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The year 2004 can be rated highly satisfactory with regard to Public Debt management. The level
and trend of main financial variables, debt, the average cost of debt, interest charges, and the
full range of interest rate variability indicators, bear testimony to the strength of Central Government
finances and Spain’s competitive standing on this score vis à vis main partner countries.
Markets and rating agencies have been quick to reflect this situation in their respective valuations.
Kingdom of Spain Public Debt is now being issued under cost conditions fully comparable with
the benchmark countries in the Eurozone. Moreover, since Standard and Poor's announced its
upgrade in December 2004, Spanish Debt has figured in the top ratings category of the three
main international agencies.
2.1 CENTRAL GOVERNMENT FINANCING POLICY
2 2.1.1. CENTRAL GOVERNMENT DEBT ISSUANCE IN 2004
The robust 2004 performance of the Spanish economy and the Central Government cash position
counselled a cutback in Tesoro Público’s issuance programme. The result was a sizeable reduction
with respect to the gross and net sales announced at the end of 2003. The conjunction also
Central Government
finances unfold better than
expected
favoured new buy-back transactions to facilitate management of the Central Government cash
position and the Debt portfolio itself.
GOVERNMENT
In gross terms Debt issues in the year came to ¤75.9 billion, which was 5% less than the forecast The decision is to cut back
D E B T I N S PA I N amount. This volume easily sufficed to cover the Central Government cash financing requirement, gross issuance
and to meet the year's redemptions schedule. Finally net issuance was ¤5.2 billion in cash terms
against the ¤10 billion of the provisional remit.
One of the main novelties in the 2004 strategy was the decision to tap the foreign-currency market
for the first time in two years. However the issue in question was of marginal importance with
the bulk of finance still raised in euros. By instrument, the issuance split in euros tilted towards
the Bonos and Obligaciones segment, which accounted for 52% of gross sales against the 42%
of Letras del Tesoro.
Letras del Tesoro issuance was finally ¤3.7 billion down on the planned figure of ¤36 billion, and An adjustment falling
thus bore the larger part of the adjustment to the year’s lower financing requirements. That said, mainly on Letras
the Treasury was careful to keep sales compatible with the liquidity goals underpinning the Letras
market reform begun in 2001.
Gross issuance of Bonos del Estado and Obligaciones del Estado was squarely on target at ¤38.7 Extra liquidity behind new
billion. Tesoro Público was again represented at all main points on the curve, issuing 3Y and 5Y Bonos and Obligaciones
Bonos along with 10Y, 15Y and 30Y Obligaciones. As in previous years, a key element of the occupying medium and
strategy was to provide adequate liquidity to each of these maturities. This variable is seen as a long curve sectors
vital means to keep down the cost of long-term debt, especially in a landscape like today’s of
growing market integration and product standardisation.
45
In consequence, issuance was slanted towards the maturities of new benchmarks; namely a 3Y Among the main innovations in 2004 issuance policy were: Main 2004 novelties
Bono (3.0% maturing July 2007), a 5Y Bono (3.60% maturing January 2009) and a 10Y Obligación
(4.40% maturing January 2015). Specifically, the 3Y and 5Y Bono closed 2004 with an outstanding • The Medium Term Note programme was revised in the year. The new documentation gives the
balance of ¤7.8 billion and ¤11.4 respectively, configuring an issuance split bunched mainly in Treasury ample freedom of action on international markets, in accordance with the latest financial
the medium sector (52%) and the 10Y tenor (27%), with the remainder (20%) corresponding to practices and regulations, while incorporating EU recommendations on Collective Action Clauses.
15Y and 30Y Obligaciones. For a fuller discussion, see Exhibit A.
• The Treasury returned to the dollar market in October 2004 in the frame of this new Euronotes
Redemptions of Central Government Debt amounted to ¤70.70 billion in the year, which was
Programme, with the $1.50 billion issue of a 3.75% Eurobond maturing October 2009. The
rather more than forecast due to the buy-back operations discussed in the following section.
placement proved a success in terms of the quality of the public reached and their geographical
distribution. Particularly encouraging was its large take-up by North American and Asian investors.
Net financing raised Bonos and Obligaciones closed the year with a positive net issuance of ¤10.3 billion against the
The main features of the issue are detailed in Exhibit B.
through Bonos and negative ¤1.65 billion of Letras del Tesoro. The Other and Foreign-currency Debt items again
Obligaciones provided negative net financing. • The syndicated placement of a new 10Y Obligación (4.40% maturing January 2015). This issue
met all the objectives proposed: to reach the market by a higher-profile means than the standard
auction, to secure a price consistent with Spain's solid economic position, to put ample liquidity
behind the new benchmark from day one onward, and to diversify the investor base. Details of
TABLE 2.1.1.A. CENTRAL GOVERNMENT FINANCING PROGRAMME 2004 the operation are given in Exhibit C.
(Face value. In million euros)
Issuance Redemptions Net Financing
EXHIBIT A: UPDATE OF THE EURO MEDIUM TERM
Letras del Tesoro 36.0 37.6 -1.6
NOTES PROGRAMME
Bonos and Obligaciones 38.7 28.4 10.3
3Y and 5Y 20.4 21.8 -1.4
10Y 10.3 6.2 4.1 Medium Term Notes (MTN) programmes are extremely useful instruments that traditionally
15Y and 30Y 8.0 0.4 7.6 form part of the repertoire of leading international issuers, especially in the euromarket and
Foreign-Currency Debt 1.2 3.3 -2.1 the local US market. Essentially, this is a comprehensive legal frame allowing borrowers to
issue notes up to a predetermined ceiling amount. These notes can be of a varied nature as
Others 0.0 1.4 -1.4 regards interest rate (fixed, floating or indexed), currency and term. An offering circular
Total 75.9 70.7 5.2
specifying these features is distributed among market agents, which serves for all issues under
the facility. All the principal needs to do is attach a pricing supplement with the data for each
Source: General Directorate of the Treasury and Financial Policy
separate issue.
In 2004, Tesoro Público concluded the fourth update of its Euro MTN Programme dating back
Regularity, transparency Debt issuance techniques in 2004 conserved the following characteristics:
to 1987, when it was signed by the General Directorate of the Treasury with a ceiling of 2
and publicity are the billion dollars. Successive updates followed in 1993, 1997 and 2000, a far as the current
issuance watchwords • Auctions retained their issuance primacy, accounting for over 90% of sales, while syndication
amount of ¤8 billion.
was reserved for the placement of new benchmarks and external issues.
• Auctions were resolved by the “modified Dutch procedure” meaning sales went through at the A salient feature of the 2004 update is the first-time inclusion of Collective Action Clauses,
average price of bids above the average price, and at the price actually stated in the case of all pursuant to G-10 recommendations and the EU’s undertakings on quorums and majority votes.
other accepted bids. The system for resolving Letras auctions was modified so the allocation The insertion of CACs also brings into play the figure of the trustee, appointed to represent
reference becomes yield rather than price. bondholders’ interests.
• Auction dates adhered to a pre-set annual calendar, while details on the exact stocks to be
Finally, the 2004 update included the adoption of Rule 144A, meaning notes can be sold to
placed were released ten days before the start of each quarter.
certain institutional investors resident in the United States (QIBs or Qualified Institutional
• Decisions on the volumes to be placed in each tenor were informed by the opinions given by Buyers), without following the standard procedure laid down by the Securities Exchange
the Primary Dealers group prior to each auction. Commission (SEC).
• Auctions of conventional stocks were fewer in number but with a higher volume placed at each.
This change, which was advocated by Primary Dealers, is designed to more closely focus investor
attention.
