Liquidity risk refers to a situation where the volume of liquid assets diminishes quickly as a result of unanticipated cash flow obligations and/or a possible difficulty in raising cash quickly by borrowing.
- For liquidity management, the maximum maturity of term deposits and reverse repos is 92 days. The maximum maturity is shorter for the Liquidity Reserve’s term deposits in local banks with ratings less than P1.
- Money can only be invested into bonds where the issue size is at least EUR 1 billion and where the investment is a maximum 10% of the total issue size and there is an active secondary market.
- For liquidity risk management, a minimum liquidity requirement was introduced and committed credit facilities with the main local partner banks were established in 2011. The minimum required level of the liquidity position equals the State’s six-month negative net cash flow comprising:
- transactional requirements, meaning the excess of budgeted monthly outgoings over budgeted revenue (also taking into account entities such as the Health Insurance Fund and the Unemployment Insurance Fund whose cash management is consolidated with central government), including debt and interest payments during the next one-month period, and
- precautionary requirements, representing an estimate of the deterioration in budgeted tax revenues over the following six months in the event of an economic downturn of the severity experienced in 2009 and a provision for liabilities from guarantees given by the State that are expected to crystallise in the following six months.
The actual liquidity position is calculated as (a) the Liquidity Reserve (deposits with maximum three months maturity, current accounts and bonds, liquid and high-grade) plus (b) undrawn amounts from facilities committed for at least the following three months (by banks). These facilities also serve to mitigate operational risks and to ensure that unexpected large outgoing payments can be made without having to liquidate investments.
Graph: Monthly level of the liquidity reserve, the amount of unused credit facilities and the minimum liquidity requirement, in millions of euros