Tài chính kế toán - Chapter 12: Government debt, monetary policy and the payments system

Chapter 12Government debt, monetary policy and the payments systemWebsites:www.rba.gov.auwww.aofm.gov.auLearning objectivesOutline reasons why governments borrowDescribe features of the main Commonwealth government debt instruments, issuance process, participants and related calculationsDescribe the purpose and structure of state government central borrowing authoritiesOutline monetary policy techniques used by the RBA to influence interest rates, including open market operations and the impacts on system liquidityDescribe the purpose and operation of the payments systemChapter organisation12.1 Commonwealth government borrowing12.2 Commonwealth government securities12.3 State government securities12.4 Monetary policy12.5 The payments system12.6 Summary12.1 Commonwealth government borrowingGovernments need to fund capital and recurrent expendituresGovernments might also need to fund economic stimulus by expansionary fiscal policy (as was the case following the GFC)This is achieved by issuing debt securities in the money and capital marketsFiscal policy relates to the annual incomes and expenditures of a governmentMonetary policy affects the level of short-term interest rates by adjusting the level of financial system liquidity(cont.)12.1 Commonwealth government borrowing (cont.)Borrowing requirementFull financial yearBorrow to finance budget deficitsRoll over existing bonds that matureRetire debt at/prior to maturity if budget in surplusInstruments issued are Treasury bonds and they are bought mainly by commercial banks, other financial institutions and portfolio managers for:liquidity managementportfolio investmentsrisk managementpayments system requirementsprudential requirements(cont.)12.1 Commonwealth government borrowing (cont.)Borrowing requirement (cont.)Full financial year (cont.)Budget surpluses and debt reduction policies have limited the supply of government securitiesLong-dated bonds are now issued every two years, ensuring sufficient securities to support 10-year bond futures contractsGovernment intends to issue about $5 billion of Treasury bonds each year to ensure a deep and liquid marketCrowding-out effectGovernment demand for debt financing reduces amount of funds available for investment in private sectorMinimised in times of strong fiscal managementCopyright  2009 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Institutions, Instruments and Markets 6e by VineySlides prepared by Anthony Stanger(cont.)12.1 Commonwealth government borrowing (cont.)Borrowing requirement (cont.)Within financial yearBorrow to finance short-term mismatches between receipts and payments; i.e. manage day-to-day liquidityRoll over existing debtInstruments issued for intra-year budgetary purposes are short term; i.e. Treasury notes (T-notes)Chapter organisation12.1 Commonwealth government borrowing12.2 Commonwealth government securities12.3 State government securities12.4 Monetary policy12.5 The payments system12.6 Summary12.2 Commonwealth government securitiesLike the private sector, the Commonwealth Government issues both coupon and discount securitiesTreasury bonds (or T-bonds) for full-financial-year financingTreasury notes (or T-notes) for within-year or intra-year financingT-bondsMain featuresCoupon instrument (coupons normally paid each six months)Coupon payment = coupon rate x face value of bondFace value of bond redeemed at maturity date or may be sold in secondary market for early redemption(cont.)T-bonds (cont.)Main features (cont.)Until 1984 either bearer bond or inscribed stockSince 1994 inscribed stock, which has the following advantages:Less costly to maintain register of bond holdersOwnership of bearer bonds not registered, facilitating tax evasion and money launderingProtected from risk of theft, destruction and misplacement(cont.)T-bonds (cont.)Primary market transactionsIssued by Commonwealth Treasury through RBAIssued through the tender systemRemoves rate setting from political arenaBids submitted through Yieldbroker DEBTS SystemMinimum $1 million, thereafter multiples of $1 millionBids made in terms of yield to maturity, not priceBids are accepted in ascending order of yield, i.e. lowest-yield bid (highest price) first, until issue fully subscribed(cont.)T-bonds (cont.)Who buys T-bonds?As at January 2011 RBA held 2.7%—can influence financial system liquidity by buying or selling T-bonds to investorsBanks held 16%—held for operational and prudential liquidity but decreasing owing to changes in regulationsGeneral and life insurance offices held less than 1%Other private financial institutions, held 