46 G O V E R N M E N T D E B T I N S PA I N 47
DISTRIBUCIÓN DE LA EMISIÓN POR VALORES (2004)
7 (% sobre total)
3
13
12
50
DISTRIBUTION OF THE 5Y EUROBOND BY INVESTOR GROUP
EXHIBIT B: RESULTS OF THE 5Y EUROBOND (% of total)
22
2004 conditions were judged right for a return to the dollar market, which the Treasury had 4
the requisite documentationObligaciones a 10 años Obligaciones a 15 y 30 años
not tapped since 2001. It was in early October, with Letras del Tesoro Bonos a 3 y 5 años
in place, Divisas 15
that the Treasury’s target scenario arose; namely, a good possibility of diversifying the investor y Política Financiera
Fuente: Dirección General del Tesoro
45
base and an especially interesting arbitrage opportunity between dollar and euro financing.
16
OBLIG. A 15 AÑOS POR TIPO DE INVERSOR The placement proved a notable success in terms of the quality of the public reached and
total) their geographical distribution. The breakdown of end investors was 45% Central Banks, 20%
20
fund managers, 16% banks and a further 4% between insurance undertakings and pension
funds. Geographically, the lead was taken by Asian investors (48% overall and 38% ex. Japan), Central Banks Fund Managers Banks Others Insurers and Pension funds
followed by Europeans (23%) and North Americans (15%). Source: General Directorate of the Treasury and Financial Policy
37
The Eurobond struck an immediate chord with the market. Overbidding and the non price
sensitivity of orders allowed $1.50 billion to be placed at the lower end of the offering range,
specifically at an 18 bp spread to the equivalent US bond. At the same time, the currency
swaps arranged to close out the exchange rate risk meant the financing cost in euros came EXHIBIT C: THE SYNDICATED ISSUE OF THE 10Y BENCHMARK
out 10.5 bp below that of a same-dated euro issue, equivalent to a ¤5.6 million saving in
current terms. The positive experience of previous syndication rounds in 2002 and 2003, involving the 10Y
pensiones Bancos centrales Aseguradoras Otros
and 15Y Obligación respectively, and the importance of ensuring an efficient placement in a
Tesoro y Política Financiera
climate of unsettled rate expectations, were the Treasury’s main reasons for syndicating the
first tranche of its new 10Y benchmark in summer 2004.
The final conditions were:
Out of the multiple syndicate design options, the model chosen was again a two-tier structure.
Amount 1,500,000,000 US dollars
The first tier comprised lead managers Banco Bilbao Vizcaya Argentaria, Crédit Agricole
Maturity October 2009
Coupon 3.375%
Indosuez, Crédit Suisse First Boston, Deutsche Bank, Dresdner Bank and Santander Central
POR VALORES (2004)
Price 99.582% Hispano), while the second was made up of remaining banks in the Bonos and Obligaciones
l)
Yield 3.467% Primary Dealers group.
Lead Managers ABN AMRO, Barclays Capital and Credit Suisse First Boston
Bank syndicate formed by Geographically, 18% of orders originated in the United Kingdom, 25% in France and Germany
11 Primary Dealers La Caixa, SCH, BBVA, Dresdner Bank, Goldman Sachs, Citigroup,
and 19% in the rest of Europe. Meantime, 6% of bonds found their way to Asia and 2% to
Calyon, Morgan Stanley, Natexis, JP Morgan and Deutsche Bank
the United States. Spanish investors, finally, purchased 30% of the issue. By investor group,
50
mutual funds acquired 40% (of which 5% went to hedge funds), followed by banks with
37%, insurers and pension funds with 17%, and central banks with 6%.
GEOGRAPHICAL DISTRIBUTION OF THE 5Y EUROBOND
(% of total)
As to price, the bonds were placed with a yield spread of 8 basis points vs. the Bund used
as a reference instrument (DBR 4.25% maturing January 2013). This represented the narrowest
10
0 años Obligaciones a 15 y 30 años Divisas spread ever achieved in a syndicated issue, and a benchmark premium of half a basis point
14 to the Obligación July 2013.
o y Política Financiera 38
15 Issue characteristics were as follows:
Annual interest 4.40%
23 Subscription price 99.683%
Other Asia Europe United States Others Japan Face value allotted 5,000,000,000 euros
Maturity 31 January 2015
Source: General Directorate of the Treasury and Financial Policy Yield 4.439%
48 G O V E R N M E N T D E B T I N S PA I N 49
OBLIG. A 15 AÑOS POR TIPO DE INVERSOR
total)
POR VALORES (2004)
l)
37
50
FIGURE 2.1.2.A. DEBT EXCHANGES AND BUY-BACKS BY YEARS
GEOGRAPHICAL DISTRIBUTION OF THE 1OY OBLIGACIÓN (In million euros)
(% of total) 9,000
pensiones Bancos centrales Aseguradoras Otros
8,000
Tesoro y Política Financiera
11 2
4 7,000
0 años Obligaciones a 15 y 30 años Divisas
19 6,000
43
o y Política Financiera
5,000
POR VALORES (2004) 4,000
l)
3,000
30
2,000
Japan Scandinavia United States Other Asia United Kingdom Spain Other EMU
1,000
Source: General Directorate of the Treasury and Financial Policy
0
1997 1998 1999 2000 2001 2002 2003 2004
50
Exchanges Buy-backs
DISTRIBUTION OF THE 10Y OBLIGACIÓN BY INVESTOR GROUP
Source: General Directorate of the Treasury and Financial Policy
(% of total)
Aimed at managing the
3 22 The buy-back programme had the dual goal of rationalising cash planning, and of reducing the
0 años Obligaciones a 15 y 30 años Divisas 5 cash and redemptions
portfolio’s exposure to a run-up in rates by thinning out future redemptions of large-circulation
39 profile...
o y Política Financiera 15 bonds. Some 47% of the face value repurchased addressed the first of these objectives, corresponding
as it did to bonds maturing in 2004 and January 2005. Bringing forward these redemptions not
only saves on interest charges but also does a lot to reduce the level and variability of the Treasury’s
cash balance.
34
A further 30% approximately of the face value repurchased was to bring down future refinancing
Banks Mutual Funds Insurers Hedge Funds Central Banks Pension Funds Agencies
risk. Particularly targeted was the Obligación 6% maturing January 2008 in view of its large
outstanding balance.
Source: General Directorate of the Treasury and Financial Policy
Other buy-backs targets were non strippable bonds with high coupon rates, the aim in this case ...and boosting Debt
being to boost market liquidity. market liquidity
2.1.2. DEBT PORTFOLIO MANAGEMENT OPERATIONS TABLE 2.1.2.B. DEBT BUY-BACKS IN 2004
(Face value. In million euros)
The issuance strategy of 2004 was supported by the use of tools to manage the main risks carried
Bond repurchased Amount repurchased
by the Central Government Debt portfolio; namely, interest-rate and exchange-rate risk. The
groundwork was also completed on the Treasury’s future system to manage the credit risk associated Reference Coupon Maturity Cash amount % of total Face value % of total
to derivative transactions, as described more fully in our next Exhibit.
