A debt of duty

The Australian Office of Financial Management has a central role to play in the government's efforts to ensure the country's economy weathers the ongoing financial storm. Kathleen Kearney speaks with the agency's chief executive, Neil Hyden

The Australian authorities have unveiled a series of initiatives - including an A$42 billion ($27 billion) fiscal stimulus plan on February 3 and a benchmark interest rate cut to 3.25% on the same day - aimed at warding off recession and ensuring the smooth function of its financial markets. Neil Hyden, chief executive of the Australian Office of Financial Management (AOFM) in Sydney, a unit of the Treasury responsible for operational aspects of Australian government debt, has a critical role to play.

Hyden, who has also worked at the World Bank and the Australian Treasury, oversees a team responsible for managing A$50 billion of government debt, including a sizeable portfolio of interest rate swaps. His team will have to start issuing short-term treasury notes for the first time since 2001, along with treasury bonds this year in a bid to finance the government's planned spending spree. Other duties include injecting A$8 billion into the country's flagging residential mortgage-backed securities (RMBS) market.

"The policy response here has been quick and vigorous, and the starting position was strong," Hyden says. "That all points to the (negative economic) impact being more muted than elsewhere." But the AOFM will require new financial and operational risk management, administration and financial reporting to keep up with fast-changing policy efforts.

Hyden expects to start issuing new treasury notes and bills - three-month to one-year contracts - shortly, but says the AOFM has not decided on their likely amount, tenor or schedule. "It depends on the day-to-day cashflows of the government and how the revenue and expenditure flows match up," he says, "so you have to judge it day to day." The notes will be issued weekly throughout the year, and the agency will seek feedback from market participants on the issuance.

The AOFM, meanwhile, intends to increase treasury bond tenders most weeks, with the amount offered at each tender normally in the range of A$500 million to A$700 million. This means total issuance is expected to be between A$22 billion and A$24 billion by June. Attention placed on these new treasury operations has slowed efforts to intervene in the RMBS market, says Hyden. But the programme remains on track, he adds, and the AOFM should invest the entire A$8 billion earmarked by the government in the coming months.

The agency received a total of 17 compliant proposals and about a handful of non-compliant submissions from mortgage-loan originators and arrangers seeking mandates to issue RMBS in the second of four rounds of the government's RMBS purchase programme. The agency received 12 proposals in the first round and issued four mandates (see Sovereign underpinning, page 28). The government announced the initiative on September 26, and the first mandates were made around a month later. The first mandates in the second round were issued in February, and Hyden expects they will come to market by mid-March, after which the AOFM will issue further mandates.

Meanwhile, the government said on November 20 it would unwind A$4 billion in notional of its A$24 billion portfolio of interest rate swaps in six to seven months and do no more for the time being. One reason for this is that the existing swaps were not needed any more and another is to improve its credit position with counterparties. The AOFM unwound 30 swaps with a total notional principal value of A$3.75 billion, including 12 unwound in response to adjustments to credit ratings or other credit-related events, the agency said on February 3. The unwound swaps had a net realised value of A$269 million in favour of the Australian government, it added.

Counterparties included many major banks operating in Australia, including international banks, and all the swaps were denominated in Australian dollars. The AOFM will continue to unwind swaps beyond the A$4 billion target to reduce further the size of its portfolio.

Australia has enjoyed a period of budget surpluses and has had low government debt over the past five years. But it is not immune to the ravages of the global financial crisis. The AOFM's reputation for prudent debt management is likely to face some stern tests in the coming months.