In recent years, the Debt Agency has made clever use of the low interest rates to significantly extend the maturity of the Belgian government debt, to the great benefit of the taxpayer. “The issue of 21.9 billion euros in government bonds with a term of barely one year does not change that strategy,” says Jean Deboutte, director of the Debt Agency.
The Kingdom of Belgium is a regular customer on the international financial markets, which should come as no surprise when you have to finance a federal debt of around 500 billion euros. The management of this debt is a task for the Federal Debt Agency. This must raise nearly 50 billion euros this year: 27 billion to finance the federal budget deficit and 21 billion to refinance maturing debt. In the coming years, the agency will continue to drain approximately 50 billion euros per year from the financial markets on behalf of the government.
Given the size of federal debts, it is vital that the Debt Agency can finance them as cheaply as possible without taking too great a risk. The agency faces the same dilemmas as people who take out a mortgage loan. Do you opt for a variable interest rate, which is often cheaper than a fixed interest rate, but with the risk that interest rates will rise? Or do you go for security and pay a fixed interest rate, which is usually more expensive?
A successful strategy
In recent years, the Debt Agency has managed the federal debt excellently. The average interest rate that the government paid on outstanding debt has fallen steadily over the past decade, to 1.43 percent in 2021. At the same time, the average term of the debt has risen from 6 years in 2009 to 10.7 years now. The agency was therefore able to reduce both the cost and the risk profile of the debt, which is quite exceptional. Normally you pay extra for safety in the form of a longer term. For the budget, and therefore also for the taxpayer, the falling interest costs were a blessing. They fell from just over 3 percent of GDP in 2010 to 1.24 percent last year.
It must be said that the right strategy has been obvious in recent years. Long-term interest rates had fallen particularly deeply, partly due to the expansionary policy of the European Central Bank. In 2021, the Belgian government could even enjoy negative long-term interest rates. In this context, it was obvious to take full advantage of the exceptional interest rate environment by issuing as much long-term debt as possible.
In recent years, the Debt Agency was one of the first in Europe to jump on that train. In 2021, the average maturity of new issues was 16 years. This year, the agency has already raised 34 billion euros over an average term of 17 years. With more than 10 years in Europe, only Austria does better. And Greece, but that is still a special case after the Greek debt restructuring in the previous decade. The federal government has anchored the long-term debt financing strategy with minimum requirements. For example, the average term must be at least 9.25 years. In the following twelve months, a maximum of 17.5 percent of the debt may also expire. A maximum of 42.5 percent may mature over the next five years to limit the refinancing risk.
In the meantime, the budget and the taxpayer benefit from this successful strategy. Thanks to the long average debt maturity, interest costs are rising slowly, from 8.5 billion this year (1.48% of GDP) to 14.8 billion (2.17%) in 2028. The damage could have been much higher increase. “This strategy bought us ten years to get the budget in order,” says Professor Hans Degryse (KU Leuven).
Staatsbon hardly thwarts the strategy
Now almost 22 billion euros is suddenly pouring in, via the issue of the government bond with a term of barely one year. This is at odds with the strategy of recent years. In addition, it is quite an expensive operation. The government pays an interest of 3.3 percent and 0.3 percent commission costs to the placing banks on the government bond, while Belgium can still borrow on the international markets at less than 3 percent over five years and slightly more than 3 percent over ten years . “We are now borrowing relatively much in the short term at a time when borrowing in the short term is more expensive than in the long term. The government would have been better off issuing government bonds with a term of five years or longer if the intention was that the saver would finance the debt,” says Hans Degryse.
“Nevertheless, the net impact of the issuance of the government bond on the term and cost of the debt is very limited,” says Jean Deboutte, director of the Debt Agency. “This is because we are reducing other short-term issuance by EUR 10 billion this year and because we are reinvesting the cash surplus of EUR 9 billion on the interbank market at attractive conditions with various major counterparties. That market is safe and liquid, and we can earn an interest rate of 3.66 percent. If necessary, we can also park our surpluses at the National Bank, but then for 20 basis points less. Thanks to these measures, the average debt maturity is only slightly reduced to 10.4 years. We will spend only EUR 2.4 billion less long-term debt out of a total of EUR 400 billion. That’s very little. We remain well above the risk parameters we use. Our long-term financing plan remains unchanged, as is our long-term financing strategy.”
Of course, the agency also builds in some flexibility by financing the debt in a limited way in the short term. This year, for example, the plan was initially to raise 250 million euros through the issue of government bonds. But that was about millions, instead of the billions that have now been raised. The issue of 22 billion euros in government bonds therefore does not fit in with the strategy of the Debt Agency, but in a political choice by the government to encourage banks to increase their interest rates on savings and term accounts more quickly via the government bonds. . “The government’s political objective conflicts with the strategy that the agency had also drawn up for 2023,” says Hans Degryse.
Need a new strategy?
Gradually, the question arises whether a new strategy is required. Long-term interest rates have already risen significantly since 2022. This year, the agency placed debt at an average of 3 percent. It has been since 2010 that borrowing is so expensive in the long term. So the strategy of locking in debt over the long term becomes more expensive. It may therefore become interesting to finance the debt a little more in the short term, especially if inflation were to cool further, which would make room for a fall in the ECB’s key interest rate towards 2024.
The Debt Agency also does not have a crystal ball, but given the greater uncertainty about the evolution of interest rates starting from the increased level, it may be appropriate to build in a little more flexibility by financing the debt a little more in the short term. Due to the cooling of inflation and the economy, a fall in long-term interest rates is certainly possible later this year or in 2024. After that, a resumption of the rising trend in long-term interest rates cannot be ruled out. Structural changes, such as the energy transition or slowing globalization, can regularly push inflation above 2 percent.
Even more important is the great money hunger of Western governments, which have to finance relatively large government deficits at a time when the central banks are no longer buying government bonds. Between 2015 and 2022, the National Bank bought more than 20 percent of the outstanding Belgian government debt on behalf of the European Central Bank. In the following years, the National Bank will gradually sell that debt again, which could cause a break in the bond markets. If the biggest buyer of government bonds turns into the biggest seller, higher interest rates are inevitable to reconcile supply and demand. “With the central bank, the largest counterparty for governments will disappear. It may therefore be too early to fund us more in the short term. Take advantage of the artificially lower long-term interest rates, as long as the central bank still holds a large portfolio of government bonds,” says Hans Degryse.
The agency is also taking into account a further rise in long-term interest rates, from 3.01 percent this year to 4.34 percent in 2028. In that scenario, it is better to stick to the strategy of keeping the debt as long as possible in the long term. term to finance. “We think the current interest rates are still very good in the long term, which is why we are sticking to our strategy,” says Jean Deboutte. “Thanks to the long maturity of the debt we have built up, we have already bought ourselves some room to manoeuvre. We absolutely want to avoid having to borrow at high interest rates in the long term. That is the biggest risk to the budget and the taxpayer. The current long term debt allows us to borrow at the shorter term if necessary, if interest rates become too expensive in the long term.”
Read also:
The complete state bond file
2023-09-04 16:57:43
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