Spain: Policy m easures tow ards a sustained and balanced grow th - - PowerPoint PPT Presentation

Spain: Policy m easures tow ards a sustained and balanced grow th path

February, 2011

1

The reform s and m acroeconom ic developm ents in 2 0 1 0 and 2 0 1 1 are laying the foundations of a sound and rebalanced grow th for the Spanish econom y

Highlights

Two main questions:

• Are reform s tackling the underlying problem s? Existing

evidence on financial system reform, labour market reform, business environment & fiscal consolidation says so

• Can Spain grow ? Spanish firms are competitive and have the

potential to absorb resources and to enhance growth in the future

2

• Reform s are w orking
• Fiscal consolidation
• Future balanced grow th path
• Funding and Debt Managem ent

Banking system restructuring

3

• Creation of FROB

to liquidate non-viable entities and to support restructuring process of viable ones (up to 33 billion with possibility of increasing up to 99 billion if needed). Conditional on cost cutting measures: 25% of branch closure and 15 to 18% of employment reduction on average

• Regulatory reform of saving banks
• Stress tests & transparency: Additional coverage and severity on

European Stress Tests (July 2010) coupled with enhanced transparency on asset exposure (January 2011)

• Saving banks restructuring process finalised: Saving banks have

decreased in number from 45 to 17 in a 6-month process

• New Plan to Strengthen Capital Base and Confidence

4

Cajas decreased in num ber from 4 5 to 1 7 in 6 m onths

Restructuring process of Cajas

* Includes €1,493 M from FROB and €3,775 M from DGS. Source: Bank of Spain and FROB.

Entity Total Assets € Million % of total savings banks' assets Financial support € Million Supporting Fund New institutional setting

UNNIM 28,463 2.2% 380 FROB Merger DIADA 79,329 6.1% 1,250 FROB Merger CAJA ESPAÑA/ DUERO 46,351 3.7% 525 FROB Merger BANCA CIVICA/ CAJASOL- GUADALAJARA 77,174 6.0% 977 FROB IPS UNICAJA-JAEN 35,155 2.8% Not requiring Merger NOVA CAIXA GALICIA 77,480 6.0% 1,162 FROB Merger CCM-CAJASTUR* 127,267 9.9% 5,268 FROB+ DGS IPS CAJASUR-BBK 48,726 3.8% 392 FROB Business transfer LA CAIXA-GIRONA 260,561 20.3% Not requiring Merger CAJA MURCIA-GRANADA 72,105 5.6% 916 FROB IPS CAJAMADRID-BANCAJA 337,257 26.3% 4,465 FROB IPS CAI-BURGOS-BADAJOZ 20,807 1.6% Not requiring IPS

Total 1 ,2 1 0 ,6 7 5 9 4 .3 % 1 5 ,3 3 5

5

Recent m arket doubts require additional m easures

• Additional transparency requirements by Bank of Spain:

Financial institutions must offer to the market specific information

• n

land, construction and residential m ortgage portfolios, in particular those related to the guarantees supporting loan to value and coverage to meet possible impairments

6

• Goals:
• To restore credibility of our financial institutions
• To facilitate funding of financial institutions
• Measures:
• Higher and faster implementation of Basel I I I :
• Core capital 8 % relative to RWA 31st Dec 2010
• Higher ratio for entities no listed, with sm all presence of private

investors and are dependent upon w holesale funding m arkets

• Entities that currently do not reach this higher standard m ust

raise it by Fall 2 0 1 1

• The FROB w ill act as a backstop w ith som e conditions
• purchasing shares under market conditions
• limited time horizon (no more than 5 years)
• Restricted to equity issued by a bank
• Presentation of a restructuring plan
• Compliance with good corporate practices

Recent Plan to Strengthen Financial Sector

7

• Labour market reform:
• Fostering perm anent and training contracts
• Clarifying grounds for objective dism issals
• I nternal flexibility at firm level: firms can opt out from conditions

imposed by sector-specific collective bargaining agreements

Labour m arket reform

Approved on July 2 0 1 0

Source: Ministerio de Trabajo e Inmigración.* Agreed wage increase, cumulative over the year.

