a

GAO

United States General Accounting Office

Report to Congressional Requesters

November 2001 DEBT 

MANAGEMENT

Insights and Tools 

From Selected Nations

GAO-02-14
Page 1 GAO-02-14 Debt Management

November 21, 2001

The Honorable Bill Thomas

Chairman

Committee on Ways and Means

House of Representatives

The Honorable E. Clay Shaw, Jr.

Chairman, Subcommittee on Social Security

Committee on Ways and Means

House of Representatives

The Honorable Pete V. Domenici

Ranking Minority Member

Committee on the Budget

United States Senate

For 4 years, the United States has had a budget surplus that has resulted in

decreasing debt levels. Debt held by the public fell approximately

$453 billion from the end of fiscal year 1997 to the end of fiscal year 2001.1

Although it appears now that the economy and the challenges of

combating terrorism will prompt deficits for the short term, we may again

return to surpluses. In fact, we and others have argued that surpluses will

be needed in the future to prepare for the long-term costs of the baby

boom generation.

As we have previously reported, deficits and surpluses present different

challenges for debt management. Earlier this year2

 we provided you with

information on how the U.S. Treasury has been managing debt as the

budget was in surplus. Given the possibility for budget deficits in the near

term, the Treasury is likely to face new and persistent challenges in debt

management.

 1

Gross federal debt includes debt held by the public and debt held by government accounts,

such as the Social Security trust funds. Despite the current budget surpluses, gross federal

debt continues to grow because debt held by government accounts has increased at a

faster rate than debt held by the public has declined. Because debt held by government

accounts is an intragovernmental transaction, it is not the focus of this report.

2

See Federal Debt: Debt Management Actions and Future Challenges (GAO-01-317,

February 28, 2001). See also Federal Debt: Debt Management in a Period of Budget

Surplus (GAO/AIMD-99-270, September 29, 1999).

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-02-14 Debt Management

A number of other nations experienced a cycle of budget deficit and

surplus before the United States. You asked us to examine the experiences

of some of these nations looking for insights and lessons learned for the

United States. You asked that we pay particular attention to the various

techniques used, including the use of “debt buybacks.” As discussed with

your staff, we selected five nations—Australia, New Zealand, Norway,

Sweden, and the United Kingdom—whose recent approaches and

experiences with debt management in times of surplus might have

relevance to or provide useful information for the United States.

To obtain information on the experiences of these other nations in

managing sovereign debt, we interviewed government officials, capital

market participants, academics, and others to discuss fiscal and debt

management goals, the relationship between budget changes and debt

policies and actions, and the nature of the capital markets in these nations.

We also gathered and analyzed documents and publications on debt

management in these five nations. With respect to United States debt

policy, we interviewed officials and gathered data from the Department of

the Treasury, Federal Reserve Board of Governors and Federal Reserve

Bank of New York, and private sector market participants in Washington,

D.C., and New York City. We did our work in accordance with generally

accepted government auditing standards from March 2000 through

October 2001. The Treasury and the Congressional Budget Office (CBO)

generally agreed with this report and provided technical comments that

we have incorporated as appropriate.

The five countries in our study experienced both budget surpluses and

deficits during the period from 1988 through 2000. Recent budget

surpluses contributed to falling sovereign public debt levels in absolute

terms and as a share of the economy. Fiscal strategies, including clearly

defined targets of debt to the overall economy, helped achieve budget

surpluses in several countries. Setting targets that measure the size of

gross or net debt3

 to the economy allowed decisionmakers to track

progress toward fiscal health and provided justification for continued

fiscal discipline.

Whether government debt is increasing or decreasing, debt managers’

objectives remain the same. The objectives are (1) ensuring that the

 3

Net debt is defined as gross debt minus financial assets.

Results in Brief
Page 3 GAO-02-14 Debt Management

government’s financing needs are met, (2) minimizing the government’s

cost of financing, (3) promoting efficient markets, and (4) keeping risk at

an acceptable level. However, the trade-offs among the objectives may be

different and the objectives themselves are not always compatible. During

a budget deficit, a primary consideration is making government securities

more attractive to potential investors, which includes deciding whether to

introduce new instruments. On the other hand, periods of budget

surpluses pose challenges to maintaining liquid4 benchmark issues and

reducing borrowing costs. Declining levels of publicly held debt would

present challenges in supporting liquid markets across the yield curve of

securities.5

 Tensions between minimizing financing cost and supporting

domestic markets could be accentuated.

During periods of surplus, falling debt levels have caused debt managers in

all study countries to concentrate a large number of diverse debt issues

into fewer, but larger, benchmark issues that are also expected to lower

the governments’ financing costs. These fewer, more liquid benchmark

issues generally have initial maturities ranging from 2 to 15 years. The U.S.

Treasury announced on October 31, 2001, that it was suspending issuance

of the 30-year nominal and inflation-indexed bonds. A Treasury official

noted that the market’s attention and action have shifted away from the

30-year bond toward the 10-year note. The Treasury’s action will leave

three Treasury benchmarks ranging from 2 to 10 years—similar to most

study countries. Lower debt levels and resulting decreases in newly issued

government securities also caused central banks to modify investment

decisions. Central banks in most countries we studied generally held a

smaller share of their portfolio in government securities and generally held

an increasing share of outstanding government debt.

While we examined debt management approaches when all study

countries and the United States were in budget surplus, some of these

tools could be used during budget deficits as well. All study countries have

deployed a number of debt management tools that the United States has

used. These include debt buybacks, reopening of outstanding issues, and

reducing or eliminating certain maturities of debt. Debt managers noted

 4

A liquid debt issue is one that is large enough to be traded at will and one for which the

offer and purchase prices differ only slightly. Benchmark issues are used by other financial

services to price their products.

5

A yield curve is a graphical depiction of the current relationship between interest rates and

time to maturity, holding all other factors (such as credit risk) constant.
Page 4 GAO-02-14 Debt Management

that reverse auctions are a way to consolidate government debt into

benchmark maturities and allow issuance of new bonds to meet market

demand. While we examined buybacks used in the study countries and the

United States when their budgets were in surplus, buyback results also

could be achieved in times of budget deficits. Debt buybacks can have the

advantage of allowing debt managers to change the characteristics of

outstanding debt as well as to create larger benchmark issues. The

experiences of other countries suggest that it can be difficult to manage

and predict the costs of reverse auctions.

Each of the countries, except Norway, used reverse auctions6

 that bought

back debt before it matured. Unexpected changes in key information

about the amount of debt repurchases and a compressed time schedule

caused Sweden’s buyback operations in 2000 to be more costly than

expected. Australian officials said that buying back debt through means

other than a reverse auction may lower costs to the government. The

Reserve Bank of Australia (RBA), Australia’s central bank, has conducted

bond repurchases on behalf of the Australian Office of Financial

Management (AOFM) for several years. However, an RBA official said that

the success of these operations is a function in part of the liquidity of the

bond and the level of information about the operations themselves. Debt

managers in the United Kingdom planned to buy back debt using a

combination of reverse auctions and open market repurchases to guard

against the risk that it might be progressively more expensive to acquire

securities as reverse auctions continued.

All study countries, as well as the United States, used other tools to

increase market efficiency and allow increased issuance of benchmark

securities. However, the other nations used a broader range of tools: open

window repurchases, debt exchanges, buybacks without canceling debt,

switch auctions, taps and reverse taps, and swaps.

The additional debt management tools used regularly in other nations may

hold promise for the United States. Australia and the United Kingdom

allow investors to offer securities to the government for repurchase at the

government’s option. Called “open window repurchases,” these programs

provide an opportunity for the government to buy back debt at market

 6

In a reverse auction, the government receives offers from market participants to sell

securities at a specific price. In the United States, the Treasury accepts the most

competitive offers.
Page 5 GAO-02-14 Debt Management

rates. A variation of this approach allows investors to offer only securities

nearing their maturity dates for repurchase at the government’s option.

These programs act as both debt management and cash management

tools—reducing outstanding debt and smoothing cash flows by giving debt

managers another opportunity to use excess cash flows in surplus months

that may occur even in a budget deficit year. The government can choose

which issues to repurchase in both a reverse auction and an open window

repurchase. From the investor’s perspective, open window repurchases

can be advantageous because they are an opportunity for the investor to

switch its funds to another investment before the security matures. While

the amount of debt repurchased may be lower in an open window

program, these programs may provide a lower cost buyback because the

government can choose to buy when it believes market prices are

advantageous. Open window repurchases likely can be done more

frequently than reverse auctions and may have lower administrative costs.

Debt management offices in Australia and the United Kingdom have used

open window repurchases to supplement reverse auction debt buybacks.

Debt exchanges are used in three of the five study countries to promote

liquidity of benchmark securities by exchanging outstanding debt

securities for the newly issued, more liquid benchmark securities.

Exchange offers are opportunities for investors to convert one debt

security into another—for example, an older, nonbenchmark security into

a new benchmark bond—at a ratio to be determined by the debt

management office. The U.S. Treasury now is studying the advisability and

feasibility of debt exchanges.

The United Kingdom has used switch auctions—a recent innovation—to

build up liquid benchmark securities in a time of low issuance and when

the Debt Management Office wished to obtain a share of a debt issue that

was too large to have been considered for a debt exchange. In a switch

auction, the debt management office offers to buy a certain amount of a

nonbenchmark bond against the issue of a further amount of a benchmark

bond, with the exchange ratio to be determined by the accepted bids.

Switch auctions also may hold promise for the U.S. Treasury in supporting

the creation of large benchmark issues without increasing outstanding

debt.

Some debt management tools used abroad hold less promise for the

United States because they may be difficult to implement in a way

consistent with the value of equal access, or may require the government

to assume credit risk. One-on-one offers to buy or sell debt securities

between the debt management office and an individual market participant
Page 6 GAO-02-14 Debt Management

are used in all study countries. Another tool—swaps of securities between

the government and a capital market participant—may provide the

opportunity for lower cost financing, but requires the government to

assume the risk that the swap partner may default.

