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					         Kingdom of Spain

Economic Policy and 2010 Funding
            Strategy

    Secretary of State for the Economy
               February 2010
• Highlights

• The long growth cycle and the crisis

• Fiscal consolidation and structural reform

• Funding Strategy of the Kingdom of Spain




                  ~2009~
                                               1
                      Highlights
• Long growth cycle previous to the international crisis
• Important challenges ahead: Unemployment and deficit,
consequence of the crisis but also symptoms of underlying
structural shortcomings
• The Spanish Government is determined to act:
   • Fiscal consolidation: A cut of 5.7% of GDP in structural
     primary deficit in 2010-2013
   • Structural reforms to boost potential GDP: Sustainable
     Economy, Bank Reorganisation, Pensions, Labour Market
• Strengths: Sound financial system, low Debt/GDP,
  institutional ability for reform
                                                                2
• Highlights

• The long growth cycle and the crisis

• Fiscal consolidation and structural reform

• Funding Strategy of the Kingdom of Spain




                                               3
             1994-2008: Convergence and Debt reduction

• GDP per capita has leapt forward, exceeding the average of EU-25
• Fiscal rigour during the good times allowed debt to GDP to be more
  than halved

                                                 GDP                                                                                Debt to GDP
                    (Year on year real growth rates)                                                                                (% nominal GDP)

                                                                                                         80%
6%                                                                                                                                                Euro-area
                                                                              Spain
4%                                                                                                       70%
2%                                                                                                       60%
                           Euro-area
0%
                                                                                                         50%
-2%                                                                                                                                                             Spain
                                                                                                         40%
-4%
-6%                                                                                                      30%
                                                                                                               2000

                                                                                                                      2001

                                                                                                                             2002

                                                                                                                                    2003

                                                                                                                                           2004

                                                                                                                                                  2005

                                                                                                                                                         2006

                                                                                                                                                                2007

                                                                                                                                                                        2008

                                                                                                                                                                               2009
      1996

             1997
                    1998

                            1999

                                   2000

                                          2001

                                                 2002
                                                        2003

                                                               2004

                                                                      2005

                                                                             2006
                                                                                    2007

                                                                                           2008

                                                                                                  2009




Source: Eurostat.                                                                                        Source: Eurostat.
                                                                                                                                                                                      4
                 Investment binge: housing and beyond

  • What has fuelled domestic demand is a soaring investment rate,
    with the national savings rate staying close to Eurozone average
  • The housing boom is part of the story, but not the whole story


                       Savings rate                                     Investment rate vs. Savings rate
                       (% nominal GDP)                                                          (% nominal GDP)
                                                            34
 30

 25
                                                            30

 20
                                                            26

 15                                                         22

 10                                                         18
                                                                 1999

                                                                         2000

                                                                                2001

                                                                                         2002

                                                                                                 2003

                                                                                                        2004

                                                                                                               2005

                                                                                                                      2006

                                                                                                                             2007

                                                                                                                                    2008

                                                                                                                                           2009
       Belgium      Germany     Spain      France   Italy

                         2000   2005    2009*                                          Savings rate            Investment rate
Source: Eurostat.
                                                            Source: Eurostat.
* 2009Q3                                                                                                                                          5
       Investment binge: housing and beyond
• The residential real estate sector grabbed a non-sustainable share
  of GDP and employment…

        Construction Sector: Gross Value Added and Employment
                     (% Total Value Added and of Total Employment)
            14
            13
            12
            11
            10
             9
             8
             7
             6
                 1995
                 1996
                 1997
                 1998
                 1999
                 2000
                 2001
                 2002
                 2003
                 2004
                 2005
                 2006
                 2007
                 2008
                 2009
                         Full-time equivalent employees      Gross Value Added
             Source: National Statistics Institute, Spain.
                                                                                 6
                                Investment binge: housing and beyond
 • …but Spain has also invested heavily in equipment, infrastructure
   and Research and Development


           Investment in equipment
       Investment in equipment (average growth, 1995-2008, %)
       (average growth, 1995-2008 in percent)                                                                                   Public Investment
                                                                                                    5.0                                       (% of GDP)
10
 8                                                                                                  4.0

 6                                                                                                  3.0
 4                                                                                                  2.0
 2                                                                                                  1.0
 0                                                                                                  0.0
                                                                      UK
                                                    EU-15
                                                    EU-15
                                                    EU-15




                                                                           Italy
                                                                           Italy
                                                                           Italy
        Germany

                  Netherlands




                                                            Denmark




                                                                                            Spain
                                          Austria
                                          Austria
                                          Austria
                                Finland
                                Finland
                                Finland




                                                                                   France
                                                                                   France
                                                                                   France