Labour m arket developem ents since Labour m arket reform . Hiring, dism isals and w age developm ents ( Year-on-year grow th rates)

May June July Aug Sep Oct Nov Dec Perm anent

• 0.8
• 8.3
• 13.8
• 2.7
• 4.9
• 6.3

0.8 8.6 Fom ento

• 5.4
• 18
• 17.3

41.5 35.1 56.1 80.5 136.5 Tem porary 7.3 2.7 0.7 7.7 3.4

• 0.3

4.9 4.3 Training 3.7

• 7.4
• 10.5
• 2.7

14.5 20.6 46.0

• 5.1

Objective reasons

• 18.9
• 12.3

6.4 18.8 18.0 11.6 23.7 Disciplinary reasons

• 27.3
• 26.3
• 20.5
• 12.8
• 13.3
• 26.8
• 19.7

2 0 0 9 2 0 1 0 -Q1 2 0 1 0 -Q2 2 0 1 0 - Q3 2 0 1 0 -Q4 Collective agreem ents* 2.7 1.5 1.3 1.3 1.3 Real w age 3.5 0.9 0.2

• 1.8

Real labour cost 3.8 0.0

• 0.4
• 2.2

W age developm ents Post-reform period Pre- reform period Hiring by type of contract Dism issals

8

• Unem ploym ent rate is still very high (20.3% in 2010-Q4) and

low ering it must be the focus of our effort

• Additional measures already implemented:
• Private placem ent offices: effective interaction between

private and public employment agencies

• Active

Labour Market Policies: Activation strategies, enhancing individual employment orientation plans and formation

• More to be done:
• Collective bargaining: fostering collective agreements at the

firm level to increase flexibility

Additional labour m arket reform s

To be approved in March

0.0 0.5 1.0 1.5 2.0 2.5 3.0

France Germany Australia Spain Canada United Kingdom United States

1998 2003 2008

9

Product m arket reform s

• According to OECD Spain has pursued a substantial reduction of product

m arket regulation in the last decade

• Nowadays Spain is well situated compared to other OECD countries

Product Market Regulation I ndex (6: more restrictive, 0: less restrictive)

Source: OECD.

10

Additional Product m arket reform s

• Some pools of m arket rigidities still remain in the economy

Professional services Red tape Business creation Perm its and licenses Most analysts point to…

Liberalizing access regulation, foster com petition and m obility ( Draft of the Professional Services Law by Spring 2 0 1 1 ) Reduction program : target reduction 3 0 % by 2 0 12 and 5 0 % by 2 0 2 0 Tim e to incorporate shortened to betw een 1 to 5 days ( for m ost lim ited liability com panies) from an average of 3 3 . ( approved) Am bitious transposition of Service Directive and rem oval of local licenses ( approved)

… w hich the governm ent is already tackling

11

• Reform s are w orking
• Fiscal consolidation
• Future balanced grow th path
• Funding and Debt Managem ent

12

Our com m itm ent: achieving a fiscal deficit of 3 % in 2 0 1 3

• More than 60% of total fiscal adjustment delivered in first 2 years
• Deficit targets robust to:
• Implementation risks, through stronger control mechanisms
• Negative growth surprises, as the targets are unconditional on

macroeconomic performance

Source: National Accounts and Ministerio de Economía y Hacienda. In brackets: net of internal transfers among Public Administration units.

GENERAL GOVERNMENT BALANCE COMMI TMENTS BY UNI T ( % of GDP) 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 General Governm ent Budget Balance

• 1 1 .1
• 9 .3
• 6 .0
• 4 .4
• 3 .0
• Central Government
• 9.3
• 5.9
• 2.3
• 3.2
• 2.1

(-6.7) (-4.8)

• Autonomous Communities
• 2.0
• 3.1
• 3.3
• 1.3
• 1.1

(-2.4) (-1.3)

• Local Governments
• 0.6
• 0.6
• 0.8
• 0.3
• 0.2

(-0.4) (-0.3)

• Social Security

0.8 0.2 0.4 0.4 0.4

13

I n 2 0 1 0 General Governm ent w ill deliver

• According to National Accounts, budget deficit in 2 0 1 0 for the Central

Governm ent will be 5 .1 % . This gives a 0.8% saving to finance potential deviations of other levels of government

