a euro sovereign issuer an efficient and mature debt market

13

A Euro Sovereign IssuerA Euro Sovereign Issuer

An efficient and mature debt market An efficient and mature debt market

A Euro Sovereign IssuerA Euro Sovereign Issuer

An efficient and mature debt market An efficient and mature debt market

August 2006August 2006

Republic of Portugal

213

A stable political and social environment

• Budgetary consolidation …

• … through structural reforms

• A market-driven borrowing strategy

• 2006 Borrowing Programme

• An efficient and liquid OT market

TOPICS

313

• The two main political parties have the backing of roughly 80% of the

Portuguese voters and share the objective of budgetary consolidation

• A government with absolute majority in the Parliament since February

2005

• A new President of the Republic was elected in January 2006

• No elections in the near term (until 2009 for Central and Local

Government and 2011 for the Presidency)

• A high degree of social consensus

Portuguese public finance reform programmePortuguese public finance reform programme

A stable political and social environment

413

• A stable political and social environment

Budgetary consolidation …





TOPICS

513

Portugal’s public finance reform programmePortugal’s public finance reform programme

The Portuguese government has a strong mandate to put public finances on

a sustainable footing

The Stability and Growth Programme (SGP), 2005 - 2009 (December 2005)

includes a comprehensive set of measures aimed at a major overhaul of

public finances, including the following:

Central Government restructuring

Social Security reform

Improvement in the use of public resources

Fight against fraud and tax evasion

2006 Budget Law presented to the Parliament reaffirms the

Government’s commitments and objectives included in the SGP

613

Gro

ss

de

bt

Bu

dg

et

de

fic

it

Public finances in the medium-term: SGP 2005-2009

Government committed to reduce budget deficit over the coming years

Deficit reduction based on structural measures rather than on one-off

and temporary measures

The Stability and Growth ProgrammeThe Stability and Growth Programme

Sources: SGP (December, 2005)

2.72.9

4.3

2.9 2.93.2

6.0

4.6

3.7

2.6

1.5

0

1

2

3

4

5

6

7

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

(As

a pe

rcen

tage

of G

DP

)

Forecast

51.450.4

52.9

55.557.0

69.3

66.2

68.468.7

58.7

63.9

50

55

60

65

70

75

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

(As

a pe

rcen

tage

of G

DP

)

Forescast

713

Portuguese economy on recovery pathR

ea

l G

DP

gro

wth

Mo

nth

ly C

oin

cid

en

t In

dic

ato

r

Ec

on

om

ic S

en

tim

en

t In

dic

ato

r

Source: Bank of Portugal

Source: SGP (December, 2005)


Ha

rmo

niz

ed

IC

P


3.9 3.9

2.0

0.8

-1.1

1.2

0.4

1.1

1.8

2.4

3.0

-2

-1

0

1

2

3

4

5

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

(% c

han

ge)

Forecast

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

II III IV I II III IV Jan Feb Mar Apr May June

2004 2005 2006

82

84

86

88

90

92

94

96

98


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0


2004 2005 2006

(%, Y

oY c

hang

e)

Portugal

Euro area

813



… through structural reforms




TOPICS

913

Structural reforms…Structural reforms…

Measures to reduce public expenditure

• Cost control of the human resources expenditures

• New rules and guidelines to improve human resources management

Reforming the Public Administration

Promotion of the sustainability of the social security system, through

fundamental changes of applicable rules, in line with major demographic

trends

1013

Improving the use of public resources

• Streamlining of the fundamental public services (education, healthcare, justice and

local Government), including the harmonization of public health protection systems

in line with the private sector regime

• Rationalization of real-estate properties

Budgetary control

• Review of legislation regarding the framework of Local Authorities financing system,

including the strengthening of financial reporting obligations

• Creation of the position of (strong) Financial Controller in each ministry

• Wage moderation (growth rates in line or below the inflation rate)