                                                                                                           1995
                                                                                                                  1996
                                                                                                                         1997
                                                                                                                                1998
                                                                                                                                       1999
                                                                                                                                               2000
                                                                                                                                                      2001
                                                                                                                                                             2002
                                                                                                                                                                    2003
                                                                                                                                                                           2004
                                                                                                                                                                                  2005
                                                                                                                                                                                         2006
                                                                                                                                                                                                2007
                                                                                                                                                                                                       2008
                                                                                                          EU-27          GERMANY                FRANCE              ITALY           UK          SPAIN

Source: Eurostat.
     Source: Eurostat

                                                                                                                                                                                                              7
                                      Intensive in employment
   • Residential construction attracted low skilled labour, dragging
     productivity lower
   • Labour supply matched this demand with the help of immigration
     flows

                   Active population                                                    Labor productivity
       (Growth rates from 2005Q1 to 2009Q3)
                                                                                         (Relative to EU-27, PPP)
 12%                                                             107
 10%                                                             106
  8%                                                             105
                                                                 104
  6%
                                                                 103
  4%
                                                                 102
  2%                                                             101
  0%                                                             100
                    Germany




                                               Italy
                              Spain



                                      France




                                                       Kingdom
         Belgium




                                                                         1999
                                                                                2000
                                                                                       2001
                                                                                              2002
                                                                                                     2003
                                                                                                            2004
                                                                                                                   2005
                                                                                                                          2006
                                                                                                                                 2007
                                                                                                                                        2008
                                                                                                                                               2009
                                                        United




Source: Eurostat. Labor Force Survey.                                                                                                                 8
                                                                 Source: Eurostat. Labor Force Survey.
                                                     Cost competitiveness
   • Loss of competitiveness has been moderate in the tradable sector
   • Nominal divergence stems from non-tradables (where the bulk of
     the adjustment is taking place)


                Unit labour cost index                                                                      Manufacturing ULC index
               (Relative to eurozone 1999=100)                                                              (Relative to eurozone 1999=100)
125                                                                                       140
120                                                                                       130
115                                                                                       120
110                                                                                       110
105                                                                                       100
100                                                                                        90
 95                                                                                        80
                                                                                                  1999
                                                                                                         2000
                                                                                                                 2001
                                                                                                                        2002
                                                                                                                                2003
                                                                                                                                       2004
                                                                                                                                               2005
                                                                                                                                                      2006
                                                                                                                                                             2007
                                                                                                                                                                    2008
                                                                                                                                                                           2009
        1999
                2000
                        2001
                               2002
                                       2003
                                              2004
                                                      2005
                                                             2006
                                                                    2007
                                                                           2008
                                                                                  2009




                       Spain          Italy          Germany           France                                   Spain          Italy          Germany           France
Source: Eurostat.                                                                                                                                                                 9
                                                                                         Source: Eurostat
       Exports show underlying improvement in supply
  • In spite of brisk                                     domestic              demand              and             waning          price
    competitiveness…
  • …Spain's market shares have outperformed most of peers


      Share in world merchandise exports                                       Share in world exports of services*
                       (Index 2000=100)                                 150                        (Index 2000=100)
120

110
                                                                        125
100

90                                                                      100

80
                                                                        75
70

60                                                                      50
  2000   2001   2002   2003   2004   2005   2006   2007   2008   2009         2000   2001   2002     2003    2004    2005   2006   2007     2008

            Spain       Germany        France      United States                        Spain      Germany      France      United States

Source: International Monetary Fund.                                          Source: World Trade Organisation.
                                                                              * Services other than transportation and travel.
                                                                                                                                                   10
   Services Exports’ market share has increased
                   significantly
• Among others, services related to architecture, construction and
  engineering have more than doubled market share
                                            Share of service exports in the OCDE, by service

                                                                                                                                                                                       10
                                                                                                                                          2000
                                                                                                                                          2007
                                                                                                                                                                                       8


                                                                                                                                                                                       6


                                                                                                                                                                                       4


                                                                                                                                                                                       2


                                                                                                                                                                                       0
                                  Tourism




                                                                                                                                                                          Government
         Total




                                                                                                            Information
                                                                                    Insurance




                                                                                                                                                          Entertainment
                                                                                                Financial
                 Transportation




                                                                                                                          Royalties and



                                                                                                                                           Professional
                                                Communications




                                                                                                                                            services to
                                                                 and engineering
                                                                   Architectural,




                                                                                                               services
                                                                   construction,




                                                                                                                                               Other
                                                                                                                             patents
                     services




         Source: OECD.                                                                                                                                                                      11
            FDI flows have increased significantly
• Outward FDI stock per capita has grown faster in Spain than in
  the Eurozone
• Remains a major destination of international investment

