This written evidence has been submitted by the Sovereigns Department of Fitch IBCA Limited, the international credit rating agency. Fitch IBCA provides international credit ratings for the foreign and local currency debt of over 60 sovereign governments worldwide. Fitch IBCA's Sovereign Risk Report on the UK was published in October 1999. The material below firstly sets out in brief terms some aspects of public debt management which are important in assessing sovereign credit risk and then offers a few observations on public debt management policies from an international perspective.

PUBLIC DEBT MANAGEMENT AND CREDIT RATING

  2.  When assessing the risk of default on sovereign debt considerable attention is given to the structure of public debt in addition to its overall level and trend. In general a lower risk of default will be associated with a country which has a low share of short term debt in its total debt stock and a smooth profile of public debt maturities. These features will mitigate the risks of governments facing difficulties in persuading lenders to rollover their holdings of maturing public debt. Deep and liquid government bond markets may also help reduce debt service costs and reduce bond market volatility, although the benefits of market depth obviously have to be assessed carefully against the overall level of public borrowing.

  3.  The importance of the maturity structure of debt can be illustrated by the example of Belgium, where Fitch IBCA's sovereign credit rating was downgraded (from AA+ to AA-) last December, on the eve of Belgium's entry to EMU. This reflected the fact that, in addition to its high overall stock of public debt, Belgium has a particularly high stock of short-term debt—equivalent to around 30 per cent of GDP. This increases its vulnerability to liquidity and roll-over risks. These risks are significantly more serious within EMU because the Belgium government can no longer rely on a captive pool of domestic investors who demand local currency assets, but rather have to compete with 10 other sovereign governments issuing in the Euro. In addition, the scope for central bank liquidity support is much more limited under the "no bail out" clause in the Maastricht Treaty. Italy's relatively low sovereign credit rating reflects similar concerns about the maturity of its public debt. By contrast the UK's low stock of short term public debt, as well as lower public debt overall, means that rollover and liquidity risks are less of a concern, allowing the government some flexibility in debt management without fear of jeopardising credit worthiness.

  4.  Transparency in public debt management is also important. Rating agencies look to the availability of clear consolidated fiscal accounts, covering the total of government debt liabilities, including publicly guaranteed debt. Transparency is also important as regards the objectives of public debt managers and their accountability to policy makers.

RECENT INTERNATIONAL TRENDS IN PUBLIC DEBT MANAGEMENT

  5.  The introduction of the UK Debt Management Office can be seen as part of a wider international trend towards the establishment of autonomous or quasi-autonomous public debt management agencies in the 1990s. Several OECD countries now have autonomous agencies (see table), and the numbers are growing fast—Australia and Greece have both established agencies in the last six months. Even where debt management has remained an integral part of the Finance Ministry or Central Bank, the general tendency has been towards stronger recognition of debt management as a specialist function and greater independence in pursuing debt management objectives. And it is not just developed countries that have followed this trend—for example in 1997 Hungary transferred responsibility for managing foreign currency debt from the central bank to a Government Debt Management Agency which is part of the Treasury.

Austria	Austrian Federal Financing Agency
Sweden	Swedish National Debt Office
Belgium	Belgian Debt Agency
Portugal	Portuguese Government Debt Agency
Greece	Public Debt Management Agency
Ireland	National Treasury Management Agency
Australia	Australian Office of Financial Management
New Zealand	New Zealand Debt Management Office

  6.  Countries have expressed common aims in this process, namely:

—  to improve transparency and reduce the risk of political interference in debt management;

—  to raise the credibility of monetary policy by mitigating potential conflicts of interest between the central bank's debt management objectives and its monetary policy goals;

—  to exploit the advantages of specialisation in risk management skills.

  7.  It is virtually impossible to isolate the impact of the shift to greater autonomy in debt management from wider trends in fiscal policy. But developments in debt management in recent years generally appear to have been positive. For example some smaller euro area countries such as Ireland, Austria and Portugal have been successful in boosting market liquidity and improving their standing with investors. These countries now have low levels of short-term debt. And in Belgium, which now has an independent debt management agency, more progress seems to have been made in reducing debt and lengthening maturities than in other heavily indebted euro area member states. In addition, the experience of the Swedish National Debt Office in the early 1900s showed that specialist public debt managers have the potential to outperform external private sector debt managers in terms of reducing funding costs. Hungary's move in 1997 has also been seen as greatly enhancing the transparency of the public sector balance sheet. More generally, by contributing to greater transparency in fiscal policy overall, the shift to greater autonomy in debt management may have helped to lock in the drive towards fiscal consolidation in recent years.

  8.  In conclusion, it would seem unrealistic to suggest that the shift towards greater autonomy in public debt management has, by itself, had a major impact on sovereign risk, relative to the impacts of wider trends of fiscal consolidation. But to the extent that it has contributed to greater transparency in overall fiscal policy, more independence in pubic debt management is likely to have been helpful.

23 November 1999