When some study countries experienced budget surpluses, their

governments decided to continue to maintain their sovereign debt markets

to keep a role for the central government in debt markets and/or to

facilitate potentially higher levels of borrowing in the future. As a

consequence, these countries have had excess cash to invest in financial

assets. Particular investment decisions have been influenced by both the

size of the current surplus and projections about its level over time. Two

of the five nations in our study have chosen to place this excess cash in

short-term, liquid accounts in either the central bank or the domestic

banking system. Pending the further development of strategies, Australia

has placed surplus funds in an account at the central bank. The United

Kingdom initially invested the surplus in money market instruments,

including liabilities of banks, using the cash to reduce net debt. Sweden

and New Zealand used excess cash to offset their net government debt

denominated in foreign currencies. They bought back some of their debt

denominated in foreign currencies and increased foreign currency assets

to offset their net remaining foreign currency denominated debt. Norway,

with substantial although declining oil activity receipts projected to

continue at least through 2004, created a Petroleum Fund that holds

predominantly longer-term assets (bonds and equities) and assumes more

risk.

The budgetary surpluses of recent years that were achieved by fiscal

discipline and strong economic growth positioned us well to respond to

both the events of September 11, 2001, and to the economic slowdown.

Although the budget may dip into deficit in the short term, once the

economy rebounds the nation may again return to surplus. For example,

the Senate and House Committees on the Budget, on a bipartisan basis,

endorsed a long-term fiscal policy to maintain surpluses equal to the Social

Security surplus. For the long term, sustained budgetary surpluses bolster

the nation’s economic capacity to afford the burgeoning costs of the baby

boom retirement. Other nations have used debt reduction and investment

in financial assets as a way to achieve national goals and to prepare for

future demographic changes. Several study nations have recognized

potential governance issues associated with ownership of longer-term

assets. The United States might be faced with similar issues in the future

should we return to surpluses.
Page 7 GAO-02-14 Debt Management

All of the study countries and the United States had budget deficits give

way to budget surpluses in the 1990s. Debt changes closely followed the

budget changes for four of the study countries. Debt and budget surplus

targets were used as fiscal goals in some countries. Maintaining

government debt at prudent or stable levels is a fiscal goal pursued in most

of the countries we studied. While in budget surplus each of the study

nations decided, for reasons particular to its own political and economic

considerations, to maintain some level of government debt to retain a

presence in the capital market. This choice may facilitate the borrowing

increase that may be caused by the recent global economic downturn.

Table 1 below shows the pattern of surpluses and deficits from 1988

through 2000. Four of the study countries—all but New Zealand—

experienced a cycle of budget surpluses, followed by deficits and then a

return to surpluses in the last 13 years. Budget surpluses were achieved in

the 1990s as a result of budget consolidations and economic growth.7 For

the United States, there was a gap of nearly 30 years between its 1969 and

1998 unified surpluses. The current global economic downturn may cause

some nations to return to deficits and increase debt levels.

Table 1: Budget Deficits and Budget Surpluses as Percentages of GDP, 1988 Through 2000

Country 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

United States -3.1% -2.8% -3.9% -4.5% -4.7% -3.9% -2.9% -2.2% -1.4% -0.3% 0.8% 1.4% 2.4%

United Kingdom 0.7% 3.0% 1.3% 0.1% -2.3% -5.9% -7.1% -5.3% -4.4% -3.0% -0.4% 0.6% 1.0%

Australia 0.6% 1.8% 1.7% 0.1% -2.9% -4.0% -3.8% -2.8% -2.0% -1.0% 0.2% 0.7% 2.0%

New Zealand -4.8% -3.7% -4.7% -3.8% -3.3% -0.6% 3.0% 3.1% 3.6% 2.0% 2.6% 1.8% 1.4%

Norway 2.7% 1.8% 2.6% 0.1% -1.7% -1.4% 0.4% 3.5% 6.6% 7.9% 3.6% 4.9% 14.0%

Sweden 0.7% 1.9% -1.0% -4.1% -9.7% -13.6% -8.5% -8.1% -1.2% -0.3% 0.5% 4.1% 4.9%

Notes: Budget surplus/deficit measures and source documents are listed in the footnote.8 Budget

deficits are shaded.

 7

Our report, Budget Surpluses: Experiences of Other Nations and Implications for the

United States (GAO/AIMD-00-23, November 2, 1999), describes the economic changes and

fiscal efforts that resulted in budget surpluses during the 1980s and 1990s.

8

United States – “federal surplus or deficit,” CBO, The Budget and Economic Outlook FY

2002-2011; United Kingdom – “public sector net cash requirement,” HM Treasury, Budget

2001; Australia – “commonwealth general government cash surplus,” Commonwealth

Budget 2001-2002; New Zealand – budget measure is “financial balance” in 1988-1995,

OECD Economic Outlook, December 2000, and “operating balance” in 1996-2000, Financial

Statements of the Government of New Zealand, June 30, 2000; Norway – “financial

balance,” OECD Economic Outlook, December 2000; and Sweden – “central government

budget balance,” Statens Finanser, Ekonomistyrningsverket.

Budget Surpluses,

Fiscal Policies, and

Debt Levels

The Pattern of Surpluses

and Deficits and Related

Debt Levels
Page 8 GAO-02-14 Debt Management

Debt changes closely followed the budget cycles for four of the study

countries. Debt reductions were achieved with the budget surpluses in the

late 1980s, but debt levels increased sharply when governments borrowed

to finance the budget deficits in the early and mid-1990s. (See figure 1.)

Figure 1: Gross Debt as a Percentage of GDP, 1988 Through 2000

Note: Gross debt measures and source documents are listed in the footnote.9

The gross debt trends10 for the six countries show the response of debt

levels to budget balances and economic changes. The ratios of debt to

GDP in figure 1 closely track the cycles of budget surplus and deficit

shown in table 1. All of the study countries except Sweden and the United

 9

United States – “federal debt held by the public,” CBO, The Budget and Economic Outlook

FY 2002-2011; United Kingdom – “general government gross debt,” HM Treasury, Budget

2001; Australia – “government securities on issue,” Australian Office of Financial

Management, Annual Reports and The Treasury: Commonwealth Debt Management; New

Zealand – “Crown gross debt” in New Zealand’s 2001 Economic and Fiscal Update and

“gross total debt” in New Zealand’s Debt Management Office’s Web site

www.nzdmo.govt.nz; Norway – “general government gross financial liabilities,” OECD

Economic Outlook, December 2000; and Sweden – “central government debt” in Swedish

National Debt Office’s Web site www.rgk.se.

10For this report, gross debt refers only to debt held by the public.

0

14

28

42

56

70

84

United States United Kingdom Australia New Zealand Norway Sweden

Years 1988-2000

Percentage
Page 9 GAO-02-14 Debt Management

Kingdom show debt-to-GDP ratios in 2000 lower than at any time in the

period from 1988 through 2000.

Net debt-to-GDP ratios in the period 1988 through 2000 are shown in figure

2 for the study countries and the United States. Norway’s and Sweden’s

large asset holdings make their net debt substantially lower than their

gross debt. Since Norway’s assets are larger than its debt, it had negative

net debt-to-GDP ratios in this period. After Norway, Sweden had the

lowest net debt-to-GDP ratio (2 percent in 2000), although its gross debtto-GDP ratio (61.2 percent in 2000) was the highest among the study

countries and the United States.
Page 10 GAO-02-14 Debt Management

Figure 2: Net Debt-to-GDP Ratios, 1988 Through 2000

Note: Net debt measures and source documents are listed in the footnote.11

As noted in our study of the fiscal policy experiences of study nations,

debt and budget targets were used as fiscal goals in some countries.

Maintaining government debt at prudent or stable levels is a fiscal goal

pursued in most of the countries we studied. Debt objectives can be

defined in both nominal amounts and relative terms. Gross debt as a

 11United States – “federal debt held by the public,” CBO, The Budget and Economic

Outlook FY 2002-2011, and “financial assets,” U.S. Treasury, Financial Report of the

United States Government; United Kingdom – “public sector net debt,” HM Treasury,

Budget 2001; Australia – “commonwealth general government net debt,” Commonwealth

Budget 2001-2002; New Zealand – “net Crown debt” in New Zealand’s 2001 Economic and

Fiscal Update; Norway – “general government net financial liabilities,” OECD Economic

Outlook, December 2000; and Sweden – “general government net financial liabilities,”

OECD Economic Outlook, December 2000.

Some Countries Used

Fiscal Targets

-56

-42

-28

-14

0

14

28

42

56

70

United States United Kingdom Australia New Zealand

Norway

Sweden

Years 1988-2000

Percentage
Page 11 GAO-02-14 Debt Management

percentage of GDP compares debt to the size of the economy.

Governments measure the extent to which they have accumulated

financial assets by reviewing goals they have set for “net debt”—which is

defined as gross debt minus financial assets. (See table 2.)

Table 2: Fiscal Targets Used in Study Countries

Country Fiscal targets Notes

Australia Reduce net debt, with a projected

negative net debt in fiscal year 2004-

2005, while maintaining liquidity in

benchmark securities.

New Zealand Maintain relatively stable long-term

targets for net and gross debt below 20

percent and 30 percent of GDP,

respectively, on average over the

economic cycle.

Gross debt would increase in

nominal terms from 2001

through 2005 to finance

financial and physical assets.

Norway Keep revenue and expenditure at

sustainable levels consistent with

stable prices and long-term fiscal

sustainability, which is the primary

fiscal objective.

Short-term fluctuations in oil

prices should not affect

economic policy.

Sweden Maintain 2 percent of GDP budget

surplus on average over an economic

cycle.

Sweden has a nominal ceiling

for central government

expenditures for 3 years

ahead.

United Kingdom Maintain net debt at a sustainable

level, below 40 percent of GDP.