Bono 3 4.65 31/10/04 1,243 30.2 1,197 33.0
Bono 5 3.25 31/01/05 525 13.3 510 14.1
New impetus for the buy- A new programme of Central Government Debt buy-backs on the secondary market withdrew a Obligación 10 10.15 31/01/06 174 4.4 149 4.1
nominal amount of ¤3.63 billion. As in previous years, direct buy-backs took preference over Debt Obligación 10 8.80 30/04/06 126 3.2 110 3.0
back programme
Obligación 10 7.35 31/03/07 113 2.9 100 2.8
exchanges in view of the sterling health of Central Government cash accounts. The technique Obligación 10 6.00 31/01/08 1,201 30.5 1,069 29.5
used was one of reverse auctions through the Primary Dealer network. Early redemptions of Obligación 15 8.20 28/02/09 505 12.8 413 11.4
Spanish Debt have summed ¤52.23 billion since 1997, ¤25.54 billion through exchanges and the Obligación 15 8.70 28/02/12 105 2.7 79 2.2
other ¤26.69 billion through buy-backs. Total 3,991 100.0 3,627 100.0
Source: General Directorate of the Treasury and Financial Policy
50 G O V E R N M E N T D E B T I N S PA I N 51
Exploiting the strength of A prime concern in exchange risk management was to consolidate and realise part of the exchange
gains on dollar issues still exposed to exchange-rate risk, in view of the euro’s advance against for a period of three years. As indicated in the corresponding tender specifications, SCH will
the euro to partially close
the greenback. Hedge arrangements were also made for the 5Y Eurobond issue in dollars of undertake on the Treasury's behalf all the valuation, notification, settlement, custody and
out dollar exposure
October 2004. In all, the currency swaps concluded last year managed dollar exposure down to other operations envisaged in collateral agreements, the exception being the valuation of the
21% of the outstanding Debt denominated in the US currency. Treasury's transaction risk with counterparty entities.
In cash management, finally, the Treasury stuck with the system inaugurated in 2001. Since The Treasury's bilateral relations with each counterparty will be documented in a Credit Support
February that year, it has been assigning the balance in its Banco de España account to credit Annex drawn up under UK legislation, appended to the ISDA master agreement. It should be
entities, between half past two each afternoon and seven o’clock the following morning. This not noted that this is, of necessity, a unilateral system designed to protect the Treasury against
only furthers the purposes of ECB monetary policy, by reducing the variability of one of the main counterparty risk and not vice versa. The main points negotiated stand as follows:
autonomous factors influencing liquidity, but also allows more efficient management of the Central
Government cash position. • Eligible collateral is initially confined to bonds issued by the treasuries of Spain, France,
Germany, Belgium, the Netherlands, Italy, Austria, Finland, Ireland and Portugal, though the
The average daily balance transferred in 2004 was 4.6% lower than in the previous year. Also list may later be extended, possibly even to the use of cash.
down was the spread to the EONIA at which liquidity auctions were allotted. • Following the standard practice, a portion of credit risk is left uncollateralised depending
on the credit rating of the counterparty. This threshold drops to zero when the rating is A+/
A1 or below.
FIGURE 2.1.2.C. LIQUIDITY AUCTIONS IN 2004 • Both parties, the Treasury and the counterparty, may act as the Valuation Agent. This
(Spreads vs. EONIA in basis points) arrangement was requested by counterparties and is also the standard market practice. On
0 each valuation date, the Agent role will be taken by the party calling for the collateral.
-1 • And finally, the initial idea is that open positions and collateral adjustments should be
-2 calculated on a weekly basis.
-3
-4
-5
-6
2.1.3. FINANCIAL PERFORMANCE 2004: THE LEVEL AND COST OF
GOVERNMENT DEBT
-7
-8 The year 2004 was characterised by positive developments in both the level and cost of Central Debt absorbs less of the
Government Debt, which served to consolidate the downtrend in the Debt/GDP ratio and win national income
-9
January February March April May June July August September October November December more degrees of freedom for fiscal policy.
Source: General Directorate of the Treasury and Financial Policy
The nominal stock of Central Government Debt rose ¤10 billion in 2004, reflecting the year’s
positive net issuance to cover central government financing requirements, and the assumption
of the debt of RENFE pursuant to the provisions of Royal Decree 7/2004 of 27 September. That
said, the Central Government Debt expanded slower than the nominal growth rate of the
EXHIBIT D: COLLATERALISATION AS A VEHICLE Spanish economy, delivering a one percentage point reduction in its GDP weight to 39.2% at
FOR MITIGATING CREDIT RISK the annual close.
Collateralisation systems are widely used by swap market participants, in particular neighbour- Meantime, the General Government Debt/GDP ratio receded 2.5 percentage points to 48.9%.
country Treasuries, to mitigate the credit risk of derivative products. The Spanish Treasury has This sizeable reduction contrasts with the experience of partner countries, which have seen their
laid the groundwork for a similar system, and negotiated its key features with non resident public debt ratios creep slowly higher. In 2004, specifically, the average Eurozone ratio rose half
counterparties. a percentage point to 71.3% of GDP.
Following what is increasingly the standard practice, the Spanish Treasury has entrusted the
system's management to a specialist entity, concretely SCH, which was appointed last October
52 G O V E R N M E N T D E B T I N S PA I N 53
FIGURE 2.1.3.A. PUBLIC DEBT/GDP Lower average costs, the moderate growth of the nominal stock and the vigour of the Spanish Interest payments drop
(%) economy combined to lighten the debt servicing bill as a percentage of GDP. Specifically, on a below 2% of GDP
80 National Accounts basis, the interest payments/GDP ratio closed the year at less than 2%, while
72.8 71.3
the same ratio in cash terms fell to a record low of 2.2%.
63.1
60
52.9
48.9
FIGURE 2.1.3.C. CENTRAL GOVERNMENT DEBT SERVICING CHARGES
40 39.2 (% of GDP)
55.0 3.1
52.9
3.0 2.9
20 50.0
2.7
45.0
2.5
0
1999 2000 2001 2002 2003 2004 (f) 40.6
40.0 2.3
Eurozone average Spanish General Government Spanish Central Government (f): forecast
Source: Banco de España 2.1
35.0
1.9
1.9
2004 Debt issuance unfolded against a backdrop of rising rates to the month of June followed 30.0
Lower average portfolio 1.7
costs with cost at issuance by a steady run-down to the end of the year which was steepest in the longest maturities. The
levelling off result of this up-down movement, accompanied by a flattening of the yield curve slope, was that 25.0 1.5
1999 2000 2001 2002 2003 2004
average cost at issuance stabilised at 2.9%. This flat evolution contrasts with the sustained decline
Debt/GDP Interest payments/GDP
of the preceding years, in particular the 1.2 percentage point reduction of 2003.
Source: General Directorate of the Treasury and Financial Policy
Even so, the average cost of the Central Government Debt portfolio continued to benefit from
the falling yields of preceding years, and managed to close the year at 4.6%, two decimal points
less than in 2003. We cannot end this look at the financing year without referring to Standard and Poor’s upgrade Aaa/AAA/AAA
of Kingdom of Spain Debt in euros and foreign currency. The agency announced in December
that it was awarding Spain its maximum rating (AAA) in recognition of its fiscal consolidation
FIGURE 2.1.3.B. COST OF THE DEBT PORT FOLIO
achievements and the strength of the national economy. The result is that Spain now forms part
(%)
of the club of around 20 countries holding the top rating from the big three international
6.0
agencies, removing one of the last barriers that might dissuade investors from finding a place
5.5 for our Debt in their portfolios.
5.0
4.5
2.1.4. THE CENTRAL GOVERNMENT DEBT PORTFOLIO AT END 2004:
STRUCTURE AND RISK PROFILE
4.0
The 2004 structure of Central Government Debt was affected by the assumption of RENFE’s debt Bonos and Obligaciones
3.5
under Royal Decree-Law 7/2004 of 27 September, which added one percentage point of weight make up 80% of the
3.0 to the "Others" category. The Exhibit that follows sets out the main characteristics of the debt Central Government Debt
assumed. As regards the Debt portfolio itself, Bonos and Obligaciones again made up the largest portfolio
2.5
group with 80.2%, while Letras weighed in at 11.6%.
2.0
1999 2000 2001 2002 2003 2004
Average cost of outstanding debt Cost at issuance
Source: General Directorate of the Treasury and Financial Policy
54 G O V E R N M E N T D E B T I N S PA I N 55
TABLE 2.1.4.A. CENTRAL GOVERNMENT DEBT OUTSTANDING debt, closed at slightly over 6 years. If we also factor the refinancing of future debt cashflows,
(In billion euros) the resulting term i.e. portfolio duration stands at 4.9 years (4.7 years in 2003).