Structural reforms…Structural reforms…

Measures to reduce public expenditure

1113

… underpinning fiscal consolidation… underpinning fiscal consolidation

Measures to increase tax revenue

Tax rate increases

• Increase in VAT, as well as in personal income tax rate, with some of the revenue

assigned to the social security system

• Tax increase on tobacco and fuel

• New additional personal income tax bracket for the highest incomes

Fight against fraud and tax evasion

• Lifting banking secrecy for tax purposes

• Publication of tax debtors list

• New debt recovery instruments and mechanisms, significant worsening of sanctions

for non-compliance with tax obligations)

Reduction of tax benefits and exemptions

1213

At least 80% of the revenues will be used to reduce the outstanding government debt, thus reducing the borrowing needs

Expected privatisation revenues

Privatisation Programme

(EUR millions)2006 2007 2008 2009

Privatisation revenues 1.600,0 800,0 700,0 600,0% GDP 1.1 0.5 0.4 0.3

Privatisation program for 2006-2007

Sectors Pulp and paper Oil and gas Electricity Electricity transmission Portuguese airlines Air navigation public services

Supported by an important privatisation programmeSupported by an important privatisation programme

1313

General government gross debt - 2005

Portuguese fiscal foundationsPortuguese fiscal foundations

Portugal has a lower debt burden than euro area average and better than “core” Europe and other rating peers

Source: European Commission, May 2006

0

20

40

60

80

100

120

GRE ITA BEL GER FRA POR AUS NETH SPA FIN IRE

(As

a %

of

GD

P)

Euro area average = 70.8%

1413




A market-driven borrowing strategy



TOPICS

1513

… … channelling them to the Euro channelling them to the Euro government market …government market …

OT (gross) and BT (net) issuance

Debt structure per instrument

A Euro sovereign issuer with low borrowing needs…A Euro sovereign issuer with low borrowing needs…

0

2

4

6

8

10

12

14

16

18

1998 1999 2000 2001 2002 2003 2004 2005 2006F

EU

R b

illio

n

Fixed-rate OT

Treasury Bills

End of 2005

BT - Treasury Bills12%

Retail (CA)16%

Others6%

OT - Standard Long Term Government

Bonds66%

End of 1998

BT - Treasury Bills3%

Retail (CA)21%

OT - Standard

Long Term Government

Bonds38%

Others38%

1613

Aiming at building up a Portuguese benchmark yield curveAiming at building up a Portuguese benchmark yield curve

A market driven borrowing strategyA market driven borrowing strategy

• Size

• Tradability – Efficient and standard market conditions

The most important driving factor:

LiquidityLiquidity

A market oriented borrowing

strategy

A market oriented borrowing

strategy

Active debt management -

derivatives and buy-backs

Active debt management -

derivatives and buy-backs

Priority to the development of a government benchmark yield curve

Interest rate and refinancing risk management

• Predictability Predictability

• TransparencyTransparency

• AccountabilityAccountability

The main pillars:

1713





2006 Borrowing Programme


TOPICS

1813

Borrowing needs are expected to

be around € 16.5 billion, of which:

• € 9.1 billion of net borrowing

needs

• € 7.1 billion of medium and

long term debt redemptions

Borrowing needs to be met

through:

• € 15 billion by the issuance of

Government Bonds (OT)

• Treasury Bills (BT) net

issuance expected to be

marginal

• € 1.5 billion to be met through

the issuance of non tradable

instruments

Debt Buyback Programme mainly

to reduce the refinancing risk in

2006, therefore with limited impact

on gross borrowing needs

2006 Borrowing programme2006 Borrowing programme

1913

OT issuance in 2006OT issuance in 2006

New OT April 2037 EUR 3 billion through syndication in March plus EUR 1.1 billion through an auction