The ratio of net debt to GDP

was forecasted to fall to

about 34 percent of GDP in

fiscal year 2001-2002, and

remain at about that level for

the next 4 years.

Sources: Data from study countries obtained in early September 2001.

The amount of general government net debt in Australia has fallen

consistently since the mid-1990s, from a peak of almost 19 percent of GDP

in fiscal year 1995-1996 to an expected 5.4 percent in fiscal year 2001-2002.

Using the policy settings in the fiscal year 2000-2001 budget, net debt could

be eliminated in fiscal year 2004-2005. New Zealand’s 2001 Economic and

Fiscal Update projects net debt-to-GDP levels of from 15.8 percent to 18

percent from 2001 through 2005.

In Europe, the Maastricht Treaty provides for a target ratio of gross

general government debt to GDP at market prices of 60 percent and

budget deficits of not more than 3 percent of GDP at market prices.

Sweden and the United Kingdom subsequently adopted fiscal policies and

debt targets that would enable them to achieve and maintain these levels.
Page 12 GAO-02-14 Debt Management

Sweden’s fiscal policy anchor is a budget surplus of 2 percent of GDP on

average over an economic cycle. This fiscal policy goal was adopted to

reduce general government debt in preparation for demographic changes

and to allow Sweden to achieve and maintain Maastricht’s convergence

criteria. The United Kingdom’s fiscal targets,12 adopted in 1998, included a

sustainable investment rule that called for holding public sector net debt

as a percentage of national income at a “stable and prudent” level over the

economic cycle. However, the United Kingdom achieved a net debt-toGDP ratio of 31.6 percent in 2001, below the level of 40 percent of GDP

referenced in 1998. The 2001 budget projects a steady ratio around 30

percent in the next 5 years.

While in budget surplus, each of these five nations also decided, for

reasons particular to its own political and economic considerations, to

maintain some level of government debt and the ability to issue debt by

retaining a presence in the capital market. The reasons given for keeping

some government debt include

• preparing for the possibility that the government may need to borrow

again (New Zealand);

• strengthening the domestic capital market (Australia, New Zealand, and

Norway); and

• providing a secure, long-term investment vehicle for pension and

insurance funds (United Kingdom).

Both structural differences in domestic capital markets and the relative

size of government debt in the world and domestic bond markets affect

options available to government decisionmakers and debt managers. For

example, some nations where government bonds comprise a large share of

bond markets found it important to maintain some level of debt to ensure

continued viability of a market for government bonds. Table 3 shows the

relative market shares of government securities by country.

 12The United Kingdom’s fiscal targets are described in the Finance Act 1998 and the Code

for Fiscal Stability 1998.

Study Countries Decided

to Maintain Government

Debt
Page 13 GAO-02-14 Debt Management

Table 3: Relative Market Share of Government Securities by Country

Country

Share of each country’s

government bonds in world

bond market

Share of central government

bonds in each country’s bond

market

United States 7.34% 15.0%

Australia 0.21% 35.5%

New Zealand 0.04% 61.9%

Norway 0.05% 35.0%

Sweden 0.24% 49.0%

United Kingdom 1.33% 39.1%

Note: World bond market includes government, corporate, foreign, and Eurobond issuers.

Source: Merrill Lynch, Size and Structure of the World Bond Market: 2001, April 2001 (data as of

December 31, 2000).

The experience of moving between budget surpluses and deficits has

influenced current debt management policy and practices in the countries

we visited. Government officials told us their current debt management is

based on the assumption that borrowing needs may increase in the future.

Although the five study countries and the United States do not have

identical objectives in managing their sovereign debt, debt management

objectives in all of these countries generally fall into four categories:

• ensuring that the government’s financing needs are met,

• minimizing the cost of financing,

• supporting domestic capital markets, and

• keeping risk at an acceptable level.

Debt management objectives may remain the same regardless of whether a

government’s budget is in deficit or surplus. However, debt managers may

use different strategies to pursue these goals when budget surpluses allow

lower debt levels than when deficits cause debt to increase. Additionally,

while debt managers continually make decisions on the composition of

government debt, balancing the objectives becomes more challenging

when the amount of debt outstanding is being reduced. This is because the

objectives, while interrelated, are not always entirely compatible.

Ensuring that the government’s financing needs are met is a critical

objective and achieving it is the result of successful debt and cash

management. The cycles for issuing bills, notes, and bonds are determined

Countries Have

Similar Debt

Management

Objectives
Page 14 GAO-02-14 Debt Management

largely by the government’s cash management needs. Short, variable term

bills can be issued as needed to cover low points in available cash.

Minimizing the cost of borrowing usually is viewed as a medium- to longterm objective. Debt management offices use different approaches toward

achieving lowest long-term cost. For example, debt management offices

like those in our study have decided to maintain regular, predictable

operations and to maintain broad and deep markets, while others with

small operations may time their actions to take advantage of market

conditions. Taking advantage of market conditions can include issuing a

particular type of security only when conditions (such as price) are

advantageous to the government.

Supporting domestic markets is important because efficient, liquid—

defined as broad and deep—markets that address investor demands also

contribute to achieving the first two objectives. The U.S. Treasury

advances its goal of efficient markets by issuing debt with various

maturities and in sufficient amounts to appeal to the broadest range of

investors. One way the United Kingdom’s Debt Management Office has

supported its domestic market is by issuing relatively more long-term debt

to meet strong and increased demand caused in part by regulatory and tax

factors and because the demographic profile is becoming older and

pension funds are demanding more nominal bonds.13 According to the

United Kingdom’s Treasury, meeting this demand will benefit both the

government and investors. Insurance companies and pension funds

acquire the relatively longer-term government securities to meet their

portfolio needs, and the government may get cheaper financing because it

is issuing where demand is high. However, this government strategy means

that there is less relatively new debt in the shorter maturity ranges sought

by other capital market participants. Sweden’s National Debt Office also

helped to strengthen the domestic capital market by its strategy of issuing

securities in kronor and executing a swap agreement wherein the

government pays interest in foreign currency, and receives payment in

kronor equal to the cash flow for a krona-denominated bond. Thus,

Sweden gets a lower borrowing cost than if it sold bonds denominated in a

foreign currency and this results in improved liquidity in the domestic

 13Institutional and regulatory factors included the “Minimum Funding Requirements” that

created incentives for pension funds to hold long-dated government securities. The

Government has announced that these Requirements will be abolished. Other factors

include the “Advance Corporation Tax,” abolished in April 1999, and the dividend tax

credit, abolished in the 1997 budget.
Page 15 GAO-02-14 Debt Management

government securities market. Debt management offices in the countries

we studied believed it was important to consult with market participants

about such issues as market conditions and investor demand.

Keeping risks at an acceptable level is key to success in each of the other

objectives. Debt management offices encounter and manage the following

types of risk:

• Funding risk is the possibility that a debt management office would not be

able to access markets or raise funds at an acceptable cost. For example,

rates may be unacceptably high when the government needs to issue debt

to cover a budget deficit.

• Liquidity risk is the possibility that market conditions might shift in such a

way as to not allow for quick or cost-effective liquidation of securities or

positions. For example, the government may face liquidity risk when it

repurchases outstanding marketable debt prior to maturity if it causes a

substantial change in prices.

• Market risk is the possibility that, once debt has been issued, adverse

changes in interest rates or foreign currency exchange rates could cause

either debt service costs to increase directly or the opportunity to reduce

debt service costs to be missed. For example, the funding cost may be

higher on new debt than on maturing debt.

• Portfolio concentration risk is created when a portfolio is unduly affected

by one specific instrument, individual transaction, industry, or country.

• Operational risk includes, among other things, the possibility of errors in

transactions, failures of internal controls, breaches of legal requirements,

and disruption of markets from external events such as natural disasters.

• Debt management offices that use swaps in managing their debt also face

credit risk. Credit risk is the possible default or lowered credit rating of a

financial institution participating in a swap operation with the

government.

Debt managers’ assessments of the risks inherent in each of the debt

management tools are one factor used when deciding among several tools

that could address the same objective. For example, debt managers could

use debt buybacks coupled with greater new issuance, switch auctions,
Page 16 GAO-02-14 Debt Management

and debt exchanges to change the average maturity/duration14 of

outstanding debt, as is done in the United Kingdom. These tools, explained

later in more detail, may affect market risk or liquidity risk differently. The

relative market share of a government’s securities in the world and

domestic capital markets is one factor that affects the amount of risk

associated with particular debt management tools. For example, United

States government securities represent a smaller share of the domestic

capital market than do the securities of the study nations. The relatively

deep, liquid private capital market in the United States accounts in part for

the statement of a Treasury official that the market could adjust to

declines in the supply of Treasury securities in times of budget surpluses.

However, as we noted in an earlier report, the changes may not be either

seamless or without cost.

Debt management in some study countries is driven by policy decisions on

debt targets and portfolio benchmarks. Further, differences in the size and

depth of capital markets affect options available to debt managers.

Many of the study nations set formal debt maturity or duration targets to

assist debt managers in managing risk. For example, during periods of

budget surplus, governments generally reduce debt or issue less debt than

in deficit periods. Thus, the maturity profile or the average duration is

determined more by the character of outstanding debt than the

composition of new issues. These maturity profile issues are important

because debt maturity can have a significant influence on the

government’s cost of financing as it affects interest payments and market

liquidity. While the United States does not have formal debt targets,

operationally the Treasury considers objectives similar to those of the

study countries. (See table 4.)

 14Average maturity and average duration indicate the level of market and funding risk a

government might face. Modified duration of outstanding debt is the percentage change in

the debt’s market value arising from a 1-percent change in the nominal interest rate. Two

study nations use duration targets and two do not use any targets. A Treasury official noted

that the United States does not have a formal target. However, it monitors average maturity

rather than using duration because the United States does not match assets and liabilities.

