Expert opinion: Niek Nahuis

Nahuis begins by pointing out that the DSTA does three things: “Firstly, we finance the state debt, which currently stands at about EUR 288 billion.

“We are the eyes and ears of the Minister of Finance.”

We are in fact a kind of reverse APG, the pension fund that has some EUR 240 billion in assets (at December 2009) and must manage them as sensibly as possible on behalf of its pension-holders. We have almost EUR 300 billion in debt, and it’s our job to handle it as responsibly as possible.

Our debt portfolio consists of numerous loans and a substantial number of them have to be renewed each year. If we switch them, we work in exactly the same way as when you switch your mortgage. You look for the most favorable conditions.

Spreading is obviously essential: you can’t refinance hundreds of billions of debt every year.” The DSTA organizes auctions to refinance the state debt. It also regulates central government’s balance. To perform these activities, the DSTA operates in the money and capital markets.

“We’re just like a bank in fact, so we have our own dealing room where traders keep a watch on loads of screens that display rates,” Nahuis adds.

Treasury banking

Then there is treasury banking. This is an arrangement whereby public institutions keep their funds with the Ministry of Finance, in the form of a current account, just like a savings account at a bank, or in the form of a deposit.

Most institutions can also take out loans with the state treasury. “In the past only total treasury banking was possible, but since October 2009 there has also been a partial variant under which deposits can be lodged without entering into a current account relationship with the treasury,” says Nahuis. The DSTA further coordinates the organization of central government payments.

“You can safely assume that each year our organization handles a few hundred billion euros.”

The DSTA website describes the organization as the Minister’s eyes and ears in the financial markets. Nahuis points out: “You can look upon that as another one of our tasks. We possess considerable knowledge of the financial markets, precisely because we operate at the heart of it every day. It enables us to identify trends.”

When it comes to managing risks, the DSTA has to deal with matters like interest-rate risks, credit risks and currency risks.

The agency obviously wants to finance at the lowest possible costs within acceptable risks. “Generally speaking it goes like this: the shorter the term of the loan, , the cheaper it is. But even here you want to make a spread, depending on your risk appetite, which in our case differs from the situation at a company, and ultimately it is the minister who decides. We don’t have a profit target.”

Nahuis adds, laughing, “I’ve no idea how you could link a profit target to a debt of EUR 288 billion.” Nahuis refers to acceptable risks, but what exactly are they? He answers the question by mentioning the benchmark that for the past two years has been applied as a control variable.

A seven-year centered portfolio has been set as the benchmark for the 2008-2011 period. Nahuis explains: “Every day we issue a notional seven-year loan. The DSTA regards the seven-year point on the interest curve as the optimum trade-off between cost and risk. The DSTA also examined an integral Asset and Liability Management approach. Due to the uncertainty about future public expenditure, not least because of ever-changing governments, an ALM approach is almost impossible.”

Besides interest-rate risks, the DSTA is exposed to credit risks when surplus funds are temporarily lent at interest to market parties. To minimize the risk, strict requirements are laid down for the creditworthiness of these parties. The credit risk is further limited by lending as little unsecured money as possible at interest and not for long periods of time.

So use is preferably made of buy-sell-back transactions (secured deposits) whereby security is lodged with the DSTA in the form of government bonds. “The credit crisis has resulted in a further tightening of the rules. It is now possible to lend money at interest to most counterparties without security for not more than one day.”

Besides issuances in euro, the DSTA also has issuances - to a limited extent - in foreign currencies. All issuances in foreign currencies are swapped into euro to protect against currency risks.

Crisis

Besides resulting in a further tightening of the rules, the crisis provided numerous tense moments within the walls of the DSTA. “When the state suddenly needed EUR 50 billion within a week to finance the Fortis and ABN AMRO deal, we were the ones who collected the money. Almost EUR 17 billion was needed for the actual takeover, plus more than EUR 34 billion for taking over the short-term loans.”

Nahuis explains that on the first day EUR 20 billion was borrowed, with the Dutch central bank providing a bridging loan for the rest of the amount. After that, all kinds of financial products were issued, varying from deposits and commercial paper to T-bills. “Never before had we been required to make such a huge financing effort.”

Other crisis-related practices now also fall under the DSTA’s responsibility. Examples are implementation of the guarantee scheme for banks and ING’s Alt-A portfolio that the DSTA manages.

Transparency

Transparency is an absolute priority for the DSTA, with the website used as an important source of information. The annual outlook, in which the DSTA indicates how much it will issue on the capital markets in the coming year, is published online, while almost all of its loans have an ISIN code, so information about them is obtainable via Bloomberg.

Outlook for 2010

Looking ahead to the rest of 2010, Nahuis expects market conditions to remain tough for the Dutch economy, although he believes that, viewed internationally, the Netherlands is in good shape.

The DSTA deliberately refrains from giving a view on interest rates. “If you look at the Wall Street Journal’s annual poll, you’ll see that only one-third of the respondents correctly predicts the direction of interest rates.

What we do think, however, is that the interest rate curve will go up slightly, but that’s as far as our outlook goes. When it comes to policy, we obviously make adjustments and prepare for what is likely to happen, particularly as regards such matters as the approach to the derivatives market.

Basically, we’re like a supertanker, in that it takes a lot of time to establish policy because we have to take into account so many different factors.”