A Euro Sovereign Issuer An efficient and mature debt market
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Transcript of A Euro Sovereign Issuer An efficient and mature debt market
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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 …
• … through structural reforms
• A market-driven borrowing strategy
• 2006 Borrowing Programme
• An efficient and liquid OT market
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)
Source: Bank of Portugal
Ha
rmo
niz
ed
IC
P
Source: Bank of Portugal
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
II III IV I II III IV Jan Feb Mar Apr May June
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 June
2004 2005 2006
(%, Y
oY c
hang
e)
Portugal
Euro area
813
• 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
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 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
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
• 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
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
• 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
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
Maximum B/O spreads of 5 ticks
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
Maximum B/O spreads of 10 ticks
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
Maximum B/O spreads of 20 ticks
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
2002 F M A M J J A S O N D
J 20
03 F M A M J J A S O N DJ
2004 F M A M J J A S O N D
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
The Portuguese Treasury bill marketThe Portuguese Treasury bill market
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
The Portuguese Treasury bill marketThe Portuguese Treasury bill market
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
The Portuguese Treasury bill marketThe Portuguese Treasury bill market
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.