Bonos and
Letras Foreign currency Other Total
Obligaciones
FIGURE 2.1.4.C. AVERAGE LIFE AND DURATION OF THE DEBT PORT FOLIO
1995 70.6 116.6 19.4 22.8 229.4 (Years)
% 30.8 50.8 8.4 9.9 100.0 8
1996 80.6 135.5 21.0 23.5 260.6
1997 71.8 159.9 23.7 15.3 270.7
1998 59.8 177.8 29.9 12.6 280.1 6
1999 53.1 205.3 11.2 25.0 294.7
2000 44.7 224.7 12.4 23.6 305.3
2001 35.6 237.9 13.0 20.5 306.9
4
2002 35.9 247.1 10.5 18.6 312.0
% 11.5 79.2 3.3 6.0 100.0
2003 38.8 246.0 9.0 15.4 309.1 2
% 12.5 79.6 2.9 5.0 100.0
2004 37.0 255.0 7.1 19.2 319.2
% 11.6 80.2 2.2 6.0 100.0
0
1999 2000 2001 2002 2003 2004
Source: General Directorate of the Treasury and Financial Policy
Average life Duration
Source: General Directorate of the Treasury and Financial Policy
Foreign-currency debt was a marginal 2.2% of the total. By currency, the dollar took the lead with
49% followed by the Japanese yen with 45%. However if we count in swaps, exchange-rate At the end of 2004, the portfolio in euros exhibited a reasonably smooth redemptions profile, Refinancing risk on a one-
exposure was greatest with the JPY. which mitigates the risk associated to rolling over a large proportion of debt under adverse interest- year horizon amounts to
rate conditions. Specifically, with the structure in place at end 2004, only 18% of the outstanding 18% of Debt outstandings
stock will need refinancing in 2005. This percentage rises to 30% and 39% respectively on a two-
TABLE 2.1.4.B. MAIN TESORO PÚBLICO ISSUES IN FOREIGN CURRENCIES and three-year horizon, and it is not until five years’ hence that the amount rolled over will sum
(31/12/2004)
more than half of the current portfolio.
Bond Currency Maturity Face value Coupon (%)
FIGURE 2.1.4.D. REDEMPTIONS PROFILE OF THE DEBT PORTFOLIO IN EUROS
Eurobond JPY 14/03/05 150,000 4.75
(Swapped to DEM at fixed rate 4.15%) (In euros and % of portfolio)
Eurobond JPY 20/09/06 150,000 3.10
60,000
Medium Term Note JPY 06/11/07 20,000 0.95
Medium Term Note JPY 30/10/08 30,000 1.00
Medium Term Note JPY 06/11/08 20,000 1.00 50,000
Medium Term Note JPY 17/04/17 20,000 3.13
Medium Term Note JPY 21/04/17 20,000 3.10
Global Bond USD 19/07/05 1,500 7.00 40,000
(50%/50% swapped to USD LIBOR and Euribor)
Eurobond USD 28/07/08 1,500 5.875
(Swapped to DEM at fixed rate) 30,000
Medium Term Note USD 13/12/05 21 8.93
Medium Term Note USD 28/10/09 1,500 3.375
(Swapped EURIBOR)
20,000
Bulldog bond GPB 24/03/10 60 11.75
Medium Term Note GPB 06/04/29 200 5.25
Note: This table sets out main government issues of bonds and notes. The foreign-currency portfolio also includes direct loans and debts assumed 10,000
by the Spanish Government which are not itemised due to their lesser significance
Source: General Directorate of the Treasury and Financial Policy
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
18.09% 12.25% 8.33% 6.25% 9.66% 4.32% 8.73% 5.14% 7.52% 3.76% 3.12% 0.16% 4.60% 0.16% 0.03% 0.03%
The risk profile of the According to available indicators, the interest-rate risk of the portfolio in euros underwent few
Total (Including other debt, own and assumed)
portfolio in euros stays changes in 2004. The portfolio’s average remaining term, or its average term for the rollover of Source: General Directorate of the Treasury and Financial Policy
substantially unchanged
56 G O V E R N M E N T D E B T I N S PA I N 57
Refinancing risk is significantly less than in the early 1990s. At that point, the rollover rate was
SECONDARY MARKETS IN CENTRAL
hovering near 60% on a yearly basis (18% today) and 71% (39%) on a three-year horizon. 2.2 GOVERNMENT DEBT
FIGURE 2.1.4.E. PERCENTAGE OF PORTFOLIO TO BE ROLLED OVER IN 1, 3 AND 5 YEARS
2.2.1. MAIN SECONDARY MARKET TRENDS IN 2004
100
90 89
Global Debt turnover held to the expansion trend of the previous years with trading in Bonos and Turnover expands once
80 Obligaciones as the main growth driver. In the case of Letras del Tesoro, which saw their turnover more in 2004
73
70
71 contract in 2004, the Treasury will continue the work begun in the recent reform to increase the
65
59 61 market’s liquidity and international reach.
60
54
50 One salient 2004 development was the changing pattern of Bonos and Obligaciones trading, in A shift in the trading
42 42
40 39 particular the notable advance in third-party trades. In the account-holder segment, flat turnover pattern of Bonos and
30
growth was accompanied by a shift away from electronic to non electronic (second-tier) trading Obligaciones
20
platforms.
20 18
10 Credit institutions and non residents were the largest groups of Debt holders, with EU investors Non residents and credit
0 strongly to the fore in the latter contingent. institutions are the biggest
In 1 year In 3 years In 5 years
investor groups
1992 1995 1999 2004
Source: General Directorate of the Treasury and Financial Policy 2.2.2. TURNOVER IN CENTRAL GOVERNMENT DEBT MARKETS
Total turnover in the Central Government Debt market came to ¤22.8 trillion in the year, an Total turnover up 7%...
increase of 7.3% versus 2003.
EXHIBIT E: ASSUMPTION OF RENFE DEBT
The advance drew mainly on Bonos and Obligaciones which raised their trading volumes 10.3%, ...due mainly to brisk
from ¤18.4 trillion in 2003 to ¤20.3 trillion in 2004. Note however that turnover in stripped trading in Bonos and
Article 5 of Royal Decree-Law 7/2004 of 27 September establishes that Central Government bonds receded slightly to ¤285 billion. And Letras too registered a degree of slippage, from ¤2.6 Obligaciones
will take on the ¤5.46 billion debt of rail company RENFE. This decision traces back to the trillion in 2003 to ¤2.3 trillion in 2004.
railway liberalisation package of Law 39/2003, and the need to assure that the new Entidades
Públicas Empresariales into which RENFE will be restructured get off to a sound financial start. By transaction type, the volume of outright trades declined a little from ¤2.3 trillion in 2003 to Repo turnover moves up
This means leaving them unburdened by the debt amassed from the financing of rail lines, ¤2.2 trillion in 2004, contrasting with the 8.5% advance in repos from ¤19 trillion to ¤20.6 8%
and under-resourcing in successive National Budgets. trillion.
We thus have two major categories of debt: Finally, a breakdown by market operators shows that turnover growth drew mainly on third-party
trades, which closed the year at ¤15 billion against the ¤13.5 billion of 2003. In the meantime,
• With effect from 1 November 2004, central government has assumed ¤3.66 billion in account-holder trades stayed more or less flat in the region of ¤7.7 trillion.
historical debt derived from insufficient funding allocations from the National Budget up
to 31 December 2003. This figure breaks down as ¤492 million in RENFE bonds, ¤3.04 The sections that follow track the 2004 figures for Central Government Debt markets, differentiating
billion in floating-rate loans and the rest in commercial paper. between outright transactions (spot and forward) and repo transactions (buy sell-backs and blocked
• The other ¤1.80 billion, assumed as of 31 December 2004, corresponds to the net book repos), and considering Bonos and Obligaciones, Letras and Strips.
value computed at that date for RENFE’s conventional rail network assets, which now become
the direct property of the State, after deducting the book value estimated for the Madrid-
Seville line, which is brought under the management of ADIF. This debt comprises loans
from the European Investment Bank, of which 81% are at a floating rate.