New OT October 2016 EUR 3 billion through syndication in July

OT April 2011 EUR 3 billion through auctions

OT July 2009 EUR 1 billion through an auction

Already implemented Already implemented

A complete OT/PGB yield curveA complete OT/PGB yield curve

0

1,000

2,000

3,000

4,000

5,000

6,000

OTA

ug07

OT

Jul0

8

OT

Jul0

9

OT

May

10

OTA

pr11

OT

Jun1

1

OT

Jun1

2

OT

Sep

13

OT

Jun1

4

OT

Oct

15

OT

Oct

16

OTA

pr21

OTA

pr37

EU

R m

illio

ns

issued before 2006

issued in 2006

(as of July 31, 2006)

2013

OT 4.20% 15 October 2016OT 4.20% 15 October 2016• Syndicate amount: EUR 3 billion

• Launched via syndicate limited to PD

• Syndicate structure:

-> 80% placed by 5 joint leads through a “pot”

-> 20% placed by 10 co-leads through a co-lead

pot (EUR 300 mln) and retention (EUR 300 mln)

with name give-up to IGCP

• Priced on July 12, 2006 with a reoffer yield of

4.242%:

-> 16.5 b.p. over DBR 4% July 2016

-> 7.4 b.p. below Mid-market swap rate

• Traded on MTS Portugal, EuroMTS,

TradeWeb and BondVision immediately after

• To be reopened through auctions targeting no

less than EUR 5 billion

Final investor breakdown

The new OT Oct 2016 with an internationalised placementThe new OT Oct 2016 with an internationalised placement

Other3%

France22%

Benelux8%

Spain4%

UK37%

Portugal10%

Germany3%

Italy7%

Scandinavia2%

Other Europe4%

Other3%

France22%

Benelux8%

Spain4%

UK37%

Portugal10%

Germany3%

Italy7%

Scandinavia2%

Other Europe4%

Banks47%

Insurance Companies and Pension Funds

14%

Fund Managers33%

Others3%

Hedge Funds3%

Banks47%

Insurance Companies and Pension Funds

14%

Fund Managers33%

Others3%

Hedge Funds3%

2113

OT 4.10% 15 April 2037OT 4.10% 15 April 2037• Syndicate amount: EUR 3 billion

• Launched via syndicate limited to PD

• Syndicate structure:

-> 85% placed by 5 joint leads through a “pot”

-> 15% placed by 10 co-leads through a co-lead

pot (EUR 300 mln) and retention (EUR 150 mln)

with name give-up to IGCP

• Priced on March 15, 2006 with a reoffer yield of

4.123%:

-> 22.5 b.p. over DBR 4% January 2037

-> 1.5 b.p. over Mid-market swap rate

• Traded on MTS Portugal, EuroMTS,

TradeWeb and BondVision immediately after

• To be reopened through auctions targeting no

less than EUR 5 billion

Final investor breakdownOT April 2037 placementOT April 2037 placement

Germany26%

Scandinavia3%

France6%

USA7%

Benelux22%Ireland/UK

24%

Portugal4%

Italy3%

Spain2%

Other 3%

Germany26%

Scandinavia3%

France6%

USA7%

Benelux22%Ireland/UK

24%

Portugal4%

Italy3%

Spain2%

Other 3%

Central Bank1%

Hedge Fund5%

Bank29%

Pension Fund4%

Insurance Company3%

Other1%

Asset Manager57%

Central Bank1%

Hedge Fund5%

Bank29%

Pension Fund4%

Insurance Company3%

Other1%

Asset Manager57%

2213






An efficient and liquid OT market

TOPICS

2313

Full pot

Co-Leads

Joint-Leads

Retention+

Co-lead pot

OT launched through syndication…OT launched through syndication…

Building up an international and diversified investor base

Benchmark size: € 3 billion

Allowing the benchmark OT to be traded in MTS Portugal with quoting obligations from start