Debt Management

Approaches Differ
Page 17 GAO-02-14 Debt Management

Table 4: Debt Targets of Study Countries

Country

Debt maturity or duration targets—

domestic currency nominal debt Notes

United States No formal target. Operationally, the

United States spreads issuance over

the yield curve and maintains a

limited number of liquid benchmarks.

The Treasury monitors the

average length of marketable

debt, and Treasury officials said

that buybacks have prevented

its lengthening by about 2 to 3

months. The average length of

marketable debt was 5.9 years

as of September 30, 2001.

Australia A modified debt duration range of 3

to 3.5 years for domestic debt and 1

to 1.5 years for United States dollardenominated debt.

New Zealand Spread issuance over yield curve, up

to 12 years.

Debt maturity profile is kept

relatively smooth to reduce

funding and market risks.

Norway Build up and maintain a limited

number of liquid benchmark bonds

with maturities up to 10 to 11 years.

Borrowing is done to provide

funds for net lending, equity

investments, debt amortization,

and central bank monetary

operations.

Sweden 3.5 years +/- 0.5 years duration.

No more than 25 percent of the

central government debt will mature

within 1 year.

The duration of the combined

domestic and foreign currency

debt is shorter—2.7 years, +/-

0.3 years.

United Kingdom No formal target. Operationally,

issuance has, in the recent past,

been biased toward long maturity

bonds in response to strong demand

for these bonds from investors.

Issuance in fiscal year 2000-2001

was 65 percent long-term fixed bonds

and 35 percent index-linked bonds.

Sources: Information supplied by study countries.

A flatter debt maturity profile, with approximately equal amounts of debt

in benchmark issues across the maturity curve, helps to reduce both

funding and market rate risks. For example, as a result of concentrating

debt issuance in fewer benchmark securities, New Zealand’s debt profile

in August 2001 was approximately horizontal with eight benchmark

securities (out of 10 total debt issues) of roughly similar size.

In the United States, approximately 50 percent of total outstanding

marketable debt will mature in 2 years or less. Such a profile may present

countries with less-developed capital markets or less demand for

government securities than in the United States with significant funding
Page 18 GAO-02-14 Debt Management

risk.15 The United States is less likely to incur this funding risk because the

United States’ government bond market is the largest in the world and its

securities enjoy high demand.

Four of the countries we studied—Australia, New Zealand, Norway, and

Sweden—develop hypothetical “benchmark portfolios” that target the

composition of their debt portfolios and the nature of portfolio exposures

(or market risks) that are most efficient in the long term. In Sweden, the

Ministry of Finance works with the central bank and debt management

office to develop these targets. The Australian Office of Financial

Management develops its benchmark portfolio with the assistance of

external portfolio management consultants. Once the benchmarks are set,

debt managers design strategies to achieve or maintain this portfolio

structure over the long term. Oversight and accountability for debt

management offices with portfolio benchmarks can be more direct and

transparent since they may report at year-end on their portfolios and how

they differ from the targets. Some governments publish annual reports

with assessments of debt management. For example, in Sweden the

government decides on such portfolio benchmarks as the average duration

of the nominal krona-denominated debt, and the amount of inflationindexed and foreign currency-denominated debt. The government’s

decisions and supporting analysis as well as the Swedish National Debt

Office’s proposals and central bank’s comments are published annually.

Swedish law requires the government to evaluate the management of

central government debt in a written communication to the parliament.

Evaluation is both quantitative (differences in the absolute costs

compared with the government’s guidelines) and qualitative (day-to-day

management of the debt, including market maintenance efforts).

The countries’ disparate experiences significantly influence the

implementation of debt management—that is, their choices of debt

management tools. Market share, market structure, and the preferences of

capital market participants can shape the choices available to debt

managers. Differences in balancing cost and risk also shape debt

management choices. Further, the size and timing of an actual or projected

budget deficit or surplus can affect choices about whether and how to

hold financial assets. Some examples of factors shaping debt management

abroad follow.

 15Funding risk presents the possibility that there may not be sufficient market demand for

government securities or the government could not sell them at an acceptable price.
Page 19 GAO-02-14 Debt Management

• Australia does not need to issue debt in foreign currencies because of its

deep domestic government securities market. However, it has taken on

foreign currency exposure because this can provide long-term cost and

risk advantages.

• In contrast, in New Zealand the focus of debt management from 1994 to

the present has been to reduce its large volume of foreign-currency

denominated debt and thus eliminate net foreign currency risk.

• The Norwegian government returned to surplus in 1996 on the strength of

surging oil revenues, economic improvements, and fiscal restraint. It then

was faced with the decision whether to maintain its domestic government

securities market and, if so, how to invest these receipts in assets.

• In Sweden, debt managers had to coordinate debt issuance and asset

swaps as the government undertook concurrent reform of the national

pension system. The AP funds (national pension scheme) were

restructured and SEK90 billion was transferred to the central government

budget during fiscal year 1999-2000 and SEK155 billion in 2001. The

government will use these receipts to reduce debt.

• The United Kingdom has a strong institutional demand for long-term

government securities that significantly influences debt managers’ choices.

The five countries in our study generally used similar debt management

tools to reduce the level of outstanding debt during budget surpluses.

Some countries reduced issuance of new debt securities. The study

countries employed similar tools to improve liquidity and concentrate new

debt into fewer, larger benchmark issues. These include eliminating

certain maturities, changing the frequency of auctions of certain debt

instruments, and adding new debt to existing issues (called reopening)

rather than creating new issues. At the same time, some study countries

also reconsidered issuance of inflation-linked securities and increased

issuance of short-term bills with varying maturities. Further, all study

countries bought back debt before it matured. The United States also used

these tools in its debt management. (See table 5.)

Some Debt

Management Tools

Are Common to All

Study Countries and

the United States, but

Implementation

Varies
Page 20 GAO-02-14 Debt Management

Table 5: Debt Management Tools by Country

Tool

United

States Australia

New

Zealand Norway Sweden

United

Kingdom

Reduce net issuance X X X X

Concentrate issuance into benchmarks X X X X X X

Eliminate certain maturities X X X X X X

Reopen issues X X X X X X

Buy back outstanding debt before maturity

through reverse auctions

XXX XX

Reduce or eliminate issuance of inflationlinked securitiesXXX X

Increase issuance of short-term bills with

varying maturities

X X

Offer standing repurchase of debt nearing

maturity offered by investors

XX X

Sell or buy securities between auctions

Taps/reverse taps X X X X

Open window X X X X X

Use swaps to hedge domestic interest rate

risk

X X

Use swaps to hedge currency risk X X X

Use swaps to increase issuance in domestic

currency while creating foreign currency debt

XX X

Use debt exchanges X X X

Use switch auctions X

Sources: GAO interviews with government officials in study countries and publications from study

nations and the United States.

As budget surpluses resulted in lower debt levels, all five study countries

restructured their debt portfolios to better achieve debt management

objectives. All of the countries in our study—as well as the United

States—have taken steps to concentrate debt issuance into fewer, larger

benchmark issues. These larger issues allow governments to capture a

liquidity premium16 in the market that reduces their costs of financing.

When governments run budget deficits and have large borrowing needs,

debt managers may be able to issue new debt in issues large enough to be

liquid (or efficient in the market). However, when governments with

budget surpluses reduce borrowing, new issues become smaller and less

 16A liquidity premium is the incremental price market participants are willing to pay for

securities that are part of large issues that can be easily traded.

Concentration of New and

Outstanding Debt Into

Fewer Issues
Page 21 GAO-02-14 Debt Management

liquid. Continuing with many small issues is less efficient, and the

governments’ financing costs may rise as the bond markets seek to offset

this lower liquidity. Therefore, as debt levels have fallen, debt managers

have concentrated new issuance into fewer, larger, benchmark issues. The

market rewards this increased liquidity by paying premiums that reduce

the governments’ costs of borrowing.

The study countries all have reduced the number of new issues and used

debt management tools to concentrate borrowing into fewer, more liquid

benchmarks. The five nations in our study—and the United States—have

from 3 to 12 benchmark issues that range from 1 to 30 years in maturity.

Recently, only the United Kingdom and the United States have had

benchmark bonds that mature in 30 years. The U.S. Treasury announced

on October 31, 2001, that it was suspending issuance of the 30-year

nominal and inflation-indexed bonds. The announcement acknowledged

that market interest and actions have shifted from the 30-year bond to the

10-year note. The benchmark maturities in other countries generally range

from 1 to 15 years. (See table 6.)
Page 22 GAO-02-14 Debt Management

Table 6: Benchmark Securities in Selected Countries as of August 2001

Country

Number of nominal coupon

benchmarks and terms to

maturity Comments

United

States

Number: 3

Terms: 2, 5, and 10 years

The U.S. Treasury announced on

October 31, 2001, that it was suspending

issuance of the 30-year nominal bond.

Australia Number: 12

Term: 13 years

New

Zealand

Number: 8

Terms: almost 5 years to

almost 12 years

The 5-year bond, original issue

NZD$150 million and February 2005 maturity

was reopened seven times and increased to

NZD$1,272 million at end of June 2001.

The 12-year bond, original issue

NZD$175 million and November 2011

maturity was reopened 20 times and

increased to NZD$2,871 million at end of

May 2001.

Norway Number: 5

Terms: 1 to 11 years

Norway normally issues a new domestic

bond approximately every 2 years that

matures after 11 years. Bonds with

remaining maturity less than 1 year are no

longer regarded as benchmarks.

Sweden Number: 12

Terms: 2 to 15 years

These securities are offered in several

tranches during the whole term of the bonds,

until they lose their benchmark status 1 year

before redemption.

United

Kingdom

Number: 3

Terms: 5, 10, and 30 years

Nominal issuance in recent years has been

solely 30-year gilts responding to strong

institutional demand.

Sources: Data from study countries and the U.S. Department of the Treasury and interviews with

country officials.