58 G O V E R N M E N T D E B T I N S PA I N 59
OUTRIGHT TRADES IN BONOS AND OBLIGACIONES: ACCOUNT HOLDERS AND THIRD PARTIES FIGURE 2.2.2.B. SPOT TRADING IN BONOS AND OBLIGACIONES ON THE
ELECTRONIC MARKET AND SECOND TIER
Outright trades in Bonos The Bonos and Obligaciones market posted an average daily volume in outright trades (spot and (In million euros)
and Obligaciones sum forward) of ¤8.33 billion, compared to the ¤8.78 billion of 2003. Of this total, ¤6.14 billion 500,000
¤8.33 billion (59%) fell to third-party trades, 17.8% more than in 2003, while the average in the account-
holder segment dropped by 38.6% to ¤2,192 million. This trend towards increased business-to-
400,000
consumer trading with a contrasting decline in wholesale activity was already apparent in 2003.
Its likeliest origin is the persistence of interest rates at record lows coinciding with the growing
professionalism of institutional investors and the greater transparency provided by electronic 300,000
trading, with the result that account holders now transact directly with clients without concluding
offset trades among their own number.
200,000
FIGURE 2.2.2.A. OUTRIGHT TRADES BETWEEN ACCOUNT HOLDERS AND WITH THIRD PARTIES 100,000
(Average daily volume in million euros)
7,000 0
1999 2000 2001 2002 2003 2004
6,000
Senaf MTS España EuroMTS Second tier
Source: Iberclear
5,000
4,000 This decline in electronic trading was by no means unique to Spain. The same combination of low The phenomenon is not
interest rates and near-zero volatility has also penalised electronic trading in neighbour markets unique to Spain
3,000 like the Netherlands, France, Germany, Belgium and Italy.
2,000
FIGURE 2.2.2.B (BIS). SPOT TRADING ON MTS PLATFORMS
1,000
(In million euros)
0 300,000
1999 2000 2001 2002 2003 2004
Account holders Third parties
250,000
Source: Banco de España
200,000
Spot trading on electronic An analysis of account-holder turnover (electronic platform and second tier), considering only
platforms falls off sharply outright spot transactions, reveals a year-on-year decrease of 36.7%. This contraction traces to 150,000
while second-tier turnover the decline in electronic trading, which was steepest in the case of Senaf (down from ¤253.65
moves slightly higher billion in 2003 to ¤69.76 billion in 2004). The other local electronic platform, MTS España, 100,000
reported a decrease in its trading volumes from ¤183.21 billion in 2003 to ¤85.26 billion in 2004,
while EuroMTS turnover also tailed off sharply from ¤111.70 billion to ¤47.50 billion. Conversely, 50,000
the second-tier market grew its annual turnover in this modality by 9% to ¤346.94 billion. The
explanation for this change in account-holder trading patterns could lie in the year’s low interest 0
rates and muted volatility, which have drawn them towards the more flexible hedging and arbitrage MTS España MTS Holland MTS Belgium MTS Germany MTS France
opportunities afforded by the second tier. 2003 2004
Source: MTS
Moving back to electronic trading in Bonos and Obligaciones, turnover developments in 2004 MTS España takes top
produced a change in the market ranking. Specifically, MTS España moves into the lead with place by turnover
42.1% of the total, followed by Senaf with 34.4% and EuroMTS with 23.5%.
60 G O V E R N M E N T D E B T I N S PA I N 61
Gestores de activos Entidades de crédito Fondos de pensiones Bancos centrales Aseguradoras Otros
Fuente: Dirección General del Tesoro y Política Financiera
POR VALORES (2004)
l)
DISTRIBUCIÓN DE LA EMISIÓN POR VALORES (2004)
7
FIGURE 2.2.2.C. SPOT TRADING IN BONOS AND OBLIGACIONES
(% sobre total)
This advance drew primarily on the account-holder segment, which grew its average daily trading
50
ON THE ELECTRONIC MARKET volumes by 35% to ¤335 million. Of this amount, 58% was transacted on electronic platforms
3
(% of total) 13 and the other 42% on the second tier. One development of note was Letras’ entry to trading on
the EuroMTS platform.
12
0 años Obligaciones a 15 y 30 años Divisas 23.5 50
34.4
FIGURE 2.2.2.E. ACCOUNT-HOLDER SPOT TRADING IN LETRAS DEL TESORO
o y Política Financiera
22 (% of total)
0.2
Letras del Tesoro Bonos a 3 y 5 años Obligaciones a 10 años Obligaciones a 15 y 30 años Divisas
42.0
Fuente: Dirección General del Tesoro y Política Financiera
41.9
Senaf MTS España EuroMTS 42.1
Source: Iberclear
15.7
Finally, the bond most keenly traded on electronic platforms was the 10Y Obligación 4.75% EuroMTS Senaf MTS Second tier
maturing 30 July 2014, which accounted for 9% of spot trades. Next came the 5Y benchmark
Source: Iberclear
3.60% maturing 31 January 2009, with a turnover share of 8.35%, followed closely by the 10Y
Obligación 4.20% maturing 30 July 2013.
THE STRIPS MARKET: CHARACTERISTICS AND OUTRIGHT TRADES
OUTRIGHT TRADES IN LETRAS: ACCOUNT HOLDERS AND THIRD PARTIES
The strips market in Spanish debt commenced in 1998 with the first-time authorisation of bond
Outright Letras transactions Letras del Tesoro turnover in this modality moved up 26% year on year, from a daily average of
stripping and reconstitution. The facility was extended to new references in the following years
grow their volume ¤360 million in 2003 to ¤453 million in 2004.
as far as twenty in all at the 2003 close.
These were joined in 2004 by one new reference, the 5Y benchmark 3.60%, while two instruments 18 strippable bonds with
FIGURE 2.2.2.D. SPOT TRADING IN LETRAS BETWEEN ACCOUNT HOLDERS were redeemed in the year, the 5Y Bono 4.50% and the 3Y Bono 4.65%. This left an end-2004 over ¤320 billion
AND WITH THIRD PARTIES total of 18 POs with their respective IOs covering a spectrum of maturities from 2005 to 2032,
(Average daily volume in million euros) and with a maximum strippable volume at end 2003 of more than ¤320 billion.
400
Gross monthly stripping fluctuated in the year from a February low of ¤124 million to a May peak
of ¤708 million. Reconstitutions touched their high point in October, with ¤327 million, against
300 an August volume of just ¤11 million. Net stripping to December was ¤22 billion, 2.5% up on
the figure for the previous year.
200
100
0
1999 2000 2001 2002 2003 2004
Account holders Third parties
Source: Banco de España
62 G O V E R N M E N T D E B T I N S PA I N 63
FIGURE 2.2.2.F. STRIPPING AND RECONSTITUTION REPO TRANSACTIONS
(In million euros)
800 22,200 Before looking at the performance of the repos market we must distinguish between two types
of admissible transactions, that is, buy-sell backs and blocked repos. Buy-sell backs have traditionally
22,000
been the province of the account-holder segment, while the majority of blocked repo transactions
21,800
600
are closed with third parties.