      Outward FDI stock per capita                       Top receivers of FDI in 2008
          relative to Eurozone                                                (Stock in millions of US $)
                                              2500000
  0.90
                                              2000000
  0.85
  0.80                                        1500000


  0.75                                        1000000

  0.70                                         500000

  0.65                                             0




                                                                                                                                Germany




                                                                                                                                                      UK




                                                                                                                                                                    US
                                                                               China




                                                                                                Belgium
                                                                                       Canada




                                                                                                                                          Hong Kong




                                                                                                                                                           France
                                                        Italy




                                                                                                                  Netherlands
                                                                                                          Spain
                                                                Switzerland
  0.60
         2002 2003 2004 2005 2006 2007 2008

Source: World Investment Report 2009
                                                    Source: World Investment Report 2009
                                                                                                                                                                         12
            The crisis prompts an abrupt adjustment
 • Rapid downsizing of residential sector: output, L (mainly in
   temporary contracts)
 • Ripple effects on employment in other sectors

               Unemployment rate
20                     (In percent)
                                                                     Sectoral employment
16                                                                        (total number)
                                                                       july 2008     sept 2009        dif        %
                                                    Total              19.382.121      17.935.095   -1.447.026       (100)
12
                                                      Construction       2.361.177      1.752.157    -609.021    (42,1)
                                                      Industry           2.731.068      2.377.211    -353.857    (24,5)
 8                                                    Services         13.150.027      12.599.061    -550.966    (38,1)

                                                    Sources: Eurostat. Labor Force Survey.
 4
     2005    2006       2007       2008    2009
            Spain        Euro area (16 countries)
Sources: Eurostat. Labor Force Survey.
                                                                                                                        13
                 Changes in sectoral and external balances
     • Large swing in private sector balance: plummeting Investment and
       soaring Savings
     • Government Deficit jumps, but 2.5 points of GDP are one-off
     • Current Account deficit has halved in 2009
                                                        Sectoral balances
                                                           (% of GDP)

                                                         Public Sector Balance
                            8                                                            6,5
                            6                            Private Sector
                            4                            Balance
                                          1,9
                            2
                        %   0
                           -2
                           -4
                           -6                                   -4,1
                                                                       -5,0
                           -8
                          -10
                          -12                   -11,0                            -11,4
                          -14
                                           2007                   2008            2009

Source: National Statistics Institute, Spain.                                                  14
• Highlights

• The long growth cycle and the crisis

• Fiscal consolidation and structural reform

• Funding Strategy of the Kingdom of Spain



                                               15
      Policy Strategy for Sustainable Growth

• Prudent Macroeconomic Scenario 2010-2013
• Agreement on Fiscal Consolidation to bring the deficit
  back to 3% in 2013
• Structural Reforms:
     • Structural Reforms in the goods markets
     • Public Pensions System
     • Labour Market
     • Banking sector Restructuring



                                                           16
            The Government’s Macroeconomic scenario

  • The output gap will be closed by 2013, after peaking in 2010
  • External demand contribution to GDP will gradually wane as
    domestic demand gathers steam
  • Potential growth will recover from a trough of 0.6% in 2010 to
    1.6% in 2013

Macroeconomic scenario 2009-2013                    2009    2010   2011   2012   2013
(Growth rate in percent)
GDP                                                 -3.6    -0.3   1.8    2.9    3.1
Final Consumption Expenditure                        -2.4    0.3    1.7    2.2    2.1
Gross Fixed Capital Formation                       -15.7   -6.5    0.3    4.2    5.9
National Demand (contribution to GDP growth)        -6.4    -1.4   1.4    2.6    3.0
Exports of Goods and Services                       -12.4    2.8    5.2    6.9    7.4
Imports of Goods and Services                       -18.7   -1.3    3.7    5.8    6.8
External demand (contribution to GDP growth)        2.8     1.1    0.4    0.3    0.1
Source: Annual update of the Stability Programme.




                                                                                        17
                                  Fiscal consolidation strategy


  • Substantial reduction in Spending and moderate increase
    in Revenues
  • Already in 2010 a 2.2% cut in structural deficit



Fiscal Adjustment Path 2009-2013                    2009    2010   2011   2012   2013
(Growth rate in percent)
GDP                                                  -3.6   -0.3   1.8    2.9    3.1
General Government Budget Balance (% of GDP)        -11.4   -9.8   -7.5   -5.3   -3.0
General Government Gross Debt (% of GDP)            55.2    65.9   71.9   74.3   74.1
Source: Annual update of the Stability Programme.




