Financing risk stems from the availability of funding and its terms and conditions. Financing risk concerns both short-term liquidity risk (under 12 months) and long-term refinancing risk (over 12 months).
Short-term financing risk (under 12 months) is managed by maintaining an invested liquidity buffer and by issuing short-term debt. Liquidity management is based on a cash forecasting system covering the entire public sector and maintained by the State Treasury. On the basis of the forecasts, the State Treasury either invests surplus cash assets or seeks short-term financing from the markets.
The Ministry of Finance has set limits on the size of forecast uncovered payments. When making investment decisions, the government uses credit risk-free alternatives, with securitized investments as the preferred choice. Short-term funding methods include e.g. government bonds that may be issued both in euro and USD denominations, as well as other short-term loans.
As a long-term refinancing risk management measure, the Finnish government has diversified its funding. The principle of diversification includes diversification of funding with regard to terms of maturity, instruments and investor base. Funding is conducted in such a way that formation of temporal risk concentrations is not possible. Government funding is based on market- and investor-led benchmark bonds. It secures efficient implementation of the most extensive financing requirements. The government usually issues new benchmark bonds with medium (ca. 5 years) and long (over 10 years) terms to maturity under so-called syndicated arrangements. The aim of the issue strategy is a smooth redemption profile with no concentrations of refinancing. The government may also repurchase debt in order to reduce refinancing risk.