21,600
21,400 Turnover in buy-sell backs rose by 3.8% in the year to ¤8.1 trillion. Of this total, 87% fell to Repo turnover advances
account-holder trades and the rest to third parties. This growth owed to a 5% increase in account- 3.8% year on year
400 21,200
holder volumes, drawn mainly from increased trades on Bonos and Obligaciones and the new
21,000
popularity of strips, while Letra buy-sell backs in the account-holder segment tailed off in the
20,800 year. The result was that Bonos and Obligaciones accounted for 94.2% of account-holder
200
20,600
transactions against the 5.5% of Letras. Buy-sell backs on PO and IO strips represented a small
but significant 0.3%, considering their near disappearance in 2003. Terms again tended to the
20,400
shortest end, with overnight transactions dominating strongly.
0 20,200
Jan.04 February March April May June July August September October November December
Reconstitution Stripping Strips outstanding (right-hand scale)
Source: Banco de España
FIGURE 2.2.2.H. REPO TURNOVER
(Cash amounts in trillion euros)
8
Strip turnover decreases Outright account-holder trades in stripped Debt securities dropped back 37.1% vs. 2003 as far
among account holders as an average daily volume of ¤13.6 million. Meantime, outright transactions with third parties 7
and with third parties summed 17.2% more than in 2003.
6
5
FIGURE 2.2.2.G. OUTRIGHT TRADES IN STRIPPED DEBT
4
(Average daily volume in million euros)
60 3
2
50
1
40
0
1999 2000 2001 2002 2003 2004
30
Account holders Third parties
Source: Banco de España
20
10 Meantime, blocked repos grew their turnover 11.6% to ¤12.5 trillion. As much as 99.2% of To close 2004 at over
this total corresponded to third-party transactions while account-holder trading was marginal ¤12.5 trillion
0 only. By asset, Bonos and Obligaciones accounted for 83.7% of third-party repos, against 14.3%
J03 Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. J04 Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec.
on Letras and 2% on stripped debt securities. Short terms were also the most popular in this
Account holders Third parties
trading segment.
Source: Banco de España and Iberclear
By reference, the most keenly traded was the PO or principal component of the Obligación 6%
maturing 31 January 2008, which accounted for 13.1% of all strips traded in the electronic
market. Next in line, with a share of 9.43%, was the PO of the 30Y Obligación 6% maturing
31 January 2029.
64 G O V E R N M E N T D E B T I N S PA I N 65
FIGURE 2.2.2.I. REPO TURNOVER Spanish credit institutions have traditionally made up the largest single group of Debt holders, Credit institutions head the
(Cash amounts in trillion euros) though their importance began to wane as the disintermediation process gained ground in our list with 43%
15.0 financial system. This decline reversed in 2001, however, and the credit sector came back to
prominence, raising its share from 33.7% in December 2000 to 46% in December 2003 before
12.5 settling back last year to 43%.
10.0
The weight of non residents, as stated, has advanced strongly from the 26% of 1999 to 41% in Tailed closely by non
2004. The importance of this investor group merits it a separate section later on in this chapter. resident investors with
7.5
41%
5.0
LETRAS DEL TESORO HELD TO MATURITY
2.5
At the short end of the maturities range, the salient 2004 development was the growing ownership Credit institutions raise
share of credit institutions. Concretely, this collective ended the year holding almost 68% of bills their ownership share in
0
1999 2000 2001 2002 2003 2004 in issue. Letras del Tesoro and
Account holders Third parties become the single biggest
Source: Banco de España With interest rates at record lows and investors increasingly insensitive to risk spreads, short-term investor group
Spanish governments have lost out in popularity to European paper. The result has been a downturn
in demand from institutional and non resident investors. That said, non resident ownership is still
2.2.3. DISTRIBUTION OF THE CENTRAL GOVERNMENT DEBT far higher than it was before the Letras market reform of 2003. Specifically, the share of this
PORTFOLIO group has climbed from 3.8% in 2002 to almost 7% at the 2004 close.
DISTRIBUTION OF THE HELD-TO-MATURITY PORTFOLIO OF UNSTRIPPED
GOVERNMENT DEBT
FIGURE 2.2.3.B. LETRAS DEL TESORO HELD TO MATURITY
Two investors groups hold The ownership distribution of unstripped Government Debt held to maturity has undergone significant (%)
80
84% of outstanding debt: changes in the last few years. Although credit entities keep their lead, it has been increasingly
credit institutions and non challenged, since 1999 and the advent of the euro, by non resident investors. This last group, 70
residents specifically, has raised its share of Central Government Debt outstanding from 26% in 1999 to 41%
60
at the 2004 close. Mutual funds, conversely, have dropped back sharply from 21% in 1999 to only
4% at the end of last year. This left 84% of the end-2004 unstripped Debt portfolio in the hands 50
of two main investor groups; namely, credit entities (43%) and non residents (41%). 40
30
FIGURE 2.2.3.A. DISTRIBUTION OF CENTRAL GOVERNMENT DEBT HELD TO MATURITY
20
(%)
50
10
0
40
1999 2000 2001 2002 2003 2004
Credit institutions Insurance and Pension Funds Mutual Funds Households and companies Non residents
30 Source: Banco de España
20
BONOS AND OBLIGACIONES HELD TO MATURITY
10
Non resident investors replaced credit institutions at the top of the Bonos and Obligaciones ownership Non residents take the
0 list with 46%, thus regaining the place they had held since 1999. Mutual funds, meantime, continued biggest cut of the Bonos
1999 2000 2001 2002 2003 2004 the downward progression that has taken them from a 17% share in 1999 to just 2.4% at the 2004 and Obligaciones portfolio
Credit institutions Insurance and Pension Funds Mutual Funds Households and companies Non residents close. The reason, in this case, has been portfolio diversification within the Eurozone.
Source: Banco de España
66 G O V E R N M E N T D E B T I N S PA I N 67
FIGURE 2.2.3.C. BONOS AND OBLIGACIONES HELD TO MATURITY TABLE 2.2.3.D. DISTRIBUTION OF CENTRAL GOVERNMENT DEBT BY INVESTOR TYPE
(%) (In million euros)
50
1999 2000 2001 2002 2003 2004
40 Amount % of Amount % of Amount % of Amount % of Amount % of Amount % of
total total total total total total
Residents 14,390 84 14,190 76 14,580 77 15,530 75 17,000 79 17,180 78
30
Credit institutions 1,910 11 1,860 10 2,530 13 3,040 15 3,820 18 4,370 20
Insurance & Pension f. 3,750 22 4,180 22 3,990 21 4,110 20 5,350 25 5,920 27
20
Mutual funds 6,570 38 5,900 32 5,720 30 5,830 28 5,760 27 4,890 23
Households & companies 2,160 13 2,250 12 2,340 12 2,550 12 2,070 10 1,910 9
10 Non residents 2,740 16 4,470 24 4,300 23 5,060 25 4,530 21 4,870 22
Total 17,130 100 18,660 100 18,880 100 20,590 100 21,530 100 22,050 100
0
1999 2000 2001 2002 2003 2004 Source: Banco de España
Credit institutions Insurance and Pension Funds Mutual Funds Households and companies Non residents
Source: Banco de España On a PO and IO split, we find mutual funds retained their preference for principal only strips,
while credit institutions, insurers and pension funds invested primarily in interest.