In the study countries, creating new issues each time the government goes

to the debt market may result in small, less liquid issues. Consequently,

some of these countries establish new issues only when needed to provide

borrowing across the yield curve. Because these new issues generally are

too small to serve as benchmarks when they are issued, debt managers

then add to them when the government needs to borrow again in the

future until they reach benchmark status. This practice, called reopening,

is used in all study countries to increase the size of outstanding

benchmark issues. By contrast, while U.S. Treasury securities have been

sufficient in size to be considered benchmarks when issued, the U.S.

Treasury has implemented a program of regular reopenings to maintain

their size.
Page 23 GAO-02-14 Debt Management

All study countries and the United States implemented debt management

strategies to increase concentration of new issuance into fewer, larger

issues. However, the number of outstanding issues differs markedly and

reflects historical differences. Benchmark issues represent a much larger

proportion of total outstanding issues in Australia, New Zealand, Norway,

and Sweden than they do in the United States and the United Kingdom. In

New Zealand and Norway all government borrowing is concentrated into

benchmark issues. According to an official in the United States, many of

their fixed-coupon nominal issues had benchmark size when they were

issued and some issues still retain benchmark size although they are not

the most currently traded issues. Other study countries had smaller

original issues and reopened the issues to create benchmarks. (See table

7.)

Table 7: Number of Outstanding Government Bond Issues as of August 2001

Country

Number of outstanding

government fixed-coupon

nominal issues

Of which: number of

benchmarks

United States 148 3

Australia 19 12

New Zealand 8 8

Norway 5 5

Sweden 14 12

United Kingdom 51 3

Sources: Government publications and interviews with and data provided by government officials.

Another reason the United States and the United Kingdom have more

outstanding issues is that they are the only two countries we studied that

have recently issued nominal debt maturing in 30 years.17 Issuing such

long-term debt over several decades results in a large number of individual

issues outstanding at any given time. In addition, some of the study

countries began to concentrate outstanding debt into benchmark

securities earlier than the United States, and these study countries also use

a wider range of tools to accomplish this goal.

Three of the five study countries have reduced or eliminated issuance of

inflation-linked debt. These securities are a valuable tool for debt

managers because they expand the range of savings opportunities in the

 17The U.S. Treasury announced on October 31, 2001, that it was suspending issuance of the

30-year nominal and inflation-indexed bonds.
Page 24 GAO-02-14 Debt Management

market, may produce cost savings for the government, and enhance the

credibility and conduct of monetary policy. Inflation-linked securities may

provide the government with lower-cost funding because investors receive

lower interest rates in return for protection against inflation. In return for

potentially lower costs, the government assumes the risk of unexpected

price increases and the government’s incentives to inflate are reduced.

Inflation-linked securities can be useful to policymakers interested in

damping inflation in the future. Inflation-linked securities have some

negative attributes as well—low participation and lower liquidity. These

qualities can decrease market efficiency and can increase the cost to the

government as the market charges an illiquidity premium. Of the five

countries we visited, Australia, Sweden, and the United Kingdom actively

issue inflation-linked securities, as does the United States. A Norwegian

official told us that, given the small size of Norway’s debt, diversifying into

inflation-linked securities would reduce the amount of nominal

benchmark bonds (which is close to the level needed to maintain

acceptable liquidity in each bond). A New Zealand official told us that New

Zealand stopped issuing inflation-linked securities because of lack of

investor interest and the cost of issuance relative to other alternatives.

Although the nations in our study were moving toward generally similar

debt portfolios, we would not expect to see convergence into identical

portfolio structures. A recent report from the World Bank stressed that

there is no single portfolio design appropriate for all countries.18 Debt

portfolios must respond to national priorities and market conditions.

By selectively reducing the outstanding amount of particular securities,

debt buybacks are a powerful tool to manage liquidity or the average

maturity of outstanding debt. Debt buybacks can be used as an end in

themselves—to reduce outstanding debt—or as a way to allow the debt

management office to issue more new debt without increasing overall debt

levels. Thus, debt buybacks can be used in periods of budget deficits as

well as budget surpluses. Debt buybacks can be implemented in a number

of ways. They can be used alone or in tandem with new debt issuance.

They also can be completed with different degrees of transparency,

regularity, and access by investors. Every study nation has used buybacks

 18Sound Practice in Sovereign Debt Management, The World Bank, Financial Products and

Services Department, July 12, 2000.

Debt Buybacks Are a

Flexible Tool
Page 25 GAO-02-14 Debt Management

at some point in the debt reduction process, although they have designed

and managed their programs differently from the United States.

The number of outstanding issues that are not benchmarks is one

indicator of the “buyback potential” in each country. As shown earlier in

table 7, the United States has a larger number of nominal fixed-coupon

government bond issues than any of the five study countries, with 145 that

are not benchmark issues. The portfolio structures in the United States

and the United Kingdom show significantly more potential for buybacks

than other study countries when using this measure.

While all study nations have done debt buybacks, they generally use them

differently from the United States. The United States has used a program

of ongoing, regularly scheduled reverse auctions to buy back debt. In a

reverse auction, market participants submit offers and the government

accepts the most competitive offers. The study countries—except

Norway—have done reverse auction buybacks, but they are not a routine

part of debt management abroad. Recently some study nations used

reverse auctions episodically—to reduce debt levels using one-time large

receipts from the sale of government assets. In contrast, the United States

holds reverse auctions twice a month and uses them both to reduce debt

levels and to manage average maturity and market liquidity.

In the late 1990s, the U.S. Treasury had to devise strategies for managing

large, continuing surpluses. If U.S. debt managers had used cash surpluses

to reduce debt rollover without taking other steps, they would have faced

large changes in average maturity and liquidity that could have increased

the government’s cost of financing. Because a debt buyback program of

regular reverse auctions can operationally handle relatively large volumes

and because the U.S. Treasury values regularity and predictability, the

Treasury chose to implement a debt buyback program of regular reverse

auctions with advance announcements of the size and targeted issues.

In March 2000, the Treasury held the first in a series of reverse auctions to

repurchase outstanding debt before it matured. In May 2000, the United

States implemented a program of regularly scheduled reverse auctions.

The dates and amounts of the transactions and the maturity ranges being

targeted for repurchase are announced in advance. In calendar year 2000,

the Treasury completed 20 reverse auctions and bought back $30 billion

(par value) in bonds. The Treasury’s buybacks through the end of

December 2000 targeted bonds maturing from 2010 to 2027. In calendar

year 2001, the Treasury has announced quarterly buyback amounts for its

reverse auctions. The Treasury bought back $25 billion (par value) in

The United States Buyback

Program
Page 26 GAO-02-14 Debt Management

bonds from January through August 2001. Because reverse auctions were

suspended for the month of September, the calendar year 2001 buyback

level is projected to be $34 billion (par value). While this is lower than the

earlier projection of $37 billion for 2001, it is still $4 billion higher than in

2000. On October 31, 2001, the Treasury announced that regular buybacks

would continue through calendar year 2001. However, an official noted

that there will be no buybacks in January 2002 and that in February 2002

they will begin quarterly announcements as to whether the Treasury will

do buybacks over the next 3-month period and also the size of any planned

operations. Decisions will be based on three factors: (1) projections of the

federal government’s annual unified budget surplus or deficit,

(2) projections of the cash position for the 3-month period, and

(3) analysis of how best to minimize borrowing costs over time.

When the budget was in surplus, the Treasury bought back longer

maturity, off-the-run securities. As a result, the Treasury was able to avoid

lengthening the average maturity by about 2 months that would have

occurred from debt redemptions without a buyback program. The

buybacks also enabled the Treasury to issue new debt in liquid

benchmarks favored by the market.

Buybacks have been a routine part of debt management in most of the

study countries. However, unlike the United States, the study nations

generally also used tools other than debt buybacks to manage liquidity and

average maturity/duration of outstanding debt.

The study nations have used a variety of buyback tools and did not rely as

heavily on reverse auctions as has the United States. Reverse auctions

were used by some study countries in the 1980s primarily to buy back debt

denominated in foreign currencies. In recent years, reverse auctions have

been used episodically, generally in connection with large, one-time

revenues such as those from auctions of the communications spectrum or

privatization of a government enterprise. Debt buybacks abroad are not

always announced in advance, are not always open to all market

participants, or are not always reported until after they have been

concluded.

Other countries’ experience illustrates that buybacks are an important tool

but one that potentially can be costly. These nations have used several

strategies to mitigate this potentially increased cost. They include the

episodic rather than routine use of reverse auctions and the use of reverse

auctions in combination with other tools, such as open market

repurchases, to buy back debt.

Debt Repurchases by Study

Nations
Page 27 GAO-02-14 Debt Management

Officials in Australia and Sweden reported that their experiences showed

that the cost of a debt buyback was related in part to how it was

implemented. Swedish officials told us that clear market communication is

essential, and Australian officials said that buying back debt through

means other than a reverse auction may lower costs to the government.

Australian officials told us they undertook reverse auctions in fiscal year

1988-1989. However, officials told us that these were not very successful

operations. In contrast, Australian government officials and market

analysts told us that the costs of buybacks done recently in Australia were

low and explained this in part by the way the repurchases are made.

The RBA has conducted bond repurchases on behalf of the AOFM for

several years. From 1996 through 2000, the RBA repurchased A$21.3

billion in outstanding bonds (total face value) prior to maturity. These

repurchases have been carried out both through the central bank’s open

market operations and through direct purchases in the secondary market.

An RBA official said that, although the RBA offsets these bond

repurchases when calculating needed monetary policy actions, the market

actions are taken at different times to emphasize their different purposes.

The RBA has discretion as to the timing and price of each bond

repurchase, subject to guidance set by the AOFM. Purchases are made

without prior announcement but are reported by the AOFM at the end of

the month.19 An RBA official said that the success of these operations is a

function in part of the liquidity of the bond and the level of information

about the operations themselves. Australian officials regard this approach

as one part of a long-term strategy to consolidate government debt into

fewer maturities and have been discussing other buyback strategies for

future implementation.