… and increased through auctions

OT syndication processOT syndication process

PD are the only underwriters

PD committed to place bonds in high quality investors

IGCP is the active manager

E-book building

OT issuance processOT issuance process OT issuance schedule

Syndicate + 1st

auction

+ 2nd

auction

+ 3rd

auction

EU

R b

illio

n

1 bln

1 bln

1 bln

3

bln

Syndicate + 1st

auction

+ 2nd

auction

+ 3rd

auction

EU

R b

illio

n

1 bln

1 bln

1 bln

3

bln

2413

Participants in MEDIP/MTS PortugalParticipants in MEDIP/MTS Portugal

An efficient and liquid secondary marketAn efficient and liquid secondary market

ABN Amro Bank Banco Espírito Santo Barclays Bank PLCBCP de Investimento BNP Paribas Caixa Geral de Depósitos Citigroup Global Markets CALYONDeutsche BankGoldman Sachs InternationalHSBC FranceLehman Brothers InternationalMorgan StanleySociété GénéraleUnicredit Banca Mobiliare

Fortis Bank

Banco Santander C. HispanoCCCAMCDC IXIS CECACommerzbankCredit Suisse First BostonDresdner Bank JP Morgan SecuritiesLandesbank B-WNomura InternationalWestLB

16 M

arke

t M

aker

s11

Mar

ket

Dea

lers

15 O

EV

T/ P

rimar

y 15

OE

VT

/ Prim

ary

Dea

lers

Dea

lers

All OT listed in Lisbon on MEDIP/MTS Portugal

In parallel quotation with EuroMTS

MEDIP/MTS Portugal a regulated “local” market

Driven by market-making obligations from

Primary Dealers

Market-making obligations in line with other MTS

platforms

Prices spreading over other market segments

Trading spreads within a narrow range and

similar to market peers

Settlement through Euroclear/Clearstream

Prices disclosed in real-time to non participants:

Reuters PT/MTS1 and Bloomberg

Daily turnover, reference prices and a daily fixing

in www.mtsportugal.com

OT secondary market driven by MTS PortugalOT secondary market driven by MTS Portugal

2513

10-year bid-offer spreads10-year bid-offer spreads

An efficient and liquid secondary marketAn efficient and liquid secondary market

5-year bid-offer spreads5-year bid-offer spreads

30-year bid-offer spreads30-year bid-offer spreads 15-year bid-offer spreads15-year bid-offer spreads

Maximum B/O spreads of 4 ticks

0

1

2

3

4

Mar

-05

Apr

-05

May

-05

Jun-

05

Jul-0

5

Aug

-05

Sep

-05

Oct

-05

Nov

-05

Dec

-05

Jan-

06

Feb

-06

Mar

-06

Apr

-06

May

-06

Jun-

06

Jul-0

6

Tic

ks


0

1

2

3

4

5

Mar

-05

Apr

-05

May

-05

Jun-

05

Jul-0

5

Aug

-05

Sep

-05

Oct

-05

Nov

-05

Dec

-05

Jan-

06

Feb

-06

Mar

-06

Apr

-06

May

-06

Jun-

06

Jul-0

6

Tic

ks


0

1

2

3

4

5

6

7

8

9

10

Mar

-05

Apr

-05

May

-05

Jun-

05

Jul-0

5

Aug

-05

Sep

-05

Oct

-05

Nov

-05

Dec

-05

Jan-

06

Feb

-06

Mar

-06

Apr

-06

May

-06

Jun-

06

Jul-0

6

Tic

ks


0

2

4

6

8

10

12

14

16

18

20

Mar

-06

Apr

-06

May

-06

Jun-

06

Jul-0

6

Tic

ks

2613

An efficient and liquid secondary marketAn efficient and liquid secondary market OT Daily average turnover in MTS Portugal and EuroMTS

