IGCP Portuguese Debt Management Office 13 Republic

IGCP – Portuguese Debt Management Office 13 Republic of Portugal June 2007

IGCP – Portuguese Debt Management Office 13 IGCP – Public Debt and Cash Management IGCP’s mission is to manage, in an integrated way, the cash balances and the direct debt of the Republic of Portugal, such a way as: • To fulfil the borrowing requirements of the Republic in a stable manner; • To minimize the cost of the government debt on a long-term perspective, subject to the risk strategies defined by the Government; • To optimize public sector cash management. While providing a service of public interest, the IGCP develops its activities based on principles of efficiency, transparency and accountability.

IGCP – Portuguese Debt Management Office 13 IGCP – Institutional Framework ü ü Public Debt Law Budget (net borrowing limits) Parliament Government ü ü ü Guidelines approved Annual financing strategy approved Direct information on demand ü Audit Court ü Annual financing programme proposal Guidelines proposal Quarterly report ü IGCP The debt management agency Advisory Board 3

IGCP – Portuguese Debt Management Office 13 IGCP – Public Debt and Cash Management The IGCP is subject to the authority and supervision of the Minister of Finance. Statutory bodies: • Chairman of the Board of Directors • Advisory Board • Audit Committee The Board of Directors comprises the chairman and two executive directors, all of them appointed by the Council of Ministers for a mandate of three years. The Board is empowered to discharge all duties and to take all actions committed to the IGCP under the terms of the Law.

IGCP – Portuguese Debt Management Office 13 IGCP – Public Debt and Cash Management Advisory Board: • Chairman of the Board of Directors • A member of the Board of Directors of the Bank of Portugal • Four experts in economic and financial matters, appointed by the Council of Ministers Its duties include expressing opinion on the annual financing program for the central government and on the annual report on public financing and public debt management.

IGCP – Portuguese Debt Management Office 13 IGCP – Public Debt and Cash Management The Audit Committee is composed of a chairman and two permanent members, appointed by the Minister of Finance, with the Chairman being nominated by the Inspectorate-General of Finances, while one of the permanent members should be an official chartered accountant. The Audit Committee is responsible for following up and controlling the financial management of the IGCP and the Stabilisation Fund of the Public Debt, as well as supervising the respective accounting procedures.

IGCP – Portuguese Debt Management Office 13 IGCP – Public Debt and Cash Management The activity of IGCP is subject to supervision by the Audit Court. The annual auditing by the Portuguese Audit Court focuses on üpublic debt accounting üdebt management procedures, and ümanagement model There can also be exceptional auditing procedures, whenever justified.

IGCP – Portuguese Debt Management Office 13 IGCP – Public Debt and Cash Management IGCP also reports directly to the Parliament: ü Whenever requested by the Budget and Finance Committee (usually once a year) ü Information on outstanding debt, risk profile, borrowing programme, secondary market organisation and performance

IGCP – Portuguese Debt Management Office 13 IGCP – Public Debt and Cash Management However being part of the public administration, the IGCP employees are not under the civil servants regime (labour contracts are established under the general labour law) and a corporate model has been adopted for its internal organization. There is a Markets’ Committee, composed by the Directors, the heads of the Debt and Operations Departments and of the Financial Control, Research, Tradingroom and Markets units, that meets once a week to analyse market developments, treasury forecasts, the position of the real debt portfolio against the benchmark and to define guidelines for the activity during the next week. The Financial Control unit is responsible for all aspects related with risk and performance evaluation, internal control, procedures definition and internal auditing.

IGCP – Portuguese Debt Management Office 13 IGCP – Public Debt and Cash Management A flexible, entrepreneurial-like organisation Audit Committee Board of Directors Advisory Board Market Committee Legal Affairs Debt Management Department Operations Department Issuing and Markets Unit Settlements Documentation Trading Room Accounting Financial Control Research and Reporting IT Systems Retail Debt Administrative

IGCP – Portuguese Debt Management Office 13 Annual Borrowing Programme Debt Management Guidelines ü Reflect Government’s strategic guidance on debt management, through: üRisk management model üReviewed regularly (ca. 3 years) üAbsolute and indicative limits on risks üBenchmark portfolio ü Set limits, rules, methods and reporting requirements 11

IGCP – Portuguese Debt Management Office 13 Annual Borrowing Programme Borrowing Needs Arising from ü ü Budget deficit Debt servicing Financing Strategy ü Main objective • Minimizing the debt cost in a longterm perspective and non-exposure to excessive risks ü Achieved through • Issuance strategy • Reduction of debt outstanding • Management of cash balances • Limitation and control of risks (including refinancing, credit and interest-rate risks) 12

IGCP – Portuguese Debt Management Office 13 Portugal: A European sovereign issuer ü A founder of the Euro ü A small sovereign issuer in a large domestic market ü Increased competition ü Elimination of currency risk ü Decreasing financing needs expected ü Active debt management ü A market driven approach

IGCP – Portuguese Debt Management Office 13 ü Portugal has a lower debt burden than euro area average and better than “core” Europe and other rating peers General government gross debt - 2006 Source: Eurostat (latest figures according to Excessive Deficit Procedures)

ü channelling them to the Euro government market Debt structure per instrument Gov. Bonds (gross) and T. Bills (net) issuance 20 15 EUR billion IGCP – Portuguese Debt Management Office 13 A Euro sovereign issuer with low borrowing needs 10 5 0 -5 1998 1999 2000 2001 2002 Fixed-rate Gov. Bonds 2003 2004 2005 2006 2007 F Treasury Bills 15

IGCP – Portuguese Debt Management Office 13 A market driven borrowing strategy ü Aiming at consolidating an efficient and transparent market The most important driving factor: Liquidity • • Size The strategic pillars: • • Predictability • Accountability Transparency Tradability – Efficient and standard market conditions ü Priority to the development of a government benchmark yield curve ü Interest rate and refinancing risk management A market oriented borrowing strategy Active debt management derivatives and buy-backs 16

IGCP – Portuguese Debt Management Office 13 Following best practices The role of Financial Intermediaries Advisors To fulfil the liquidity criteria § Concentration of the annual borrowing needs in the OT market Partners To overcome market inefficiencies Main Actors To widen the investor base § Development of primary § Consolidation of an § Fostering an efficient and liquid secondary market international and diversified base of investors market techniques 17

IGCP – Portuguese Debt Management Office 13 An internationalised and diversified investor base ü Around 82% of the turnover* in the OT secondary market is generated by non-domestic investors *Turnover with final investors reported by Primary Dealer (excluding intra-Primary Dealer trading) - 2006 18

IGCP – Portuguese Debt Management Office 13 Tel: +351 21 7923300 Fax: +351 21 7993795 E-mail: info@igcp. pt Further information on the Portuguese economy can be obtained from: Economic Research and Forecasting Department at the Ministry of Finance www. dgep. pt Budget Department www. dgo. pt National Statistics Office www. ine. pt Web site: igcp. pt Reuters pages: IGCP 01 Bloomberg pages: IGCP Further information on the Portuguese secondary market can be obtained from: MTS Portugal: Banco de Portugal (Central bank) www. bportugal. pt www. mtsportugal. com Reuters pages: PT/MTS 1

IGCP – Portuguese Debt Management Office 13 DISCLAIMER The 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.