                                                                                        18
   Starting and final points of fiscal consolidation

• Temporary measures (changes in tax collection, one off
  investment funds) account for 2.4% points of GDP in 2009’s total
  deficit
• Total size of fiscal policy adjustment (structural terms): 5.7% of
  GDP


        Fiscal position                                     2009    2013
        General Government Balance (1)                      -11,4      -3
        Cyclical component (2)                               -1,4       0
        Interest payments (3)                                -1,9    -3,1
        Temporary measures (4)                               -2,5       0
        Structural Primary Balance (1)-(2)-(3)-(4)           -5,6     0,1
        Source: Annual update of the Stability Programme.




                                                                            19
                              Fiscal restraint measures
Measures adopted and announced (% of GDP)
                                                            Revenues   Expenditures
              VAT                                              0.7
              Excise Taxes                                     0.3
              400€ Tax Rebate Reform                           0.4
2010 Budget
              Savings Tax Reform                               0.1
              SME Corporate Tax Reform                        -0.1
              Government Expenditure                                       -0.8
              Additional cut in 2010 Expenditure                           -0.5
New Measures* Central Government Austerity Plan 2011-2013                  -2.6
              Regional and local government Spending cuts                  -0.5
Source: Annual update of the Stability Programme.


• Restraint in wage outlays for all public administrations through:
           • 10% replacement rate
           • No new temporary hiring
           • Strong moderation in wages
• Sizable cuts in investment, transfers and subsidies

                                                                                      20
                               Can we implement this?
• We have done it in the past, which proves our compromise, the
  quality of our public finances, and the success of our fiscal
  discipline.
• Shared commitment to fiscal discipline and margin to secure
  further reductions in the deficit
           Net Lending (+)/Borrowing (-) of General Government
               4.0                                         (% nominal GDP, EDP)
               2.0
               0.0
              -2.0
              -4.0
              -6.0
              -8.0
             -10.0
             -12.0
             -14.0
                     1995

                            1996

                                   1997

                                          1998

                                                 1999

                                                        2000

                                                               2001

                                                                      2002

                                                                             2003

                                                                                    2004

                                                                                           2005

                                                                                                  2006

                                                                                                         2007

                                                                                                                2008

                                                                                                                       2009

                                                                                                                              2010*

                                                                                                                                      2011*

                                                                                                                                              2012*

                                                                                                                                                      2013*
      * Annual update of the Stability Programme.                                                                                                             21
                                           Debt dynamics

• Even after the impact of strong stabilisation policies, Spain's Debt
  to GDP is significantly lower that the Eurozone average

        Gross Debt-to-GDP (%)                                                      Gross Debt-to-GDP (%)
                  2000-2010                                                                   2010F
90                                                                 125.0
           France
80
           Germany                                                 112.5
                                                                                  Eurozone
           Spain                                                   100.0
                                                                               Average: 84.0%
70                                                                  87.5
                                                                    75.0
60                                                          65.9
                                                                    62.5
                                                                    50.0
50                                                   55.2
                                                                    37.5
40                                                                  25.0
                                              39.7
                                                                    12.5
30                                                                   0.0
     2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010                Spain   Ireland   France   Germany   Italy   UK   USA


 Sources: European Commission, Annual update of the Stability Programme and International Monetary Fund.
                                                                                                                                   22
Lowest interest burden within affordable limits
         Ratio of interests to GDP of General Government
                               (% nominal GDP, EDP)
    13

    11

     9

     7

     5

     3

     1




          *

          *
        95

        96

        97

        98

        99

        00

        01

        02

        03

        04

        05

        06

        07

        08

       09

       10
     19

     19

     19

     19

     19

     20

     20

     20

     20

     20

     20

     20

     20

     20

     20

     20
              Spain       Germany         France        Belgium       Italy   UK

     Source: European Commission.
     * European Economic Forecast Autumn 2009, European Commission.
                                                                                   23
       Structural Reforms in product markets


• Improving the institutional environment for business: by
  modernizing and simplifying government activities as well as
  increasing general government discipline
• Fostering competitiveness: by reducing the administrative
  burden of creating companies and reducing red tape
• Fostering modernization: promoting sectors that are at the base
  of economic activity (R&D, innovation and training), improving
  support for their integration into the overall value chain, and
  facilitating the internationalization of businesses
Estimated impact on GDP ⇨ + 0.32% in Potential GDP


                                                                    24
             Residential Real Estate Sector

• Phasing out fiscal incentives for housing ownership from
  2011 (deduction of mortgage payments)
• Removing barriers to the development of the rental market:
  • Same fiscal treatment than ownership
  • Creation of REITS
  • Legal changes to strengthen certainty for landlords
• Tax Incentives for refurbishment provide some support




                                                               25
                                                                                                             26