2.5%—held for liquidity managementOther holders (other central banks and overseas institutions) held 77%(cont.)T-bonds (cont.)Secondary market transactionsOn-exchangeAll T-bonds listed on ASXLow trading volumes owing to lack of trading facilities/mechanisms to match buyers and sellersOver-the-counterBuyers and sellers may deal directly through a broker or financial institution(cont.)T-bonds (cont.)Secondary market transactions (cont.)Individuals and institutions may participate in the secondary market for the following reasons:Funding requirementsLiquidity needsReserve requirementsInterest rate expectationsTo maintain the maturity profile of a bond portfolio(cont.)T-bonds (cont.)PricingSame as corporate bonds (Chapter 10)(cont.)T-bonds (cont.)Pricing (cont.)(cont.)T-bonds (cont.)Pricing (cont.)Example 1: An existing Treasury bond has been issued with a face value of $1000. The bond pays half-yearly coupons of 7% per annum, and matures on 15 November 2012. Assume that the bond is sold on 15 July 2009. Current yields for similar Treasury bonds are 8% per annum. Calculate the price of the bond in the secondary market.T-notesT-notes are short-term discount securities issued by the Commonwealth Government through the Australian Office of Financial Management (AOFM)T-note issues have a variable term-to-maturity in order to coincide with the government’s revenue receipt datesT-notes may be redeemed at maturity date or by sale in the secondary market(cont.)T-notes (cont.)Tendering processTenders held periodically on a competitive basis to meet funding needs in the primary marketMinimum parcel of $1million face value, thereafter multiples of $1 million via the AOFM tender system in terms of yield to maturityBids accepted in ascending order of yield, i.e. lowest-yield bid (highest price) first, until issue is fully subscribedT-note purchases settled through Austraclear settlement systemNo T-notes were issued for several years after 2003. This changed considerably as the government increased its deficit during and after the GFC. (cont.)T-notes (cont.)PricingT-notes are a discount security and the calculations are the same as in Chapter 9(cont.)T-notes (cont.)Pricing (cont.)Example 2: A bank is to bid at tender for $1 million of 182-day T-notes at a yield of 5.5% per annum. What price will the bank pay if the tender is successful?(cont.)T-notes (cont.)Calculating holding period yieldThe yield in formula 12.2 above is rate of interest, expressed as a percentage per annum, on the amount outlaid to purchase the T-note (cont.)T-notes (cont.)Calculating holding period yield (cont.)Example 4: A 182-day T-note with a face value of $1 million, a current price of $975 400, with the full 182 days to run to maturity, is yielding:Chapter organisation12.1 Commonwealth government borrowing12.2 Commonwealth government securities12.3 State government securities12.4 Monetary policy12.5 The payments system12.6 Summary12.3 State government securitiesState finance needs similar to those of CommonwealthEach state has formed a central borrowing authority to facilitate debt management programs; e.g. Treasury Corporation of VictoriaIssue similar securities as the Commonwealth; i.e.:medium-term notes and longer term bonds (referred to as semi-government securities)discount securitiesCost of debt (determined by credit rating agencies) is higher than it is for the Commonwealth(cont.)12.3 State government securities (cont.)Benefits of central borrowing authoritiesMaximise economies of scaleAccess international marketsBetter manage the timing of debt issues and associated cash flowsRemove potential for competition between different issuers within the same state and achieve a lower average cost of fundsSize of the single debt issues larger than the borrowings of individual state authoritiesMore effective use of tender and dealer panelsEncourages a secondary market(cont.)12.3 State government securities (cont.)Debt issues may be:public—prospectus, advertising and marketingprivate—information memorandum, quicker, cheaperunderwritten—tender and dealer panels place issues and create a secondary market by quoting bid and offer pricesnon-underwritten—issue attractive to institutional investors owing to investment-grade credit ratingChapter organisation12.1 Commonwealth government borrowing12.2 Commonwealth government securities12.3 State government securities12.4 Monetary policy12.5 The payments system12.6 Summary12.4 Monetary policyMonetary policyActions of the RBA that influence interest rates in order to achieve the following economic objectives:Stability of the currencyMaintenance of full employmentEconomic prosperity and welfare of the Australian peopleMaintain inflation within a 2–3% range over the business cycle(cont.)12.4 Monetary policy (cont.)By impacting on the cash rate (overnight interbank rate), the RBA can affect rates of longer term securities; e.g.:RBA tightens monetary policy by selling Commonwealth Government securities (CGSs) and reducing the money supplyThis causes investment and household spending to decrease(cont.)12.4 Monetary policy (cont.)