HOLDINGS OF REGISTERED DEBT
TABLE 2.2.3.E. INVESTOR PREFERENCES: PRINCIPAL (PO) VS. INTEREST (IO)
(In million euros)
Credit institutions refinance The foregoing analysis refers to Debt holdings to maturity. But it is also worth looking at
their portfolios via repo developments in registered Debt (the held-to-maturity portfolio minus repo sales plus repo
1999 2000 2001 2002 2003 2004
transactions with mutual purchases). And here we find that 63% of Letras holdings to maturity in credit entity portfolios
% % % % % % % % % % % %
funds, households and and 47% in non resident portfolios have been ceded via buy-sell backs or blocked repos, primarily PO IO PO IO PO IO PO IO PO IO PO IO
companies to mutual funds, households and non financial companies. In Bonos and Obligaciones, meantime,
Residents 86 80 76 75 81 71 79 69 82 74 80 74
55% of credit entity holdings to maturity have been ceded via buy-sell backs or repos to mutual
Credit institutions 9 15 7 14 11 18 13 18 15 23 17 24
funds and non financial companies. In the case of non residents, conversely, there is little difference
Insurance & Pension f. 15 34 15 34 15 31 15 28 22 30 24 31
between the volume of Debt held to maturity and that of the registered portfolio. The conclusion,
Mutual funds 46 26 40 18 40 15 39 11 37 11 31 9
then, is that credit institutions, in their intermediation labours, maintain large held-to-maturity
Households & companies 17 6 14 9 15 8 13 11 9 11 8 10
portfolios which they refinance through repo arrangements with mutual funds, households and
Non residents 14 20 24 25 19 29 21 31 18 26 20 26
non financial companies.
Total 100 100 100 100 100 100 100 100 100 100 100 100
Source: Banco de España
DISTRIBUTION OF STRIPPED CENTRAL GOVERNMENT DEBT BY INVESTOR GROUP
A small increase in the A look at the 2004 distribution of the stripped Central Government Debt portfolio (PO and IO)
stripped debt holdings of reveals some slight slippage in the percentage share of non resident holdings. Credit institutions, NON RESIDENT HOLDINGS OF LETRAS, BONOS AND OBLIGACIONES
credit entities, and insurers conversely, enlarged their share in both straight and percentage terms (from 18% in 2003 to 20%
and pension funds in 2004), as did insurance companies and pension funds (up from 25% to 27%). All other groups The Public Debt portfolio in non resident hands is mainly invested in Bonos and Obligaciones del Insurers and pension funds
reduced their holdings by a small margin in both absolute and relative terms. Estado, although their interest in Letras has been growing in recent years (7% of outstandings are the main holders of
at end 2004). The present analysis, however, will centre exclusively on Bonos and Obligaciones. stripped debt
Insurers and pension funds The mutual funds which until 2003 were the biggest investors in stripped debt ceded the top spot Non resident investors, as we will see in more detail, are primarily drawn to the longer curve
are the main holders of in 2004 to insurance companies and pension funds. Strips of course are eminently suitable for segments. By country of origin, Eurozone investors are gaining in importance over other groups.
stripped debt companies called on to manage assets and liabilities on a long-term horizon.
Until 1999, non resident holdings of unstripped Bonos and Obligaciones held at around 24% of
the outstanding balance. From this point, however, a growing international interest in Spanish
Government Debt sent this share trending higher to the near-on 46% of the present day.
68 G O V E R N M E N T D E B T I N S PA I N 69
TABLE 2.2.3.F. NON RESIDENT HOLDINGS OF BONOS AND OBLIGACIONES By term, the salient feature was the 70% approximately of non resident holdings falling to The non resident portfolio
(In million euros) maturities of 5 years and more. Interest was also heavily concentrated in five strippable references is around 70% invested in
(two dated over 3 years and the rest over five years), which accounted for practically 50% of non terms exceeding 5 years
resident investment. In sum, we can detect a distinct non resident preference for bonds maturing and prizes the 2008 and
Years Non resident holdings Bono and Obligación outstandings Non resident share (%)
in the 2008 to 2013 band (principally the Obligaciones maturing in 2011 and 2013, which make 2013 maturities
1999 62,460 195,050 32.02 up 22% of their holdings).
2000 92,170 213,470 43.18
2001 102,830 226,720 45.36 The data on non resident holdings point to the following breakdown by country of origin:
2002 110,630 235,030 47.07
2003 93,430 233,310 40.05
2004 111,680 242,930 45.97 • The main country of origin is France, with 23% of the non resident total, followed by Germany France tops the list of non
with 13%. The United Kingdom was the largest source of foreign ownership until 1999 but has resident investors, followed
Source: Banco de España since reduced its share dramatically, from 42% in 1998 to 9% at present. by Germany
• Eighty percent of non resident holdings are drawn from European Union countries. Shares have 80% of non resident
varied little versus 2003, with France and Germany moving up slightly and the United Kingdom investment in EMU based
The reasons for this large advance in non resident holdings may be presumed to be Spain’s entry
and Belgium edging lower.
to Economic and Monetary Union (EMU), the upgrades awarded by international rating agencies
and the supportive labours of Primary Dealers. • Outside the EU, we find an increase in the holdings of Japanese investors from 8% to 9% of
the total, while the share of US investors receded from 2.9% to 2.7% and that of Swiss investors
The following figure tracks the progress of non resident holdings in the year 2004 with reference held at a flat 2%.
to the registered portfolio and the adjusted balance (stripping out the impact of coupon washing).
• By investor category, 24% of non resident holdings were lodged with financial institutions (20% The biggest non resident
without a branch in Spain and 4% with), 19% with mutual funds, 15% with insurance investor groups are
undertakings, 10% with central banks and international organisations, and 31% with non financial entities with 24%,
financial companies, households and others. and mutual funds with
FIGURE 2.2.3.G. GOVERNMENT DEBT HELD BY NON RESIDENTS
(In million euros)
19%
120,000
THE CHANGING WEIGHT OF MUTUAL FUNDS IN CENTRAL GOVERNMENT DEBT OUTSTANDING
According to data from securities regulator the CNMV, mutual fund investment has registered a The fast expansion of
marked shift from the domestic into the foreign portfolio. So while in 1998 domestic assets made foreign portfolios since
110,000
up 75% of fund portfolios and foreign assets 17%, by end 2004 this proportion had swung round 1998 gives way to a small
to practically equal shares (49% for the domestic and 51% for the foreign portfolio), although reduction in 2004
the latter has ceded some ground compared to 2003. The share of equity investment, meantime,
held more or less flat after the sharp run-down of 2000-2002, when stock market losses caused
100,000 a flight of investors out of the market. Specifically, stocks represented 9% of the industry portfolio
in 2004 compared to the 23% of 2000, with the reduction falling more steeply on foreign holdings.
As to the Public Debt securities held by mutual funds, we can observe a pronounced decline from the
90,000 61% portfolio weight of 1998 to only 28% today, reflecting the industry’s drive to diversify its assets.
December 03 February 04 April 04 June 04 August 04 October 04 December 04
Registered portfolio Adjusted balance The figure below charts the steady contraction in mutual fund holdings of Letras del Tesoro and Mutual funds lose relative
Source: Iberclear
Bonos and Obligaciones del Estado, in contrast to the growing popularity of Public Debt repos. weight in Letras del Tesoro
The result was an end-2004 breakdown in their Public Debt portfolio of 7% Letras del Tesoro, and Bonos and
21% Bonos and Obligaciones and 72% Debt repos. In 2003 the equivalent structure was 11% Obligaciones
Coupon washing arises when resident investors liable for withholding tax sell their bonds to non Letras del Tesoro, 24% Bonos and Obligaciones and 65% repos.
resident entities (exempt from withholdings) in the run-up to coupon payments. Its importance
has faded since 1999, because corporate income taxpayers have been released from paying
withholdings on the interest raised from new strippable bonds.