                                                                                        9 bn€ capital- 27
Preventive financial support measures


                                        Reorganization




                                                                                         bn € guaranteed
                                        reorganisation
                                         enhancement




                                                                                       funding authorized.
                                            Capital




                                                                        FROB




                                                                                          Independent
                                             and




                                                                                           funding and
                                                                                          management
                                                                                       M&A banking arm
                                                                                        of supervisor
                                                                                       20 bn € since 2007
                                          stimulus
                                          stimulus
                                           Credit
                                           Credit




                                                                               lines
                                                                      ICO




                                                                                          Risk sharing
                                                                                       Second tier funding
                                                                                       Extended 30 June
                                                                     guarantees        2010. But markets
                                                                       (2008-
                                             Liquidity enhancement




                                                                        2009)
                                                                                             open
                                                                        Bank
                                            Liquidity enhancement



                                                                                       48 bn€, around 150
                                                                                             bonds
                                                                                        De facto, phased
                                                                                              out.




                                                                        FAAF funding
                                                                                            19.3 bn€
                                                                                          High quality
                                                                                           collateral
     The financial system remains resilient


• Main source of perceived vulnerability regards losses
  stemming from lending to real estate developers
• Bank of Spain stress test: Operating income over 3
  years is able to absorb losses of 40% of the portfolio
  of lending to real estate developers.
• Extreme assumptions of stress test: PD of 40%(3
  times the peak of 1993) and LGD of 100 % (highly
  implausible)



                                                           27
FROB: a tool for restructuring the banking sector
Rationale for the initiative                  Governance

- Overcoming fragmentation         in   the   - Independent management.
savings and banks sector.
                                              - Strong accountability to Parliament.
- Achievement of economies of scale to
digest low interest margins and real          - Authorized by DG Competition.
estate impact.



 Asset Operations                             Funding

 - Support to integration processes subject   - Public-private mix of capital (9 bn€).
 to   conditions   set   by the banking
 supervisor.                                  - Agency-like     funding       programme
                                              coordinated     with    the       sovereign
 - Instrumented   through   convertible       programme.
 preference shares with market-oriented
 remuneration.



                                                                                            28
                 Pension System Reform

Proposed Measures:
  • A progressive increase in the retirement age (to 67
    years)
  • Strengthening relationship between contributions and benefits
  • A more flexible relationship between complementary social
    security and the public system
  • Possible adjustment of other parameters of the current system


Expected Results: Sustainability of the pension system



                                                                    29
                 Labour Market Reform

• Five main guidelines:


  • Stability in employment, by reducing market segmentation
  • Reform of Collective Bargaining system
  • Incentives for young workers’ employment and education
  • Promotion of the integration of women in the labour market
  • Worker intermediation and greater control of temporary
    occupational disability claims




                                                                 30
• Highlights

• The long growth cycle and the crisis

• Fiscal consolidation and structural reform

• Funding Strategy of the Kingdom of Spain




                                               31
        Highlights of Funding Strategy
• Significant reduction in net funding requirements and
persistence of sound risk metrics
• Liquidity, transparency and predictability will continue
as guiding principles for the execution of our auction program
• As for syndications, timing is dictated by the limit size of the
line to be replaced (16.5 bn for longer tenors) and market
conditions.
• Innovations for 2010: 18-month T-bills reappear, Euro
inflation linker still a project
• Maintain our stable and diversified investor base


                                                                     32
                              The funding strategy


Tesoro Funding in 2010
(Billion euro)
1: Funding requirement = Net Issuance                         76.8
2: Redemptions bonds 2010                                     35.4
3: Net issuance medium long term                              61.6
4 = 2 + 3 Gross Issuance Medium-Long Term                     97,0
5: Net Increase T-Bills                                       15.2
6: Assumption of RTVE debt                                    1.5
7 = 3 + 5 + 6: Net change outstanding debt                    78.3
8: Forecast Outstanding Central Government Debt at end 2010   553.5
Source: General State Budgets Bill 2010




                                                                      33
         Funding programme in perspective

• Cut in Net Issuance: lower cash deficit and no exceptional
  increase in net financial assets

                       Funding Programme. 2010 vs. 2009
            140                       (Net issuance in billion Euro)
            120          116.7
                                                                                2009     2010
            100
                                                                               82.3
                                   76.8
            80
                                                                                       61.6
            60

            40                                             34.4

            20                                                    15.2

             0
                    Total Net Issuance                Letras del Tesoro net Medium & long term
                                                              issues           net issues*
              (*) Includes foreign currency issues.

