Legal Regulation

Statutory obligations and legal regulations in state debt management

1. Statutory obligation and competence of the Ministry of Finance relating to the state debt management

General authorization of the Ministry of Finance for the state debt management has been stipulated by Act No. 2/1969 Coll., On the establishment of Ministries and other central bodies of the CSR state administration, by which the performance of the functions of state treasury has been assigned to the Ministry of Finance. The state treasury alone carries out 4 essential functions. These include the function of the operation performance of the state budget, the function of the management of state accountancy and yields, the function of the management of state funds, and the function of the state debt management. The activities connected with the issuing, managing, and redeeming of treasury bonds are carried out by the Ministry of Finance under Act No. 190/2004 Coll., on Bonds.

2. Liquidity management of deferred state debt

All current revenues and current expenditures of the state budget are mandatorily kept in the accounts of the Czech National Bank as a bank bearing no risks from the credit point of view. In consequence, the central bank is a paying agent of the Government. This quasi basic current account of the state is called „ Summary account of current management of state treasury. By the power of law, the state must be solvent at any moment, i.e., this account must have a credit balance at all times. This is in accordance with Article 101 of the Maastricht Agreement..

The state has to care for complying with the mandatory obligation of being solvent every day. The maintenance of daily solvency in the case of the state budget deficit means that the state has to sell on financial markets short-term bonds of money market (called Treasury bills), and to deposit the respective yields in the account so that the summary account may show credit balance at the end of every day. In case of a surplus in that account, the Ministry of Finance shall invest the surplus means in purchasing the Central Bank bills as absolutely safe investments.

To carry out such banking operations (creation of reserves, use of derivates for state debt management, etc.), the Ministry of Finance is equipped with the respective authorization in order to have a position on the market similar to that of banks, and, in consequence, to be able to carry on trade with them.

However, the sale of bonds aimed at ensuring the solvency or daily liquidity is limited by law through the relative limit. The limit has been fixed as a 6% portion from the total expenditures approved in the state budget increased by the budgeted deficit of the state budget approved by the State Budget Act. In case of the danger of exceeding that limit, the Ministry shall only be allowed to sell the limit-fixed amount of T-bills, and in case of a further deterioration of the treasury position beyond the legal limit, the Ministry shall be obliged to cease the state expenditures until the corresponding revenues come onto the accounts of the state.

The balance of the books and the state economy and the report on the state economy (the state closing account) are approved by the Chamber of Deputies. The Chamber shall decide, upon the Government proposal, on the way of disposing of the deficit (or surplus) arisen. The annual resulting deficit is usually acknowledged by the Act on Treasury Bond Programme which in fact transforms the short-term debt of the last year into the long-term debt.

3. Legal Regulation of Treasury Securities Issuance

A Treasury security is defined by the Act No. 190/2004 Coll., on Bonds as a bond issued by the Czech Republic represented by the Ministry of Finance.

The permission to issue Treasury securities must be stipulated by the law. There are two ways of granting the legal permission; first, by a law authorizing the Ministry to issue the bonds as given by the relative limit regulating the management of the short-term debt, second, by concrete special laws called „Act on State Treasury Bond Programme“ laying down the conditions (the purpose, amount, and maximum maturity period) of such legal permission for the issuance of bonds aimed at the coverage of the long-term debt. The laws on state treasury bond programmes stipulate the limit which the management of the state debt has to comply with.

The law also authorizes the Ministry of Finance to carry out the practical management of the state debt by the management of the Treasury securities portfolio through safeguarding operations, etc.

4. Relation to Central Bank

It follows from the Act on the Czech National Bank that the central bank is not allowed to grant credit to the state. At the same time, the state is obligated to maintain daily solvency by its own activities on financial markets and to manage the state debt.

On the basis of legal provisions, the state (i.e., the Treasury) ceased to be a client of the central bank and became an equal part of the banking system. However, the cenrtral bank was imposed by the law with an obligation to act as a paying agent and inland issuance agent of the state. At the same time, the Bank may, by the power of law, also perform, on the voluntary basis, other functions for the state in case the sate asks the Bank for doing so.