70 G O V E R N M E N T D E B T I N S PA I N 71
FIGURE 2.2.3.H. GOVERNMENT DEBT HELD BY MUTUAL FUNDS TABLE 2.2.3.I. PERFORMANCE OF FONDTESORO
(In million euros)
43,000
Unitholders Assets Return
Year
Long-term Short-term Total Long-term Short-term Total Long-term Short-term
1990 3,048 1,923 4,971 62 94 156
1991 42,160 22,258 64,418 903 538 1,441 13.01 12.39
1992 60,896 83,165 144,061 1,346 1,617 2,963 7.13 11.04
23,000 1993 130,145 143,654 273,799 2,983 2,759 5,742 19.54 11.35
1994 123,023 205,718 328,741 2,682 3,948 6,630 -1.72 6.72
1995 111,751 254,127 365,878 2,734 4,885 7,619 11.96 8.06
1996 197,485 345,876 543,361 4,585 6,794 11,379 12.79 6.89
1997 233,640 419,199 652,839 5,504 7,947 13,451 6.06 4.39
1998 253,630 391,011 644,641 6,277 7,022 13,299 6.03 3.21
1999 208,396 350,393 558,789 4,990 5,974 10,964 -1.01 1.50
2000 122,542 283,461 406,003 3,171 4,152 7,824 3.70 2.92
3,000 2001 114,980 348,305 463,285 3,168 6,026 9,195 3.97 3.40
1999 2000 2001 2002 2003 2004 2002 110,419 393,474 503,893 3,179 8,082 11,261 4.59 2.26
2003 95,856 379,831 475,687 2,761 7,812 10,572 1.80 1.30
Letras Bonos and Obligaciones Repos
2004 82,962 325,316 408,278 2,571 6,410 8,971 2.64 0.99
Source: CNMV
Source: General Directorate of the Treasury and Financial Policy
Fondtesoro are mutual Within the mutual fund industry is a special category specialising in Central Government Debt:
funds investing primarily in the Fondtesoros. Their operation is governed by a Ministry of Economy and Finance Order of 7
Central Government Debt June 1990 on partnership agreements relative to Central Government Debt investment funds (later EXHIBIT F: REGULATORY FRAMEWORK OF THE BOOK
amended by an Order of 22 January 2003), whose aim is to popularise government securities ENTRY DEBT MARKET
among the retail public while assuring them a stable outlet among a selected group of financial
intermediaries. With this goal in mind, the General Directorate of the Treasury and Financial Policy BASIC LEGAL FRAMEWORK
has been concluding regular agreements with UCITS management companies, which undertake
to market a designated package of funds in exchange for advertising support from Tesoro Público • General Budget Law 47/2003 of 26 November (BOE [Spanish Official Bulletin], 27 November
and the chance to use the “Fondtesoro” name. 2003), to come into force in two stages starting 1 January 2004 and 1 January 2005.
The large Debt issuance of the early nineties, the extension of tax advantages to income from • National Budget Law 61/2003 of 30 December approving the 2004 Budget (BOE, 31
Assets under
mutual fund investment and the Treasury’s partnership with fund managers for the promotion of December 2003).
management peaked in
1997, but they have since the product, caused something of a Fondtesoro boom. Unitholder numbers climbed to 652,839 • Royal Decree 5/2004 of 9 January providing for Public Debt creation in 2004 and January
lost out to stock euphoria in 1997, the same year that fund assets reached their record high of more than ¤13.45 billion. 2005. (BOE, 10 January 2004).
except in the 2000-2002 From this point to 2000, Fondtesoros shared in the general retreat of fixed-income before equity
• Ministerial Order ECO 30/2004 of 14 January providing for Central Government Debt
interval funds, which were then riding high on the wave of stock market euphoria. In 2001 and 2002, the
creation in 2004 and January 2005, and delegating certain powers to the Director General
economic slowdown penalised equity funds while prompting a renewed advance in fixed-income
of the Treasury and Financial Policy (BOE, 19 January 2004).
products, with the result that money-market Fondtesoros made a large gain in assets under
management. In 2003 and 2004, the improved economic outlook and rising stock markets caused • Royal Decrees 553/2004 of 17 April (BOE, 18 April 2004) and 562/2004 of 19 April (BOE,
another shift in investor preferences towards equity over fixed-income funds. 20 April 2004) on the reorganisation of ministerial departments.
• Royal Decree 1552/2004 of 25 June regulating the organic structure of the Ministry of
Economy and Finance (BOE, 26 June 2004).
• Ministerial Orders EHA/1112/2004 of 28 April (BOE, 29 April 2004), 3057/2004 of 21
September (BOE, 27 September 2004) and 3923/2004 (BOE, 30 November 2004) on the
ratification and delegation of powers.
72 G O V E R N M E N T D E B T I N S PA I N 73
• Securities Market Law 24/1988 of 28 July (BOE, 29 July 1988) and successive amendments. • Ministerial Order ECO/1860/2003 of 30 June for the arrangement of credit lines in euros
to be drawn on via Letras del Tesoro issues, and calling a tender to select the financial
• Law 37/1998 of 16 November amending Securities Market Law 24/1988 of 28 July (BOE,
institutions with which agreements will be concluded (BOE 5 July 2003). Credit lines open
17 November 1998).
to 28 July 2006.
• Law 41/1999 of 12 November on payment and securities settlement systems (BOE, 13
• Resolution of 17 July 2003 of the General Directorate of the Treasury and Financial Policy
November 1999).
publicising the results of the selection process for the arrangement of the above credit lines
• Budgetary Stability Law 18/2001 of 12 December (BOE, 13 December 2001). in euros (BOE, 23 July 2003). Credit lines open to 28 July 2006.
• Royal Decree 505/1987 of 3 April providing for the creation of a book-entry system for
Central Government Debt (BOE, 14 April 1987).
• Royal Decree 116/1992 of 14 February, on the representation of securities by book entries
and the clearing and settlement of stock market transactions (BOE, 20 February 1992).
• Law 44/2002 of 22 November of financial system reform measures (BOE, 23 November
2002), whose first transitional provision establishes the Sociedad de Sistemas de Registro,
Compensación y Liquidación de Valores merging the registration systems of the Servicio de
Compensación y Liquidación de Valores and those of the Banco de España book-entry system,
to manage the registration, clearing and settlement of Book-Entry Public Debt.
• Order of the Ministry of Economy and Finance of 10 February 1999 regulating the office
of Primary Dealer in Kingdom of Spain Debt (BOE, 13 February 1999). Specific implementing
provisions are contained in a Resolution of the General Directorate of the Treasury and
Financial Policy dated 5 March 2003, regulating Kingdom of Spain Primary Dealers (BOE,
11 March 2003), as partly amended by the Resolution of 24 April 2003 (BOE, 3 May 2003).
• Ministerial Order ECO/3131/2002 of 5 December on partnership agreements relative to
Central Government Debt investment funds (BOE, 12 December 2002).
• Auction calendars, the characteristics of the Letras, Bonos and Obligaciones to be issued
and the volume of such placements are set by Resolution of the General Directorate of the
Treasury and Financial Policy. The following applied in the year 2004: Resolution of 21
January 2004 of the General Directorate of the Treasury and Financial Policy specifying
determined issues of Bonos del Estado and Obligaciones del Estado and publishing the
auction calendar for 2004 and January 2005 (BOE, 27 January 2004; and Resolution of 22
January 2004 of the General Directorate of the Treasury and Financial Policy specifying
determined issues of Letras del Tesoro at three, six, twelve and eighteen months during
2004 and January 2005, and calling the corresponding auctions (BOE, 29 January 2004).
OTHER PROVISIONS
• Royal Decree Law 7/2004 of 27 September granting an extraordinary loan of 2,500,034,925
euros in respect of 1997-2001 payments due to the Autonomous Community of Andalusia
under the regional financing system, and issuing a series of provisions on the debt of Renfe
and the Government guarantee for the loan granted to the Argentine Republic.
• Ministerial Order ECO/689/2003 of 27 March approving the Regulations for the Sociedad
de los Sistemas de Registro, Compensación y Liquidación de Valores (BOE, 28 March 2003).
74 G O V E R N M E N T D E B T I N S PA I N 75