              Source: Dirección General del Tesoro y Política Financiera.                        34
                    Short-term funding

• Net issuance in 2009 in line with initial announcement: 34.4 bn€.
  Gross issuance breakdown:
  • 3-month Letras: 19.7 bn€
  • 6-month Letras: 31.6 bn€
  • 12-month Letras: 58.0 bn€


• Innovations in 2010:
  • Calendar change: 3- and 6-month Letras auction 4th Tuesday
  • 18-month T-bills relaunched: auction 3rd Tuesday




                                                                      35
              Medium- and long-term funding
• Gross issuance: 2009 overshooting (ca. 25 bn €) due to higher than
  expected impact of the crisis
• Auction procedures unchanged: Quarterly calendar + potential off-
  the-run lines announced Friday prior to the auction
• Limit size per line: increased to 16.5 bn € for longer lines
• Bonos del Estado:
   • New 5-year benchmark in March
   • Current 3-year benchmark B 2.30% 04/2013 issued until 15 bn €
• Obligaciones del Estado:
   • New 10 year O 4.00% 04/2020 (5 bn €) successfully syndicated in
     January
   • Next syndication a 15 year line, to replace the matured O 4.80% Jan-
     2024), expected for February depending on market conditions
                                                                            36
          Diversification of funding sources
• Recent foreign currency issuance:
  • Eurobond 2.75% March 2012 ($ 1.0 billion)
  • Eurobond 2.00% October 2012 ($ 2.5 billion)
  • Tesoro Público is open to additional foreign currency issuance

• Floating Rate Note 3-Month EURIBOR-10 bps, October 2012
  (€ 3.0 billion). Possible retapping in 2010

• Projects:
  • European inflation-linked issues (HICP-ex tobacco)
  • Schuldschein loans




                                                                     37
Main features of Treasury funding strategy
  600                                  Spanish debt portfolio                                                        554
                                                      (€ billion)
  500                                                                                                         475


  400                                                                                                  358
                                                                                 319 312
                                                                                         307
  300
          229
  200

  100

    0
          1995
                  1996
                         1997
                                1998
                                       1999
                                              2000
                                                     2001
                                                            2002
                                                                   2003
                                                                          2004
                                                                                 2005
                                                                                         2006
                                                                                                2007
                                                                                                       2008
                                                                                                              2009
                                                                                                                     2010 (f)
                 Foreign Currency                    Other         Letras               Bonos y Obligaciones
        Source: Dirección General del Tesoro y Política Financiera.                                                             38
Recent widening might be an opportunity
 Spread of the Spanish 10-year bond vs. main European peers
150                                       (in bps)

125

100

75

50

25

 0

-25

-50

-75
               Jan-08

               Mar-08
               Feb-08



               May-08
                                 Jun-08




                                                      Mar-09
      Oct-07




                                  Jul-08




                                             Jan-09
                                                      Feb-09



                                                               May-09
                                                               Jun-09
                                 Oct-08




                                                                Jul-09




                                                                                  Jan-10
               Nov-07
               Dec-07




                                             Nov-08
                                             Dec-08




                                                                         Oct-09
                                                                         Nov-09
                                                                         Dec-09

                                                                                  Feb-10
      Sep-07




                                 Sep-08




                                                                         Sep-09
               Apr-08




                                 Aug-08




                                                               Apr-09




                                                                         Aug-09
                       Germany    Italy    France      Belgium      Netherlands
  Source: Bloomberg.                                                                       39
Cheapening concentrated in the front end
  Spread of the Spanish 5-year bond vs. main European peers
150                                        (in bps)

125

100

75

50

25

 0

-25

-50

-75
                        Mar-08

                        May-08




                                                      Mar-09

                                                      May-09
      Oct-07




                                      Oct-08




                                                                            Oct-09
                        Jan-08
                        Feb-08




                        Jun-08
                         Jul-08




                                                      Jan-09




                                                                  Jun-09
                                                                   Jul-09




                                                                                              Jan-10
               Nov-07
               Dec-07




                                      Nov-08
                                      Dec-08

                                                      Feb-09




                                                                                     Nov-09
                                                                                     Dec-09

                                                                                              Feb-10
      Sep-07




                                      Sep-08




                                                                            Sep-09
                        Apr-08




                                      Aug-08




                                                      Apr-09




                                                                            Aug-09
                         Germany   Italy     France     Belgium      Netherlands
  Source: Bloomberg.                                                                                   40
An atractive market to invest in




                                   41
                                                       Increase in market liquidity
                                                                                     Average outstanding size: 13.5 bn €
                                                                                     Target for average outstanding <10 years: 15 bn €
  20
                                                                                     Target for average outstanding >10 years: 15 bn €
  18                                                                                 On-the-run bonds                                                                       4.10%
                                                                                                                                                                                                                              6.00%
        3.25%   5.40%                                                                                                            4.40%
  16        4.10%                                               3.90%                        4.20%                         3.30%      3.15%                       5.50%                         4.30%                                             4.20%
                                    5.35%                                 6.15%                                  4.75%                                                                4.60%                         4.80%
  14                                               5.00%                                                                                                3.80%                                                                           5.75%
                                                                                                       4.25%                                                                                                                                                4.90%
                                             2.75%
  12                                                                               2.30%