OT Repo Market Daily Average Turnover

• MTSP OT daily average turnover in

2005 : € 517.5 million

Jan-July 2006 : € 492 million

• A last resort repo window provided

by IGCP to all market makers in

MTSP

Very liquid wholesale cash and repo

segments

0

200

400

600

800

1000

20

00

20

01

20

02

20

03

20

04

J20

05 F M A M J J A S O N D

J20

06 F M A M J J

EU

R m

illio

n

Avg OT - MTS Portugal Avg OT - EuroMTS

0

500

1000

1500

2000

2500

3000J


J 20

03 F M A M J J A S O N DJ


J 20

05 F M A M J J A S O N DJ

2006 F M A M J J

EU

R m

illio

n

0%

100%

200%

300%

400%

500%

600%

700%

800%

900%

as %

of

cash

tu

rno

verDaily average turnover

As % of cash turnover

2713

Highly internationalised and diversified OT marketHighly internationalised and diversified OT market

Banks61%

Central Banks

4%Brokers

8%

Other1%

Other Investment

Funds17%

Pension Funds &

Insurance9%

Other EMU2%

Other non-EMU6%

Netherlands1%

UK34%

Portugal 15%

Belgium & Luxembourg

9%Finland0.5%

Italy6%

Spain4%

France13% Germany

10%

*Turnover with final investors reported by PD (excluding intra-PD trading) - 2005

Around 85% of the turnover* in the OT secondary market is generated Around 85% of the turnover* in the OT secondary market is generated by non-domestic investors by non-domestic investors

2813

10 Years - Asset Swap Spread

15 Years - Asset Swap Spread

Good spread performance … Good spread performance …

-23-20-17-14-11

-8-5-2147

10131619

Ma

y-0

4

Jun

-04

Jul-

04

Au

g-0

4

Se

p-0

4

Oct

-04

No

v-0

4

De

c-0

4

Jan

-05

Fe

b-0

5M

ar-

05

Ap

r-0

5

Ma

y-0

5

Jun

-05

Jul-

05

Au

g-0

5

Se

p-0

5

Oct

-05

No

v-0

5D

ec-

05

Jan

-06

Fe

b-0

6M

ar-

06

Ap

r-0

6

Ma

y-0

6

Jun

-06

Jul-

06

b.p

.

Portugal Italy France

-26-22

-18-14

-10-6

-22

610

14

Ma

y-0

4

Jun

-04

Jul-

04

Au

g-0

4

Se

p-0

4O

ct-0

4

No

v-0

4

De

c-0

4

Jan

-05

Fe

b-0

5M

ar-

05

Ap

r-0

5

Ma

y-0

5

Jun

-05

Jul-

05

Au

g-0

5

Se

p-0

5O

ct-0

5

No

v-0

5

De

c-0

5

Jan

-06

Fe

b-0

6M

ar-

06

Ap

r-0

6

Ma

y-0

6

Jun

-06

Jul-

06

p.b

.

Portugal Germany Italy Belgium

2913

BT issuance since July 2003

BT programme in steady-state since 2004

BT outstanding at the end of 2005 at around €13 billion

BT net issuance in 2006 expected to be relatively marginal

The Portuguese Treasury bill marketThe Portuguese Treasury bill market

0

500

1000

1500

2000

2500

3000

Se

p 0

6

No

v 0

6

Jan

07

Ma

r 0

7

Ma

y 0

7

Jul 0

7

Maturities

Ou

tsta

nd

ing

(E

UR

mln

)

Outstanding at August 4, 2006 Final outstanding per line

3013

2006 BT auction programme2006 BT auction programme

• A new 12-month BT to be issued every two months

• Lines to be reopened with 6 and 3-month remaining maturity

• Size per line according to international liquidity standards


0

250

500

750

1000

1250

W1 W3 W1 W3 W1 W3 W1 W3 W1 W3 W1 W3 W1 W3 W1 W3 W1 W3 W1 W3 W1 W3 W1 W3

Jan 2006 Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec

EU

R m

illio

n

12m 6m 3mNew Lines

3113

A market driven by market making obligationsA market driven by market making obligations

B/o spreads in basis points and quantities in EUR million

BT

B/o spread

(Basis points)Quantity

All buckets 4 10


12-month BT best bid-offer spreads12-month BT best bid-offer spreads

• MTSP daily average turnover in

2005 : €53 million

Jan-July 2006 : €59.1 million

• A last resort repo window provided by IGCP to all market makers

Daily average turnover on MTS Portugal Daily average turnover on MTS Portugal and outstanding of BTand outstanding of BT

