For a long time, there has been a focus on consolidating the financing need of not only the government and that of government-owned entities, while also shifting government-guaranteed lending into government bonds.
The process started in the early 2000s, where government-owned companies began shifting from issuing government-guaranteed loans themselves to an on-lending scheme in which the central government grants loans to the government-owned companies. This is called on-lending.
In the same vein, a new model for financing social housing was introduced in 2018 in order to move the financing of social housing from covered bonds towards government bonds.
As the financing cost of government bonds is significantly lower than government guaranteed loans or covered bonds, the consolidation, i.e. financing everything in government bonds, secures the government a significantly lower interest cost.
The total outstanding amounts in on-lending and social housing bonds were kr. 193 billion and kr. 155 billion, respectively, at the end of 2023 – equal to approx. 60 per cent of the central government’s total outstanding amount in government securities, see chart.
In addition, Danmarks Nationalbank also administers two government funds.
Breakdown of financing need
Explore the management of other assets
The central government provides on-lending and government guarantees to a number of government-owned companies, driven by a political wish to support certain projects. The majority of the loans are issued to government-owned companies involved in large infrastructure projects.
On-lending and guarantees contribute to better borrowing terms for the companies due to the central government's high credit rating. In order to consolidate central government debt, the financing has gradually moved from guarantees towards on-lending. This is motivated by the usually lower financing costs of on-lending, as the loan is financed by issuing government bonds, which are considerably more liquid than equivalent government-guaranteed issues by the companies. Government-owned companies typically combine on-lending with derivatives contracts with commercial banks. This enables them to improve their risk management while simultaneously benefiting from the low financing costs of on-lending.
| On-lendning | Government-guaranteed loans | |
|
A/S Femern Landworks |
X |
X |
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A/S Storebæltsforbindelsen |
X |
X |
|
A/S Øresundsforbindelsen |
X |
X |
|
Denmark's Export and Investment Fund (EIFO) |
X |
|
|
Denmark’s Green Future Fund |
X |
|
|
DR (Danish Broadcasting Corporation) |
X |
X |
|
DSB (The Danish State Railways) |
X |
|
|
Energinet |
X |
|
|
Evida Holding A/S |
X |
|
|
Femern Bælt A/S |
X |
X |
|
Finansiel Stabilitet A/S |
X |
|
|
The Danish Guarantee Fund for Non-life Insurers |
|
X |
|
Investment Fund for Developing |
X |
|
|
Kalaallit Airports International A/S |
X |
X |
|
Metroselskabet I/S |
X |
|
|
Naviair |
X |
|
|
Nordsøfonden |
X |
|
|
Hovedstadens Letbane I/S |
X |
|
|
Scandinavian Airlines System (SAS) |
X |
|
|
Sund & Bælt Holding A/S |
X |
X |
|
Udviklingsselskabet By og Havn I/S |
X |
X |
|
Øresundsbro Konsortiet I/S |
|
X |
|
|
|
|
In November 2017, the Danish government determined that it would start funding social housing in Denmark. This is done using government-guaranteed covered bonds issued in separate so-called capital centres. The capital centres are the legal entities in which the bonds issued and the loans provided are linked.
All bonds issued in the social housing capital centres are currently sold to Danmarks Nationalbank.
Government guarantees reduce interest expenses
Before November 2017, social housing was mainly financed through mortgage bonds comprising mortgage loans for both social and private sector housing. In other words, social housing was financed on the same terms and conditions as those offered to private homeowners. By transferring mortgage loans for financing social housing to a separate capital centre, the government can guarantee the bonds. This reduces the financing costs as the creditworthiness of the central government is high.
When government-guaranteed covered bonds are issued via a separate capital centre, the series are, however, only built up to moderate volumes as the underlying pool of loans is smaller. In addition, the loans are distributed on a number of mortgage credit institutions.
In addition to interest rate expenses being lower, the government can achieve further savings by purchasing the bonds and funding the purchases via issuance of government securities. This is because investors are willing to pay a premium for the higher liquidity of government securities. Effectively, this corresponds to issuance of mortgage bonds in the market being substituted by increased sales of government bonds.
Read more: Analysis: The central government will buy the bonds to
finance social housing in 2018
Danmarks Nationalbank administers the assets of Innovation Fund Denmark and the Fund for Better Working Environment and Labour Retention on behalf of the Danish government. The assets of the government funds are included in the total central government debt and are managed on a consolidated basis with other government debt assets and liabilities of the central government.
Innovation Fund Denmark
In March 2014, the Danish parliament passed a law to establish Innovation Fund Denmark by merging the Advanced Technology Foundation, the Danish Council for Strategic Research and the Danish Council for Technology and Innovation. On April 1st 2014, Innovation Fund Denmark took over the rights and obligations as well as the assets of the Advanced Technology Foundation. Danmarks Nationalbank continues to administer these assets.
By agreement with the Danish Ministry of Finance, the assets of the fund may be invested in Danish government bonds only. The investment strategy for Innovation Fund Denmark is to aim for an equal distribution of short-, medium- and long-term Danish government bonds.
The Fund for Better Working Environment and Labour Retention
The Fund for Better Working Environment and Labour Retention was established in 2007. Its assets are used for preventive measures, retention and inclusion in the labour market. The fund provides support for measures aimed at preventing physical and mental impairment, work-related accidents and occupational diseases. A total of kr. 3 billion was transferred to the fund when it was established, and no further capital injections from the government are planned.
It is a statutory provision that the assets of the Fund for Better Working Environment and Labour Retention may be invested in Danish government bonds only. The investment strategy is aimed at achieving revenue from interest and redemptions to match future transfers to the Ministry of Employment. At the end of 2023, the assets of the Fund totalled kr. 0.7 billion.