  10
    8
    6                                                                                                                                                                                                     4.00%                                                      4.70%
    4
    2
    0
         Jul-10


                           Jul-11




                                                       Jul-12




                                                                                              Jul-13


                                                                                                                  Jul-14




                                                                                                                                                                   Jul-17
                                                                                                                                                                             Jul-18
                                                                                                                                                                                       Jul-19




                                                                                                                                                                                                                                         Jul-32


                                                                                                                                                                                                                                                            Jul-40
                                                                                                                                                                                                                                                                      Jul-41
                                                                          Jan-13




                                                                                                        Jan-14




                                                                                                                                      Jan-15
                                                                                                                                               Jan-16
                                                                                                                                                         Jan-17




                                                                                                                                                                                                                     Jan-24
                                                                                                                                                                                                                               Jan-29


                                                                                                                                                                                                                                                   Jan-37
                                    Oct-11




                                                                 Oct-12




                                                                                                                             Oct-14




                                                                                                                                                                                                 Oct-19
                  Apr-11




                                              Apr-12




                                                                                    Apr-13




                                                                                                                                                                                                           Apr-20
Source: Dirección General del Tesoro y Política Financiera.
                                                                                                                                                                                                                                                                               42
             Low Debt Refinancing Risk…
           Redemption profile of Bonos & Obligaciones
         (Million Euros)
50.000

45.000

40.000

35.000

30.000

25.000

20.000

15.000

10.000

 5.000

    0
          2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020- 2024 2029 2032 2037 2040 2041
                                                            2023
  Source: Dirección General del Tesoro y Política Financiera.                                     43
            Low Debt Refinancing Risk…


           Central Government Debt refinancing risk
                           (in % of the total portfolio)
      50
                42
      40

      30
(%)




                                          24
                      20     21                  22     21
      20                                                                      18   18

      10                                                                7

       0
               1 year or less              1 to 3 years                 3 to 5 years
                               31.12.1995        31.12.1999          31.01.2010
       Source: Dirección General del Tesoro y Política Financiera.


                                                                                        44
…Thanks to relatively high duration and average life
                   to maturity…
             Duration & Average Life to Maturity of the Portfolio
                                 (Letras, Bonos and Obligaciones)
       8.0                                   (in years)

                                                                            6.69             6.78
                 5.52
       6.0

                                                                            4.79
                                                                                             4.77
       4.0
                 4.16
                                                                                  Average life
                                                                            France             6,24
       2.0                                                                  Netherlands        6,88
                                                                            Belgium            5,94
                                                                            Italy              7,07


       0.0
               2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
                                             Duration        Average life
             Source: Dirección General del Tesoro y Política Financiera.                              45
…while achieving lower Funding Costs
                           Average Funding Costs
                                      (in percent)
   6.0
   5.5
   5.0
   4.5                                                              4.32

   4.0
   3.5                                                           3.81                 3.49
   3.0
   2.5
                                                                                      2.27
   2.0
   1.5
   1.0
         2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
                 Average cost of Debt outstanding          Average cost at issuance

 Source: Dirección General del Tesoro y Política Financiera.
                                                                                             46
Reliance on foreign funding relatively moderate

                       External public sector debt in 2009
                                                     (% of GDP)
    100
     90
     80
     70
     60
     50
     40
     30
     20
     10
      0
                                Italy




                                                                                                                        Argentina
                                                                                   Germany
             Greece




                                                  France




                                                                                                       Spain
                                        Austria



                                                           Ireland




                                                                                             Finland


                                                                                                               United
                                                                                                               States



                                                                                                                                    Kingdom
                      Belgium




                                                                     Netherlands




                                                                                                                                     United
          Source: OECD.
                                                                                                                                              47
Banks financing of government debt in line with
              Eurozone average

           Holdings of government debt November 2009
                                                   (% of bank assets)
      25

      20

      15

      10

       5

       0




                                                                                                         Germany




                                                                                                                             Portugal
                        Belgium

                                  Greece




                                                                                                                                        Finland
                                                            France




                                                                                 Ireland
             Slovakia




                                                                     Euro area
                                           Italy




                                                                                           Netherlands
                                                    Spain




                                                                                                                   Austria
       Source: Citi.
                                                                                                                                                  48
Spanish Banks’ funding from ECB around
          Eurozone average