Unexpected changes in key information about the amount of debt

repurchases and a compressed time schedule marred Sweden’s buyback

operations in 2000. Sweden’s National Debt Office (SNDO) completed 14

debt repurchases of three bond issues from May 23, 2000 through June 21,

2000. The total face value of the repurchased bonds was SEK31.2 billion

(including noncompetitive offers). The buybacks were used to offset the

revenues from the privatization of the government-controlled

 19In contrast, the U.S. Treasury established transparent debt buybacks in which primary

bond dealers know in advance the total amount the Treasury is committed to spend in each

operation and the range of securities eligible for repurchase.
Page 28 GAO-02-14 Debt Management

telecommunications group, Telia, and to allow the government to continue

to issue new securities in 2000. When the debt management office

announced a buyback of SEK55 billion, the prices of debt increased. One

week later, when revenues from the Telia sale were less than expected and

the debt management office reduced the buyback total, bond prices rose

again. According to the debt office’s annual report, these buybacks

triggered a change in bond prices that implied that the government paid

from SEK250 million to SEK400 million more for the securities. Swedish

government and market representatives stated that clear communication

with the market was essential to a good outcome. The only choices

available to SNDO officials at the time were to use the receipts to buy back

debt or to place the receipts in the domestic banking system. In hindsight,

SNDO officials said they would have preferred to have authority to place

the receipts in other government securities for 2 to 3 months, but to do

this would have required a change in the law.

In fiscal year 2000-2001, the United Kingdom’s Debt Management Office

planned to buy back debt worth £5.7 billion from the market using reverse

auctions supplemented by “open window” purchases from investors with

primary dealers acting as intermediaries. Initial plans were to buy back a

total of £3.5 billion of which at least £2.5 billion was to be done using

reverse auctions. They devised this strategy to guard against the risk that

buybacks might become progressively more expensive as reverse auctions

continued.

The Debt Management Office conducted six reverse auctions during fiscal

year 2000-2001, buying back £4.1 billion (cash) from six of seven offered

bond issues—three bond issues in the 2003 through 2005 maturity range

and three issues in the 2006 through 2008 maturity range. This was an

increase from the originally planned level because the financial surplus

increased through the year. Although they were concerned that the

buybacks would get expensive, officials reported that this did not happen.

In June 2000, debt managers added a small number of additional bonds to

those for which it was prepared to bid at market prices and bought back

£1.6 billion in outstanding debt using an “open window.” There are no

initial plans to continue the reverse auction program in fiscal year 2001-

2002, although it remains a possibility if the financing requirement falls.

The arrangements for open window repurchases remain in force.

Some analysts in the United States and abroad believe that buybacks could

become more costly as the volume of debt securities dwindles, and

governments may have to pay higher prices to entice “buy and hold”

investors to sell. If true, this would reduce the long-term potential of using
Page 29 GAO-02-14 Debt Management

debt buybacks for debt reduction. So far, according to Goldman Sachs,20

the Treasury has repurchased debt at near the market prices at the time

the offers were submitted.

Some debt management tools used regularly in other nations may hold

promise for the United States in times of budget surpluses or deficits.

Other tools may be difficult to implement in ways that are compatible with

the U.S. Treasury’s position of providing equal access for transactions.

All of the study countries have at some time provided an opportunity for

investors to offer government securities—regardless of time to maturity—

to the government that then has the option to repurchase them at

prevailing market prices. When this type of debt buyback is done, the

government is said to have an open window. Bondholders would be

interested in this offer if, because of market conditions or other reasons,

they wanted to use their funds differently. New Zealand used this

approach in the early 1990s to consolidate tranches of outstanding bond

issues into benchmarks. A variation of this approach is found in Australia,

New Zealand, the United Kingdom, and Sweden where investors may offer

the government the opportunity to repurchase any securities at market

prices when they near maturity. These programs act as both debt

management and cash management tools—reducing outstanding debt and

refinancing risk and smoothing cash flows. As with a reverse auction

program, the government could choose which issues to repurchase. While

the amount of debt repurchased may be lower in an open window

program, these programs may provide a lower cost buyback because the

government can choose to buy when it believes market prices are

advantageous. Open window repurchases likely can be done more

frequently than reverse auctions and may have lower administrative costs.

Open window programs are used to complement reverse auction buybacks

in Australia, New Zealand, Sweden, and the United Kingdom.

Debt exchanges are used in three of the five study countries to promote

liquidity of benchmark securities by exchanging outstanding

nonbenchmark securities for newly issued, more liquid benchmark bonds.

Exchange offers are opportunities provided to bondholders to convert one

debt security into another at a ratio set by the debt management office.

 20Goldman Sachs’ Fixed Income Weekly Market Outlook: United States, August 17, 2001,

p. 5.

Other Countries Have

Used Debt

Management Tools

Not Currently Used by

the United States
Page 30 GAO-02-14 Debt Management

Exchange offers can be used in conjunction with an open window or be

made available periodically. Some have been kept open for 3 weeks from

the date of the initial announcement of the ratio to try to attract a wide

pool of participants. Exchange offers are voluntary and bondholders are

free to retain their existing debt security, although this issue is likely to

become less liquid and lose some of its value if the majority of other

bondholders choose to convert their holdings. For example, to enhance

the liquidity of its 5-year benchmark, the United Kingdom’s Debt

Management Office in July 1998 exchanged £2.9 billion of the 11 3⁄4 percent

Treasury bond of 2003-07 into £3.4 billion of the 6 1⁄2 percent Treasury

bond of 2003. Swedish debt managers have regularly exchanged

outstanding bonds within 1 year of maturity for Treasury bills to maintain

liquidity at the short end of the yield curve. The U.S. Treasury now is

studying the advisability and feasibility of debt exchanges.21

Switch auctions are used in the United Kingdom to build liquidity in

benchmark issues when debt managers want to obtain an amount of a

debt issue that is too large to be considered for a bond exchange offer.

Switch auctions are those in which the debt management office offers to

buy a certain amount of outstanding nonbenchmark securities in exchange

for the further issue of an amount of benchmark securities, with the

exchange ratio to be determined by the accepted offers. Switch auctions

are similar to debt exchanges in that older, nonbenchmark bonds are

converted into benchmark securities. Other than volume, the key

difference is that in a debt exchange the government directly sets the

exchange ratio and in a switch auction it does so indirectly by accepting or

rejecting market offers. The United Kingdom debt managers use switch

auctions to accelerate the creation of new, liquid benchmark securities.

Investors choose to sell their securities to the government because they

have alternate uses for their capital. In three operations in fiscal year 2000-

2001, the Debt Management Office offered to allow market makers to

switch some existing off-the-run issues into new benchmark issues. In

these operations, the Debt Management Office purchased older 8-percent

Treasury securities maturing in 2015 and reopened a newer 4.25-percent

Treasury security maturing in 2032. The three switch auctions added

£6.8 billion to the original issue, more than doubling its size in 1 year. An

AOFM official told us that Australia may use switch auctions to

 21The U.S. Treasury used “advance refundings” in the 1960s to exchange new issues for

outstanding debt.
Page 31 GAO-02-14 Debt Management

consolidate debt into fewer benchmarks. Switch auctions may provide

another tool for the U.S. Treasury to use in managing liquidity.

Some countries continue to hold debt they have bought back without

canceling it. For example, the AOFM does not always immediately cancel

the securities it repurchases. According to AOFM officials, they have not

canceled long-term debt bought back from the RBA. Rather, it is held until

the securities mature.

Other tools employed at times by some other nations may be difficult to

use in ways that are compatible with the values of transparency,

predictability, and equal access. For example, one-on-one offers to sell or

buy debt securities at market prices between the debt management office

and individual capital market participants (called “taps” or “reverse taps”)

are used in the United Kingdom and other study nations. Taps (or sales)

have been initiated by the Debt Management Office in the United Kingdom

when there is temporary excess demand in a particular security that does

not require a large auction. For example, in August 1998, the Debt

Management Office tapped £150 million of 4 3/8 percent inflation-linked

debt maturing in 2004. The United Kingdom has only tapped nominal

bonds once, when in August 1999 the Russian default saw a huge flight to

quality. Norway used a reverse tap in 1997 to buy back three bond issues.

A Swedish debt manager told us Sweden taps older issues to build

liquidity. The United States sells all marketable coupon securities only at

regularly scheduled auctions. While taps and reverse taps may be reported

after the fact, the operations are less transparent than open market

operations, may not provide equal access, and may not represent lowest

cost to the government.

The U.S. Treasury does not currently use tools that expose the government

to credit risk—for example, debt swaps. While swaps may take a number

of forms, they generally involve the government taking a position on future

changes in interest rates or the prices of government securities. For

example, a government may swap fixed interest rate securities with

another party for variable interest rate securities. Debt swaps are used in

Australia, New Zealand, Sweden, and the United Kingdom. One outcome

of using swaps is that the government assumes additional risk not found

with other debt management tools. This credit risk comes from the

possibility that the other party may default. The Australian government

uses interest rate and foreign currency swaps to achieve desired portfolio

exposures. Australia does not borrow in overseas markets, but conducts

exchange rate swaps to hedge against the possibility of changes in the

value of the Australian dollar against foreign currencies. The Australian
Page 32 GAO-02-14 Debt Management

government also swaps out of fixed rate bonds into variable rate bonds on

a portfolio basis to hedge against changes in interest rates. Sweden also

used swaps as an alternative to direct borrowing in foreign currency.

Sweden issues bonds in krona and makes a swap agreement in which the

government pays foreign interest and receives payment in krona equal to

the payment requirement for krona bonds. This lowers the cost of

borrowing and improves liquidity in the domestic government securities

market. In fiscal year 1999-2000, the United Kingdom planned to issue

£2.5 billion in domestic currency government bonds, investing the

proceeds in high-grade foreign currency assets using cross-currency swaps

to hedge the currency risk.

Each of the five study countries acquired financial assets during times of

budget surpluses. No single model of asset accumulation is followed in all

countries. Each country holding assets selected methods and asset types

to respond to its need at the time.

