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Management of interest rate risk

Interest rate risk refers to the risk of changes in the value of the financial reserves and in the cost of debt arising from changes in interest rates.

  • The interest rate risk of the Stabilisation Reserve Fund is measured on a VAR (value-at-risk) basis, with a VAR limit.
  • The interest rate risk of the Liquidity Reserve, the on-lending portfolio and the outstanding debt is measured using modified duration. The duration of the Liquidity Reserve and any on-lending must not exceed 0.45 years (5.4 months). The outstanding debt’s duration cannot exceed 0.5 years (6 months). This limit is set based on ALM principles, taking into account that the Liquidity Reserve is currently larger than the debt portfolio and has a similar maximum duration. Maintaining a similar duration of both assets and liabilities reduces the overall impact of changes in interest rate levels for the State. In the case that, in the future, the debt portfolio becomes (significantly) larger than the Liquidity Reserve, it would be appropriate to review the limit on the duration for the debt portfolio.

Graph: Liquidity Reserve and outstanding debt (in million euros, left axis) with modified duration (in years, right axis)

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Last updated: 1 August 2019