Management of government debt by the French Treasury agency (AFT)

The Court of Auditors has conducted a survey on the management of government debt by the AFT. The report, released at the beginning of the summer, lightens the honorable work done by the AFT in managing relatively well the government debt but regrets a relative dependence on the SVT (primary dealers)...

Article also available in : English EN | français FR

This survey is part of an environment where financing needs of the state, which have reached significant levels in recent years, put the debt management by the French Treasury agency under high stress and where the capital markets are subject to an increasing competition between public and private issuers.

1) Government bonds issuance strategy is intended to minimize the burden of debt without controlling (a priori) the variability

The objective assigned to the French Treasury Agency is to "cover the government financing while minimizing the duration of the debt burden to the taxpayer under the best possible conditions of safety." Its implementation is based on several principles rigorously applied by the Agency: a policy of regular, transparent and predictable issuance, innovative management; developing the most liquid and deepest possible French debt market.

The financing strategy defined and implemented by the AFT does not deal with an arbitrage between cost and risk budget. It is primarily about adapting narrowly and permanently the policy of primary issue at the request of investors. This strategy is in part the consequence of the scale of emission requirements. However, if it ensures that the price paid for each auction is as low as possible, it does not guarantee that the debt management, understood as the set of transactions made over time, is globally optimal and minimizes the fiscal burden over time.

Unlike other OECD countries, the management of the state debt is not based on a direct control of fiscal risk. Despite the potential impact on the subsequent evolution of the debt burden, no limit on refinancing risk or interest rate circumscribes the choice of the manager, In particular, the average life of the debt is not considered within the monitoring indicators, even if in the end this time is close to the average of other OECD countries rated triple A. It is simply the result of the implementation of the funding program based on the principles of regularity emissions and liquidity of the securities mentioned above. It is the same with regard to the proportion of debt to refinance in the horizon of one year or two.

2) Banks with primary dealers provide essential support to the definition and implementation of policy issuance

Primary dealers (SVT) contribute effectively to develop innovative management practices and to ensure the quality of French debt. The charter contract that binds them to the State imposes stringent requirements for participation in the primary market, market making in the secondary market and advising the AFT.

The auctions take place in good conditions. Their preparation is carried out through a sustained dialogue with the SVT which allows the Agency to properly adapt its offer of securities to meet investor demand. This close contact with SVT, privileged observers of the market and the elements of flexibility introduced from the summer of 2007, including the possibility of reopening some baselines (off the run emissions) allowed the AFT to go through the crisis without encountering major difficulties in its programming.

The relationship model built between the AFT and primary dealers has so far been convincing. However, the AFT knowledge of investor’s behavior and their needs on a daily basis comes from the primary dealers. This may be a limitation in a context where the broadening of the investor base becomes critical to securing state funding and that some new investors appear outside of traditional channels,

3) The issuance of inflation-indexed bonds is an element of debt diversification whose financial statement must be established

If inflation-indexed bonds issuance responds to clear theoretical arguments, the optimal strategy is difficult to calibrate in practice.

First issuer of indexed bonds in the euro area, the AFT has set itself a target of linked securities in the total debt between 10% and 20%. A double reference for inflation (French and European) is an advantage in terms of diversification of the investor base since issuance volumes are sufficient to provide liquidity on both segments. From this point of view, the credibility of the AFT commitment regarding this program, for now unquestioned, is paramount.

A review of post-indexed bond program, however, should be made as they fall due. Similarly, a sensitivity analysis of interest expense subject to inflation risk should be conducted regularly and presented in the annual performance programs like the one conducted on the sensitivity to changes in interest rates.

4) The auctions organization is generally reliable

The Bank of France is organizing the auction of Treasury securities as part of its general interest missions under the Monetary and Financial Code. However, the agreement, which defines the benefit in very general terms, should provide the service obligations of the Bank of France and identify indicators of service quality.

The recommendations made by the Court in 2008 after its audit on the submission and processing system of bids in auctions managed by the Bank of France have been largely implemented. However, despite all the improvements to this system, the security of the auction process is not absolute and has several weak points. In this regard, the Court recommends to secure the management of late submissions, manage contacts between the Bank of France and the SVT and the submission procedure in "downgraded" mode.

Significant progresses have been achieved in terms of speed of the auction process, even if the time of market results announcement is a little higher than that of Germany.

Next Finance September 2012

Article also available in : English EN | français FR




In the same section