The sustainability of budget surpluses is one factor that influences

governments’ choices to invest in longer-term, perhaps riskier, financial

assets. Norway’s main goal was to accumulate financial assets to address

long-term fiscal and economic concerns resulting primarily from an aging

population and declining petroleum revenues. Norway, with its projections

of substantial receipts from oil activities in the medium term, has chosen

to build an investment portfolio of foreign currency assets, sovereign and

international institution debt, and foreign equities. Norway decided to

continue to issue debt to maintain a government debt market that would

facilitate future borrowing when needed and to strengthen its domestic

capital market.

Short-term investments appealed to nations like Australia, Sweden, New

Zealand, and the United Kingdom, which have not had large, sustained

surpluses. Australia would not expect large, persistent surpluses because

its fiscal goal is to balance the budget on average over the economic cycle.

Australia has invested its surplus in interest-bearing deposits at the central

bank. Short-term increases in cash deposits provide flexibility to

policymakers. Australia also has adopted guidelines for longer-term

investments. The United Kingdom initially invested the surplus in deposits

in the banking system and used the cash to reduce outstanding debt. New

Zealand and Sweden have chosen to use surpluses to reduce their

borrowing risks by reducing foreign currency-denominated debt. While

New Zealand used early budget surpluses to reduce foreign debt, it plans

to use the 2001 surplus to invest in physical assets, increase student loans,

Financial Assets

Address Different

National Needs
Page 33 GAO-02-14 Debt Management

and pre-fund for the first time its pay-as-you-go pension fund. Sweden has

used budget surpluses to reduce both foreign currency-denominated debt

and nominal domestic debt but not inflation-linked bonds. Nations may

accumulate financial assets in times of budget deficits as well. These could

include foreign currency reserves, pension fund assets, and student loans.

Addressing long-term national needs has been one of the principal drivers

behind Norway’s investment decisions on how to use its surpluses. The

rapid aging of the population in the 2000 through 2020 period will

substantially increase demand for services for the elderly. This fiscal

pressure is expected to coincide with a decline in petroleum revenues, as

shown in figure 3. In order to ensure that future fiscal resources would be

available when oil revenues decline, Norway’s central government has

saved its budget surplus since 1996 by building a substantial portfolio of

foreign financial securities.

Figure 3: Net Cash Flow From Petroleum Activities and Old Age and Disability

Expenditures, 1988 Through 2020

Sources: Statistics Norway and the Ministry of Finance.

Norway

0

2

4

6

8

10

12

14

16

18

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Year

Percentage of GDP

Net cash from petroleum

Old age and disability pensions
Page 34 GAO-02-14 Debt Management

At the end of 2000, the Norwegian Government Petroleum Fund had about

60 percent of its investments in fixed income securities (including bank

deposits) and 40 percent of its investments in equities. The Fund’s

investments were distributed geographically as follows: Europe (52.5

percent), North America (29.2 percent), and Asia and Oceania (18.4

percent), as shown in figure 4.

Figure 4: Norway’s Government Petroleum Fund Investments as of December 31,

2000, $386.5 Billion Norwegian Kroner

Note: Percentages add to 101 percent because of rounding.

Source: Norwegian Ministry of Finance.

Norway’s strategy of investing in foreign financial assets is designed to

help the Fund achieve four objectives. These are (1) serve as a budget

buffer on which the government can rely if there is a deficit, (2) avoid

pressures in the domestic economy if funds need to be withdrawn because

of a substantial budget deficit, (3) spread the Fund’s risk over different

countries and regions, and (4) help the Fund achieve a higher rate of

return than if the money were invested in Norway. Because of substantial

oil receipts and specific medium-term goals, Norway chose a more longterm investment strategy than other nations and also accepted more risk

in hopes of higher returns. Through the program, an important part of the

Fixed income -

Europe

Equities -

Europe 

Equities -

Asia and Oceania 

Equities -

North America 

Fixed income -

North America 

Fixed income - 

Asia and Oceania

7%

11%

12%

18%

21%

32%
Page 35 GAO-02-14 Debt Management

petroleum wealth in the North Sea will have been converted to financial

assets.

One-time revenues from the sale of government assets contributed heavily

to budget surpluses. As an interim arrangement, the Commonwealth

Government in Australia invested these budget surpluses in term deposits

at the RBA. Unlike the U.S. Treasury’s deposits in Federal Reserve Banks,22

the AOFM’s accounts at the RBA earn interest. The interest rate on the

RBA term deposits averaged 5.48 percent during fiscal year 1999-2000,

which is paid on maturity.23 These term deposits have helped the

government manage its cash balances, as some deposits have matured at

times when the government otherwise would have needed to borrow from

the market. In effect, these assets reduce gross debt levels without

repurchasing outstanding debt. The AOFM manages the risk created by

short-term debt and assets in accordance with benchmarks for the

portfolio as a whole.

The Australian government has adopted guidelines for long-term financial

investments that the Treasurer is authorized to make on behalf of the

Commonwealth. The AOFM has the Treasurer’s delegation under Section

39(2) of the Financial Management and Accountability Act to make

investments, which may include the following financial assets:

• high-quality credit assets of other governments,

• debt securities of Australian state governments,

• certificates of deposit of highly rated banks, and

• debt of international organizations of which Australia is a member.

The government of the United Kingdom accumulated short-term financial

assets with its recent budget surpluses and the one-time revenues from the

auction of mobile telephone licenses in April 2000. The cash was

temporarily placed in government accounts in the domestic banking

system before being invested in money market instruments. The United

 22Although balances in the Federal Reserve Account do not earn an explicit rate of interest,

most of the Federal Reserve’s earnings are transferred to the Treasury.

23The AOFM also maintained an operational bank account with the RBA, which paid a

money market call rate on the account’s daily balance. This account paid 5.12 percent in

fiscal year 1999-2000.

Australia

United Kingdom
Page 36 GAO-02-14 Debt Management

Kingdom’s National Audit Office reported that the £19.5 billion in

spectrum auction receipts was eventually used to reduce outstanding

short-term debt (£11.4 billion), reduce sales of government bonds

(£2.2 billion), and increase foreign currency reserves to offset some

government debt denominated in foreign currencies (£5.9 billion). In

effect, the United Kingdom is smoothing the issuance of government debt

by continuing to issue in times of surplus and running down its short-term

investments as issuance needs increase.

Within New Zealand’s overall debt reduction efforts, the government gave

priority in 1994 to reducing its foreign currency debt. This objective was

achieved in late 1996 by a combination of cash obtained from budget

surpluses, sale of government assets, and higher domestic borrowing.

Since 1997 New Zealand has continued to largely eliminate its foreign

currency exchange risk by holding foreign currency assets equal to a

substantial portion of its foreign currency debt. The Government

maintained the liquidity in New Zealand’s domestic Government bond

market by investing the surplus in financial assets—predominantly student

loans—and physical assets. New Zealand’s 2001 budget projects surpluses

to continue over its forecast period that ends in fiscal year 2004-2005. The

New Zealand government has decided to use the surplus to invest in

physical assets, refinance private sector housing and health debt, increase

student loans, and pre-fund for the first time its pay-as-you-go

Superannuation (or pension) Fund.

Sweden has chosen to use budget surpluses to reduce its borrowing risks

by reducing foreign currency-denominated debt. Sweden has paid down

foreign currency debt and nominal domestic debt, but not inflation-linked

bonds.

While it is not directly related to a discussion of using budget surpluses to

acquire financial assets, the Swedish National Pension Insurance Fund, or

AP funds, provides an interesting model for how a government may

choose to hold assets. Recent reforms in Sweden’s pension system, and

resulting asset shifts between the AP funds and the government, have

affected debt management. Like the Social Security trust funds in the

United States, the AP funds are part of the unified budget total but are

considered outside the portion of the budget subject to budget controls.

The AP funds hold most of Sweden’s financial assets, as shown in table 8.

New Zealand

Sweden
Page 37 GAO-02-14 Debt Management

These assets include cash, government bonds, mortgage bonds, and

domestic and international equities.

Table 8: Sweden’s Financial Net Position (SEK billion)

1999 2000

Central government

Assets 414 439

Liabilities (1,374) (1,279)

Net financial wealth (960) (840)

National pension system

Assets 752 801

Liabilities (8) (2)

Net financial wealth 744 799

Source: Swedish Ministry of Finance.

As part of a reform of the pension system, the AP funds transferred to the

government SEK245 billion of its cash, government bonds, and mortgage

bonds during the period from 1999 through 2001. The largest transfer, in

January 2001, had a market value of SEK155 billion, and consisted of

government bonds for SEK85 billion and mortgage bonds for

SEK70 billion. The transfer of government bonds amounted to 10 percent

of the outstanding debt of kronor bonds at the end of December 2000, and

approximately 5 percent of the total government debt. The transfer of

assets from the AP funds was done to compensate the central government

budget for some extra costs. Also, with the new, more sustainable pension

system the AP funds were considered to be too large.

As government debt levels have fallen, four of the five central banks have

reduced their holdings of government bonds; however, most have held an

increasing percentage of total outstanding government debt. (See table 9.)

The U.S. Federal Reserve’s holdings of U.S. Treasury securities in its

portfolio in 2000 ranked higher than central banks in any of the study

nations. Sovereign debt represented 85 percent of the U.S. Federal

Reserve’s portfolio while it equaled only 5.8 percent of the Bank of

England’s portfolio. Central banks in all study countries except New

Zealand reduced the percentage of government securities in their

portfolios. While the U.S. Federal Reserve decreased the percentage of

government bonds in its portfolio in 1999, this percentage increased in

2000. Central bank officials in the study countries told us they have

expanded their investments in other asset classes, such as state debt and

Central Banks Have

Responded to Lower

Debt Levels
Page 38 GAO-02-14 Debt Management

government enterprises, at the same time. Central banks in some study

countries increased holdings of U.S. government corporation and federal

agency bonds, such as securities issued by the U.S. Government National

Mortgage Association (Ginnie Mae) and Fannie Mae.