                    Recourse to ECB funding
                        (% of total bank assets)
   10%
   8%
   6%
   4%
   2%
   0%
                       IRL

                             IT




                                                              FI
           NL




                                                         AU



                                                                   FR
                                                 GR
                                           PO




                                                                        BE
                 GE




                                  ESP



                                  jul-08        oct-09

    Source: Deutsche Bank.
                                                                             49
          Stable and diversified investor base
                               Government Bonds by Holder
                             (Term investment, % of total portfolio)
100%
                                                                            Spanish official
90%                                                                         institutions
        33.37%
80%                                                                         Non residents
70%                                                                43.94%
60%                                                                         Households &
                                                                            Non financ.
50%
                                                                            Pension & Mutual
40%                                                                         Funds
30%                                                                         Insurance
20%                                                                         Companies

10%                                                                         Credit Institutions

 0%
       1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

 Source: Dirección General del Tesoro y Política Financiera.
                                                                                                  50
               Stable and diversified investor base
                                       Letras del Tesoro by Holder
                                   (Term investment, % of total portfolio)
100%
                                                                                             Spanish Official
90%                                                                                          Institutions
80%                                                                                          Non-Residents
70%

60%                                                                                          Households & Non
                                                                                             financ.
50%
                                                                                             Pension and Mutual
40%                                                                                          Funds
        48.97%
30%                                                                                          Insurance companies
                                                                                    35.57%
20%

10%                                                                                          Credit Institutions

 0%
        1999     2000   2001    2002    2003    2004   2005    2006   2007   2008   2009
       Source: Dirección General del Tesoro y Política Financiera.
                                                                                                                   51
                  Stable and diversified investor base
                                     Government Bonds by Holder
                                    (Term investment, % of total portfolio)
30%


25%


20%


15%


10%


5%


0%
         France       Japan       Germany        Italy     BENELUX     Rest of EU   Asia, Afica   America   Rest of
                                                                                    and others              Europe
                                                   2006    2007     2008   2009
      Source: Dirección General del Tesoro y Política Financiera.
                                                                                                                      52
Top Primary Dealers in 2009

    Bonos y Obligaciones
          Barclays
            BBVA
           Calyon
          Santander
       Société Générale


           Letras
            BBVA
          Santander
       Société Générale



                              53
                         Thank you for your attention
José Manuel Campa Fernández– Secretary of State for the Economy


Soledad Núñez – Directora General del Tesoro y Política Financiera
DirectorTesoro@tesoro.meh.es

Gonzalo García Andrés – Subdirector General de Gestión y Financiación de la Deuda Pública
ggarcía@tesoro.meh.es

José Ramón Martínez
jrmartinez@tesoro.meh.es

Rosa Moral
rmmoral@tesoro.meh.es

Leandro Navarro
lnavarro@tesoro.meh.es

Pablo de Ramón-Laca
pramonlaca@tesoro.meh.es
                                                                        For more information please contact:
Ignacio Vicente                                          Phone: 34 91 209 95 29/30/31/32 - Fax:34 91 209 97 10
ivicente@tesoro.meh.es                                                                        Reuters: TESORO
                                                                                              Bloomberg: TESO
Rocío Chico                                                                            Internet: www.tesoro.es
mrchico@tesoro.meh.es
                                                                                                            54
        Annex: the Social Security Reserve Fund

                       Social Security Reserve Fund asset holdings
          70   (Billon €)
          60
          50
          40
          30
          20
          10
           0
                2000


                          2001


                                 2002


                                        2003


                                                  2004


                                                         2005


                                                                2006


                                                                       2007


                                                                              2008


                                                                                     2009
The Social Security Reserve Fund amounted in December 2009 to approximately 5.7%
                                               (€ 60bn) of GDP.                             55
Annex: Ley de Economía Sostenible & General
    Agreement on Fiscal Sustainability

 Competitiveness                         Tax measures

                                         - Rental market: equal treatment with
 - Society of Information.               ownership.
 - Science, R&D.                         - Elimination of tax rebates: i.e. relief
 - Internationalisation of SME’s.
                                         on mortgage payments, 400€ rebate
 - Education.                            on income tax.
 - Reduction of administrative burden.   - Corporate    Income    Tax    rebates
                                         related    to   R&D     and    to    the
                                         environment.


 Environment                             Fiscal Sustainability

                                         - Spanish    regions   to   formulate
 - Energy Policy.
                                         quarterly reports to the Fiscal Policy
 - CO2 Emission-reduction.
                                         Council.
 - Efficiency    of  transport    and
                                         - Correction and surveillance of fiscal
 infrastructure.
                                         deficits.
                                         - Debt/GDP ratio to reach limit of
                                         60% by 2013.


                                                                                     56

				
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