Risk Management

By its nature, the management of debt gives rise to various forms of financial risk. Particular areas of risk to which the Agency is exposed include market risk, liquidity risk, counterparty credit risk and operational risk.

The Agency applies a number of risk management tools to quantify and manage the different types of risk to which the level and interest cost of the debts are exposed, as a result of the volatility and uncertainty of financial markets. These tools include systems to quantify the sensitivity of budgeted debt service costs, both in the current year and in future years, to movements in exchange rates and interest rates; in addition, internal risk limits are used to manage these exposures.

Refinancing or liquidity risk is also an area of prime importance and is actively controlled. While access to financial markets is primarily dependent on the ongoing credit standing of the Irish economy, it is also subject to variations in the conditions and liquidity of the capital markets themselves; political and economic developments in other countries or regions can have a significant impact on conditions in financial markets that have become increasingly interlinked.

In order to contain this exposure, the Agency limits the concentration of debt maturities in the near term and spreads maturities over a number of years. The introduction of the euro and a single currency government bond market is a positive development from the government bond market, Ireland now has greater access to funding without exchange risk, resulting in increased flexibility in the management of maturities.

The Agency manages short term liquidity by regularly updating forecasted cash inflows and outflows and managing issuance dates and volumes to ensure that the Exchequer has, at all times during the year, adequate cash resources to meet its needs.

Credit exposures arising from deposits and derivative transactions are monitored regularly and are managed within approved limits.

Operational risk is controlled by rigorous policies and procedures governing payments and the separation of duties, in line with best practice in the financial sector generally.