0

1

2

3

4

Jul-0

4

Aug

-04

Sep

-04

Oct

-04

Nov

-04

Dec

-04

Jan-

05F

eb-0

5M

ar-0

5

Apr

-05

May

-05

Jun-

05Ju

l-05

Aug

-05

Sep

-05

Oct

-05

Nov

-05

Dec

-05

Jan-

06F

eb-0

6M

ar-0

6

Apr

-06

May

-06

Jun-

06Ju

l-06

b.p.

0

2000

4000

6000

8000

10000

12000

14000

J2003

A SO N D J2004

FMA M J JA SO ND J2005

FMA M J J A SO ND J2006

F MA M J J

Ou

tsta

nd

ing

(E

UR

mill

ion

)

0

10

20

30

40

50

60

70

80

90

Dai

ly a

vera

ge

turn

ove

r (E

UR

mill

ion

)

Daily average turnover of BTOutstanding of BT

3213

** Since July 2003

* The amounts bought by foreign banks in auctions were used as proxy to the amounts bought by foreign investors. In 2006 up to July 31.

An internationalised and diversified An internationalised and diversified

base of investorsbase of investors


Secondary market turnover breakdown by Investor Type ***

Secondary market turnover breakdown by Geography***

Portuguese Treasury bills (BT) placed with domestic and foreign investors (estimate*)

***Turnover with final investors reported by PD (excluding intra-PD trading) - 2005

76.6% 71.4% 78.2% 76.5%

23.4% 28.6% 21.8% 23.5%

0%

20%

40%

60%

80%

100%

2003** 2004 2005 2006

Foreign Domestic

Other EMU2.5%

Finland1.2%

UK11.2%

France19.4%

Germany7.0%

Other non-EMU

13.5%

Portugal 20.7%

Netherlands8.1%

Greece8.3%

Spain2.0%

Italy1.0%

Asia5.0%

Banks40.1%

Brokers3.0%

Private Clients0.6%

Central Banks26.9%

Pension Funds &

Insurance7.0%

Other Investment

Funds18.8%

Money Market Funds3.6%

3313

A complete Treasury bill segment A complete Treasury bill segment

A comprehensive benchmark bond curveA comprehensive benchmark bond curve, and, and

• A liquid yield curve:A liquid yield curve:

• Efficient and liquid government secondary market Efficient and liquid government secondary market

• A market-driven borrowing strategy A market-driven borrowing strategy

A founder of the Euro A founder of the Euro

• Strong support from leading financial intermediariesStrong support from leading financial intermediaries

• AA very large and well-diversified investor base very large and well-diversified investor base

• Offering good relative value and a good spread performanceOffering good relative value and a good spread performance

A European sovereign issuerA European sovereign issuer

3413

Further information on the Portuguese economy can be obtained from:

Tel: +351 21 7923300Fax: +351 21 7993795E-mail:[email protected]

Economic Research and Forecasting Department at the Ministry of Finance

Budget Department

National Statistics Office

Banco de Portugal (Central bank)

Web site: igcp.ptReuters pages: IGCP01

Bloomberg pages: IGCP

Further information on the Portuguese secondary market can be obtained from:

MTS Portugal: www.mtsportugal.com

Reuters pages: PT/MTS1

www.dgep.pt

www.dgo.pt

www.ine.pt

www.bportugal.pt

IGCP:

DISCLAIMERThe information and opinions contained in this document have been compiled or arrived at from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. All opinions and estimates contained in this document are published for the assistance of recipients, but is not to be relied upon as authoritative or taken in substitution for the exercise or judgment by a recipient and, therefore, does not form the basis of any contract or commitment whatsoever. IGCP does not accept any liability whatsoever for any direct or consequential loss arising from any use of this document or its contents.

a euro sovereign issuer an efficient and mature debt market

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