July 2006 Republic of Portugal The Next Step in the Development of the OT Benchmark Curve.

July 2006July 2006July 2006July 2006

Republic of Portugal

The Next Step The Next Step

in the Development of the OT Benchmark Curvein the Development of the OT Benchmark Curve

2

Section 1: New issue summary

• Section 2: Portugal’s Public Finance Reform Programme

• Section 3: Debt management and funding

CONTENTS:CONTENTS:

3

The new OT provides an attractive yield pick-up on asset swap basis versus

technically tight core issues

Portugal has a highly liquid and comprehensive yield curve with a

government bond segment up to 30 years

A very internationalized and diversified base of investors in the OT market

Recent OT issuance into the 30-year has enhanced support for the OT curve

with a broadened investor base

Portugal is committed to having manageable amounts of debt due for

redemption in any year; this reduces refinancing risks and aids secondary

market performance

A new 10-year benchmark OT will complete and consolidate Republic of

Portugal’s comprehensive and liquid yield curve

Key new issue considerationsKey new issue considerations

4

The new benchmark OT 2011

Issuer: Republic of Portugal

(AA-/Aa2/AA)

Initial size: EUR 3 billion

Launch and pricing: TBA

Start of book building: TBA

Maturity: October 15, 2016

Joint-Leads Managers: CGD, Citigroup, Goldman

Sachs, Morgan

Stanley,

SG CIB

Co-Leads: The remaining PD

Issue DetailsOT October 15, 2016

A new Euro benchmark bond to

further complete the Portugal’s

maturity curve and to provide

liquidity for investors

To reach a final size no lower than

EUR 5 billion giving enhanced

liquidity to the OT yield curve

Under market-making obligations

on MTS Portugal and EuroMTS

To be admitted as a benchmark

issue by Tradeweb and Bondvision

The new benchmark OT 2016The new benchmark OT 2016

5

The new OT 2016The new OT 2016

OT/PGB benchmark yield curve

OT issuance in 2006OT issuance in 2006

THE NEXT STEP:THE NEXT STEP: TThe new OT 2016

Until now Syndicated issue of OT 2037Final book distribution

Germany26%

Scandinavia3%

France6%

USA7% Benelux

22%Ireland/UK24%

Portugal4%

Italy3% Spain

2%Other 3%

OT April 2037 -> EUR 3 billion launched via syndication in

March with a strong participation of international investors plus

EUR 1.1 billion through auction

OT April 2011 -> EUR 3 billion through auctions

OT July 2009 -> EUR 1 billion through auction

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

OTA

pr21

OTA

pr37

EU

R m

illio

ns

6

• Section 1: New issue summary

Section 2: Portugal’s Public Finance Reform Programme

• Section 3: Debt management and funding

CONTENTS:CONTENTS:

7

• 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

8

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

9

Gro

ss d

ebt

Bu

dg

et

def

icit

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 p

erce

nta

ge

of

GD

P)

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(A

s a

per

cen

tag

e o

f G

DP

)

Forescast

10

Portuguese economy on recovery pathR

eal

GD

P g

row

thM

on

thly

Co

inc

iden

t In

dic

ato

r

Eco

no

mic

Sen

tim

ent

Ind

icat

or

Source: Bank of Portugal

Source: SGP (December, 2005)


Har

mo

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

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

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

2004 2005 2006

(%, Y

oY

ch

an

ge

)

Portugal

Euro area

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6


2004 2005 2006

82

84

86

88

90

92

94

96

98


11

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

12

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

13

… 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

14

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

15

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%

16

CONTENTS:CONTENTS:

• Section 1: New issue summary

• Section 2: Portuguese Public Finance Reform Programme

Section 3: Debt management and funding

17

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:

18

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 scheduleOT issuance schedule

Syndicate + 1stauction

+ 2ndauction

+ 3rdauction

EU

R b

illi

on

1 bln

1 bln

1 bln

3bln

19

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/

Prim

ary

15 O

EV

T/

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

20

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

An efficient and liquid secondary marketAn efficient and liquid secondary market(as of June 16, 2006)

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

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

Tic

ks


0

2

4

6

8

10

12

14

16

18

20

Mar

-06

Apr

-06

May

-06

Jun-

06

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

Tic

ks

21

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-June 2006 : € 531.3 million

• A last resort repo window provided by

IGCP to all market makers in MTSP

Very liquid wholesale cash and repo segments

J200

5

J200

6

0

500

1000

1500

2000

2500

3000

J 20

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

2003 F M A M J J A S O N D

J 20

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

2005 F M A M J J A S O N D

J 20

06 F M A M J*

EU

R m

illio

n

0%

100%

200%

300%

400%

500%

600%

700%

800%

as

% o

f c

as

h t

urn

ov

erDaily average turnover

As % of cash turnover

0

200

400

600

800

1000

2000

2001

2002

2003

2004

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

EU

R m

illi

on

EuroMTS

MTS Portugal

(as of June 16, 2006)

22

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

23

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.

July 2006 Republic of Portugal The Next Step in the Development of the OT Benchmark Curve.

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