Financing risk stems from the availability of funding and its terms and conditions. Financing risk is divided into short-term liquidity risk (less than 12 months) and long-term refinancing risk (more than 12 months).
The State Treasury manages short-term liquidity risk by maintaining an invested liquidity buffer and by issuing short-term debt. Liquidity management is based on a cash forecasting system covering the entire central government and maintained by the State Treasury. On the basis of the forecasts of government agencies, the State Treasury either invests surplus cash assets or seeks short-term financing from the markets.
When making investment decisions, the government prefers credit risk-free alternatives, such as collateralised investments. Short-term funding methods include e.g. Treasury bills that may be issued both in euro and USD denominations, as well as other short-term loans.
In order to manage the long-term refinancing risk, the Finnish government diversifies its funding by maturity, instruments and investor base. The issuance strategy strives towards a smooth redemption profile and avoids concentrations in redeeming debt. When issuing new bonds, emphasis is placed on diversification of the investor base, both in terms of geography and investor type. In addition, the government may issue different kinds of debt instruments.
The government’s funding is based on a market- and investor-driven benchmark bond strategy, which safeguards efficient funding even in large quantities. The government usually issues new benchmark bonds with medium (about five years) and long (more than ten years) terms to maturity under so-called syndicated arrangements. Buybacks may also be executed in order to reduce refinancing risk.