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The interest rate swaps of the Swedish National Debt Office have saved the state SEK 1.1 billion - but the reporting is inadequate

To keep costs low when the state borrows money, the Swedish National Debt Office uses the financial instrument of interest rate swaps. The audit of the Swedish National Audit Office shows that this has led to savings of SEK 1.1 billion since 2003, but the reporting of profits from the use of swaps is clearly inadequate.

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Photo: PLAINPICTURE/KAISER

Swedish National Debt Office is responsible for borrowing money and managing the debt on behalf of the state. This is to be done as inexpensively as possible while at the same time taking account of risk. The Government is responsible for balancing risk and cost through yearly decisions regarding among other things the average maturity of the various loans.

The Swedish National Debt Office has used the financial instrument of interest rate swaps since 2003. This means that for a given loan, the Swedish National Debt Office will switch a fixed interest cost to a floating interest cost with another actor on the finance market for a determined period of time. The Swedish National Debt Office can borrow and lend under more favourable conditions than other actors, especially with longer loan terms, which allows for economic profitability.

Since 2003, the Swedish National Debt Office has entered into interest rate swap agreements for loans totalling around SEK 300 billion. During the financial crisis, the agency altered its motives for and the financial reporting of the use of swaps.

This is the context in which the Swedish National Audit Office has audited whether the Swedish National Debt Office’s use of interest rate swaps has been efficient, and if the reporting has been satisfactory.

The audit shows that the use of interest rate swaps has reduced the state’s costs by a total of SEK 1.1 billion between 2003 and 2017.

– The Swedish National Debt Office maintained its strategy, even during the economic crisis from 2008 to 2012 when losses were incurred. The audit shows that it was a wise decision and that the state has saved more than SEK 1 billion since 2003, thanks to its use of the swapping instrument, says Auditor General Ingvar Mattson.

Apart from reduced costs for the national debt, the decisions made by the Swedish National Debt Office have also yielded two additional positive effects: improved liquidity in the bond market and reduced refinancing risk.

– In practice, this means that costs as well as risks from the state’s borrowing have progressed in the right direction, says Alexander von Gussich, project manager for the audit.

With respect to the Swedish National Debt Office’s current financial reporting, the Swedish National Audit Office is critical of the excessively positive image that has been depicted as a result of the use of interest rate swaps. The Swedish National Debt Office is comparing its costs with a hypothetical situation, which is not allowed according to the Government’s decision regarding loan terms, and has thus concluded that the use of interest rate swaps has led to savings of SEK 36 billion - far exceeding the SEK 1.1 billion established during the audit by the Swedish National Audit Office.

– The report also does not make clear which effects are the result of the agency’s own decisions and which are the result of the Government’s decisions or market development. All in all, there is a risk of this leading to a misinterpretation of the effect of using interest rate swaps, says Alexander von Gussich.

Recommendations

The Swedish National Audit Office recommends that the Swedish National Debt Office more clearly reports the specific economic effects resulting from the agency’s decisions, within the guidelines of the Government. If the agency maintains its current method of reporting financial results, the Swedish National Audit Office considers that the outcome should be divided into separate components: swapping results, debt maturity premium and unexpected market movements.

Press contact: Olle Castelius, phone: +46 8-5171 40 04.

Presskontakt: , telefon: 08-5171 42 06.

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Updated: 08 October 2018

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