Table 9: Central Banks’ Ownership of Domestic Central Government Securities

Country (amounts)

Government securities

as a percentage of

central bank’s assets

Government securities owned

by central bank, as percentage

of total government securities

United States (US$billion)

1998 : 456.3

1999 : 483.7

2000 : 518.4

83.8 %

71.7 %

85.0 %

12.5 %

12.9 %

15.8 %

Australia (AU$billion)

1998 : 11.4

1999 : 9.3

2000 : 6.9

24.2 %

18.9 %

12.4 %

10.7 %

8.7 %

8.8 %

New Zealand (NZ$billion)

1998 : 2.1

1999 : 2.2

2000 : 2.4

19.4 %

18.6 %

24.6 %

5.4 %

5.9 %

6.5 %

Norway (NOKbillion)

1998 : 9.8

1999 : 10.8

2000 : 13.5

5.1 %

4.4 %

4.5 %

3.8 %

4.2 %

4.7 %

Sweden (SEKbillion)

1998 : 32.8

1999 : 28.9

2000 : 20.7

15.3 %

12.7 %

8.9 %

2.3 %

2.1 %

1.6 %

United Kingdom (£billion)

1998 : £1.4

1999 : £1.3

2000 : £1.4

10.0 %

6.6 %

5.8 %

0.46 %

0.46 %

0.48 %

Notes: Data as of end of fiscal year for each country. The 1999 figures include the effects of

preparations for the year 2000.

Sources: Central banks’ annual reports and U.S. Treasury Bulletins.

During the recent budget surpluses in the United States, the U.S. Federal

Reserve has made several adjustments to its operations and has studied

the question of what alternative assets might replace some U.S. Treasury

securities in its portfolio. In July 2001, the Federal Reserve reported that,

for the near term, it was considering purchasing and holding mortgagebacked securities from Ginnie Mae,24 and engaging in repurchase

 24Mortgage-backed securities of Ginnie Mae are explicitly backed by the full faith and credit

of the U.S. government.
Page 39 GAO-02-14 Debt Management

agreements backed with foreign sovereign debt. The Federal Reserve is

studying other steps for possible implementation later. For many years,

Treasury securities have been used by the Federal Reserve both to add to

its permanent asset portfolio and for the conduct of monetary policy. The

high liquidity of Treasury securities allowed the New York Federal

Reserve Bank to conduct large buy-sell operations quickly and with little

disruption to capital markets. Treasury securities also allowed the Federal

Reserve to avoid credit risk in its portfolio and the potential for distorting

the allocation of credit to private entities.

The U.S. Federal Reserve made several adjustments to its operations in

response to actual and prospective reduction in Treasury securities. In

2000 the Federal Reserve started to limit its holdings of individual

Treasury bills to 35 percent of the total amount of each issue outstanding

and of longer-term securities declining to 15 percent. If the Federal

Reserve had not adopted these limits, its holdings of Treasury securities

would have been significantly higher than the increase of $34.7 billion that

occurred in 2000. The Federal Reserve satisfied its demand for longer-term

reserves by increasing its holdings of longer-term repurchase agreements.25

The Federal Reserve held an average of more than $15 billion of about 1-

month repurchase agreements in 2000. The reappearance of deficits may

prompt reconsiderations of these actions in the near future.

The debt management policies and experiences of all five of the selected

industrial nations have followed generally similar paths to each other as

they moved from deficits to a period of surpluses. The experiences and

approaches of the five nations we studied have relevance to or provide

useful insights for debt management in the United States both in times of

budget deficits and surpluses.

Because of the current global economic slowdown, the United States and

the study countries face the prospect of budget deficits and increased

borrowing and debt levels. Several study countries experienced a similar

fiscal deterioration in the late 1980s and early 1990s.

 25In a repurchase agreement an entity, like a central bank, purchases securities from a

counterparty, like a bank, and simultaneously agrees to sell them back on a specified future

date.

Implications and

Future Issues for the

United States

All Study Countries and

the United States Have

Experienced Budget

Deficits and Surpluses
Page 40 GAO-02-14 Debt Management

The timing and size of the budget surpluses in the other nations we studied

have been different from projected surpluses in the United States. Four of

the study countries—Australia, Norway, Sweden, and the United

Kingdom—experienced a cycle of surplus to deficit then surplus again in

12 years (1988 through 1999). For the United States there was a gap of

nearly 30 years between its 1969 and 1998 unified budget surpluses.

Budget surpluses in the other nations, except Norway, had been possible

because of strong economic conditions and targets that focused on budget

balance (or small surplus).26 All of the study countries, except Sweden,

reported lower gross debt-to-GDP and net debt-to-GDP ratios in 2000 than

in 1988. While Norway’s surpluses are large and projected to continue in

the medium term, the sources of the revenues are quite different. In

Norway, large revenues from oil activities are the main source of budget

surpluses that began in 1994. Although each of the study countries had a

budget surplus in 2000, shifts to deficits would influence debt

management.

Managing declining debt as the budget is in surplus presents different

challenges than managing growing debt in a budget deficit. Maintaining

liquidity and market efficiency are more difficult in a period of budget

surpluses. The United States faces challenges similar in part to those faced

by study countries. However, the timing and size of its budget surplus may

be different and pose additional challenges for the United States.

Managing debt if the surplus is projected to be large and sustained would

be different from managing debt when budget projections are uncertain or

fiscal targets focus on budget balance (or a small surplus) over the

economic cycle.

In the late 1990s, the U.S. Treasury had to devise strategies to manage

large, continuing surpluses. If U.S. debt managers had used cash surpluses

to reduce debt rollover without taking other steps, they would have faced

large changes in average maturity and liquidity that could have increased

the government’s cost of financing. Because a debt buyback program of

regular reverse auctions can operationally handle relatively large volumes

and because the U.S. Treasury values regularity and predictability, the

Treasury chose to implement a debt buyback program of regular reverse

 26Targets in New Zealand, Sweden, and the United Kingdom focus on balance (or a small

surplus) across the economic cycle.

Debt Management Choices
Page 41 GAO-02-14 Debt Management

auctions with advance announcements of the size and targeted issues.

Other nations’ experiences suggest that less transparent buybacks may

achieve savings in the short term, but, over the long term, market prices

may incorporate a premium to compensate sellers for the lack of

transparency. The nations’ experiences also suggest that, over time,

buybacks may become more costly as a government seeks to purchase

more debt from the markets. This suggests that the Treasury may consider

supplementing buybacks with other tools consistent with our values and

debt management goals.

Some other debt management tools used regularly in other nations may

hold promise for the United States and be compatible with the values of

transparency, predictability, and equal access. Repurchasing debt within a

short time before it matures and open window repurchases are used

abroad to allow investors to offer securities to the government, which then

has the option to repurchase them at market rates. These programs act as

both debt management and cash management tools—reducing outstanding

debt and smoothing cash flows. As with a buyback program, the

government could choose which issues to repurchase. However, with

these programs, both the cost of the repurchases and the amount of debt

repurchased may be lower than with reverse auctions. Debt exchanges are

used in three of the five study countries to promote liquidity of benchmark

securities by exchanging outstanding debt securities for newly issued,

more liquid benchmark securities. The U.S. Treasury now is studying the

advisability and feasibility of debt exchanges. Switch auctions are used in

the United Kingdom when the amount of debt to be converted into newly

issued securities is too large to be appropriate for a debt exchange. Switch

auctions also may hold promise for the U.S. Treasury in supporting the

creation of large benchmark issues without increasing outstanding debt.

While the United States may experience budget deficits in the near term,

the U.S. Treasury still has the challenge of managing debt to achieve its

goals of ensuring that the government’s financing needs are met,

minimizing long-term cost, and promoting efficient capital markets. A

number of the techniques described above could be used to manage debt

in times of deficits as well as surpluses. Open windows are useful for both

cash and debt management purposes. Debt exchanges and switch auctions

are used abroad to promote liquidity of benchmark securities. However,

they also could be used to manage the maturity of outstanding debt and,

indirectly, to minimize long-term costs.

The budgetary surpluses of recent years that were achieved by fiscal

discipline and strong economic growth positioned us well to respond to
Page 42 GAO-02-14 Debt Management

both the events of September 11, 2001, and to the economic slowdown.

While some acknowledge that the budget may dip into deficit in the short

term, once the economy rebounds the budget is poised to return to

surplus. For example, the Senate and House Committees on the Budget,

on a bipartisan basis, endorsed a long-term fiscal policy to maintain

surpluses equal to the Social Security surplus. For the long-term, sustained

budgetary surpluses bolster the nation’s economic capacity to afford the

burgeoning costs of the baby boom retirement. Other nations have used

debt reduction and investment in financial assets as a way to achieve

national goals and to prepare for future demographic changes. Several

study nations have recognized potential governance issues associated with

ownership of longer-term assets. The United States might be faced with

similar issues in the future should we return to surpluses.

We are sending copies of this report to the Ranking Minority Member,

House Committee on Ways and Means; the Ranking Minority Member,

Subcommittee on Social Security, House Committee on Ways and Means;

the Chairman, Senate Committee on the Budget; the Chairmen and

Ranking Minority Members, House Committee on the Budget, Senate

Committee on Finance, and House Committee on Financial Services. We

also are sending copies to the Chairman of the Federal Reserve Board, the

Secretary of the Treasury, Director of the Congressional Budget Office,

Director of the Office of Management and Budget, and other interested

parties. We also will make copies available to others upon request.

If you or your staffs have any questions concerning this report, please

contact me at (202) 512-9573. Key contributors to this assignment were

Thomas James, Jose Oyola, Carolyn Litsinger, Melinda Bowman, and Quan

Thai.

Paul L. Posner

Managing Director

Federal Budget Issues, Strategic Issues

(935351)
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