Debt Management Mitigation Strategies – Post Pandemic
When severe market pressures occur, companies can employ mitigation strategies such as buyback transactions, exchange transactions, price discovery, and efficient management of cash resources. However, these measures may be required by fiscal and monetary authorities when extreme market pressures occur. Therefore, companies must seek consultation with the relevant fiscal authorities.
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The crisis has created unprecedented volatility and economic anxiety and has posed a significant challenge for IR professionals. In this context, there are many steps that CFOs and IR professionals can take to prepare for the crisis. But first, let’s look at some of the most critical issues for companies facing this situation. Firstly, it’s essential to understand the perspectives of both buy and sell side investors. Understand how to balance short-term earnings impacts with long-term value creation.
Debt managers may want to adjust their financing practices when a crisis arises. Therefore, it is imperative to communicate changes to market participants. This requires clear communication about the decision-making process and a clear operational framework with well-defined parameters. The issuer must also unwind any departures from sound practices.
Despite the heightened risk and volatility, developing robust mitigation plans and communicating these strategies to all stakeholders is essential. This includes developing effective mechanisms for financing shortfalls, refinancing, and managing cash resources. Authorities should also consider the critical risks embedded in their debt portfolio, including interest rate, foreign exchange rate, and liquidity. Debt managers should make appropriate trade-offs between these risks and seek to maintain a competitive environment. In some instances, debt managers may also have to adapt their capital flow management strategies to meet their short and medium-term financing needs.
Alternative debt management strategies
Limited policy space prompts governments to reconsider their fiscal framework and develop alternative debt management strategies. These measures could include the development of a domestic public debt market, which can expand investor participation and demand, and lower government expenditure costs by diversifying risk. For example, the issuance of green bonds could serve as a new instrument to fund recovery plans. Moreover, fiscal rules could be amended to provide greater flexibility and market access.
The debate on the future of consumer debt management must consider the roles of financial regulators in the aftermath of the pandemic. They should respond to immediate welfare and prudential concerns while gathering information for longer-term responses. The post-pandemic debt management challenge is unprecedented in scope and complexity, and financial regulators should be more actively engaged in the process. This is the best way to address the current debt crisis.
Treasury’s cash balance policy
As we move toward the end of a year filled with uncertainty, it is essential to examine Treasury’s cash balance policy for debt management. In the first quarter of 2020, a new coronavirus pandemic hit the world, creating a shockwave that altered the financial system. Unprecedented volatility in financial markets and heightened pessimism over the economic outlook created an unprecedented demand for cash. Treasury responded by increasing the issuance of cash management bills and conducting weekly auctions of these debt securities. The outstanding issuance of these securities led to high volatility in the Treasury market, requiring the Federal Reserve to intervene to maintain the flow of credit to U.S. households.
The GAO report also analyzed the changes in Treasury securities during the COVID-19 pandemic, examining how the crisis affected the country’s financial markets and Treasury’s actions to minimize disruptions and finance the federal government’s response. In addition, the report analyzed data on Treasury securities, reviewed market research, and interviewed market participants from vital financial sectors. The findings shed light on the current cash balance policy for debt management in the face of such extraordinary flows.