(cont.)12.4 Monetary policy (cont.)Open market operationsConducted primarily by:repurchase agreements (repos) on nominated debt securitiesoutright or direct transactions in short-dated CGSssales of CGSs reduce supply of cash in money marketpurchases of CGSs inject additional cashforeign exchange swapThe RBA holds and manages a portfolio of CGSs to maintain system liquidity and effect monetary policyThe RBA achieves this by purchasing CGSs in the secondary market and occasionally taking an allotment at tender in a primary issue(cont.)12.4 Monetary policy (cont.)Impacts on system liquidityFactors impacting on the liquidity of the financial system (or money base) are:Commonwealth Government budget deficits or surplusestaxation receiptsgovernment securitiesbudget recurrent expendituresbudget capital expendituresofficial (RBA) FX transactionssales (purchases) of FX reduce (increase) financial system liquiditysales of FX by the RBA reduce system liquidity, which can be neutralised through market operations by selling CGSsnet sales of CGSs and repurchase agreementsChapter organisation12.1 Commonwealth government borrowing12.2 Commonwealth government securities12.3 State government securities12.4 Monetary policy12.5 The payments system12.6 Summary12.5 The payments systemPayments systemFacilitates the transfer of value of a financial instrument, used in transactions for goods and services, from one party to anotherTransactions may be cash or non-cash instrumentsPayments system clearing systemsAustralian Paper Clearing System for cheques, payment orders and other paper-based payment instructionsBulk Electronic Clearing System for recurring electronic credit and debit payment instructions(cont.)12.5 The payments system (cont.)Payments system clearing systems (cont.)Consumer Electronic Clearing System for card-based ATM and EFTPOS transactionsHigh Value Clearing System for high-value payment instructionsAustralian Cash Distribution Exchange System for the movement of notes and coins(cont.)12.5 The payments system (cont.)Payments classified by RBA in two ways1. High-value—large-value transactions for assets (e.g. property, wholesale market equity, debt securities and FX transactions) cleared by real-time gross settlements (RTGS)2. Low-value—day-to-day payments for goods and services, particularly by the household sector(cont.)12.5 The payments system (cont.)Exchange settlement accountsA special account held with the RBA to facilitate the settlement of value transactions within the payments systemHeld by banks, special service providers (building societies and credit unions) and other providers of payments servicesExchange settlement account transactions use same-day funds, i.e. funds not requiring clearing through the payments system(cont.)12.5 The payments system (cont.)Real-time gross settlement (RTGS)Australia operates a system of RTGSThis requires that each high-value payment transaction be settled immediately through exchange settlement accountsRBA requires banks to maintain their exchange settlement accounts in credit with same-day fundsTo facilitate management of liquidity RBA provides intra-day repurchase arrangement for exchange settlement account holdersCopyright  2009 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Institutions, Instruments and Markets 6e by VineySlides prepared by Anthony Stanger(cont.)12.5 The payments system (cont.)Repurchase agreements (repos)A repo is the sale of CGSs to the RBA on condition the seller will normally buy them back by day’s endIt provides intra-day liquidity for same-day funds for exchange settlement account holdersChapter organisation12.1 Commonwealth government borrowing12.2 Commonwealth government securities12.3 State government securities12.4 Monetary policy12.5 The payments system12.6 Summary12.6 SummaryThe RBAIssues T-bonds for long-term Commonwealth funding and T-notes for short-term Commonwealth fundingImplements monetary policy consistent with economic objectives by impacting on the overnight cash rateHolds and manages a portfolio of CGSs to maintain system liquidity and affect monetary policyExchange settlement accounts facilitate the operation of the payments systemRBA provides intra-day liquidity by offering repos