in the DMO
Debt management paradigmatic
models:
 The case of United Kingdom
 The Case of Portugal
 The case of New Zealand
 The case of Canada
 The case of Norway
 The case of Mexico
ASF | 93
6. Conclusions
ASF | 94
6. Conclusions
Debt management could
be done in very different
ways and still offer good
results in terms of meeting
the
needs
of
the
government at the lowest
cost and risk levels.
ASF | 95
6. Conclusions
Each country should aim to
adopt the models of
advanced economies as
far
as
their
market
characteristics allow it.
ASF | 96
ASF | 97