• Information on Social Security is partial, but if any deficit arises it will be

small:

• Budget execution of the social security system ended up with a 0.2%

surplus

• Preliminary information on the public employment office shows a 0.3%

deficit in National Account terms

• Some regional governments might deviate from the initial objectives but
• verall deficit should not be very distant from the target:
• Until 2010-Q3 all regions but 2 (6% of GDP) had fulfilled the

commitment

14

Monitoring Autonom ous Com m unities

• All regions require authorisation of debt issuance depending on the

compliance of the previous year target and the presentation of a rebalancing plan (table below)

• For the first time in 2010, the authorisation for new issuance was given in

three stages (initial 0.75% of GDP, additional 1.20% with proper budgetary execution in the first semester, final 0.45% with compliance)

OBJECTI VE OF BUDGETARY STABI LI TY DEBT I SSUES AND FOREI GN CURRENCY LONG TERM OPERATI ONS SHORT TERM OPERATI ONS Com pliance

( Madrid, La Rioja, Galicia)

Yes No No Non-com pliance w ith rebalancing plan

( Rest)

Yes Yes No Non-com pliance w ithout rebalancing plan Yes Yes Yes

Requirem ent of authorisation

15

Monitoring Autonom ous Com m unities

• On November 24th, following execution of the first sem ester Murcia and

Castilla la Mancha ( 6 % of GDP) have been denied the second tranche

• f debt issuance until a reequilibrium plan was presented and approved
• Both regions already presented plans to get back on track. Those plans

must be approved by the Ministry

• Additional regions expect to end 2 0 1 0 w ith a deficit higher than 2 .4 % ,

in that case the third tranche of debt issuance (0.45% of GDP) is not going to be authorised unless a plan is presented and approved

• Plans must be consistent w ith the 1 .3 % deficit
• f 2011. Public

evaluations will be provided on February 28th

16

Fiscal consolidation in 2 0 1 1 is guaranteed by the budget

• Central Governm ent Budget 2 0 1 1 :
• Non financial expenditure diminishes by 7.9%
• Spending by ministerial department is 15.6% lower than in 2010
• Personal Income Tax: increases in marginal tax rate
• SMEs taxation modified to help small enterprises growing
• Autonom ous Com m unities Budget 2 0 1 1 :
• Budgets for most communities (except Cataluña and Baleares).
• On average non financial expenditure budget diminishes by 6.4%
• Compensation of public employees budget diminishes by 5.1%
• On average ordinary revenues budget decreased by 1.4%

17

• The consolidation process lies both on revenue increases and expenditure

reductions

• Overall in the two years, around 57% of the effort is made through lower

expenditure

Breakdow n of fiscal consolidation in 2 0 1 1 ( I )

Source: Ministerio de Economía y Hacienda. Data corresponds to estimations.

( % GDP) ( % in total) ( % GDP) ( % in total) Revenue increase 1.2 66.7% 1.0 30.3% Expenditure reduction 0.6 33.3% 2.3 69.7%

Total 1 .8 3 .3

COMPOSI TI ON OF DEFI CI T REDUCTI ON MEASURES

2 0 1 0 2 0 1 1

18

Breakdow n of fiscal consolidation in 2 0 1 1 ( I I )

• Around 50% of the increase in revenues in 2010 is the consequence of

higher taxes; 90% in 2011

• Indirect taxes represents more than 50% of the tax increases

Source: Ministerio de Economía y Hacienda. Data corresponds to estimations of the effects.

BREAKDOW N OF THE I NCREASE REVENUES OF GENERAL GOVERNMENT

2 0 1 0 2 0 1 1

( % GDP) ( % GDP)

Perm anent m easures adopted in 2 0 1 0 Budget 0 .6 0 .4

Increase in VAT rates 0.2 0.3 Increase in excise duties 0.1 0.0 Elimination of 400€ income tax deduction 0.3 0.1

Perm anent m easures adopted in 2 0 1 1 Budget 0 .0 0 .1

Excise duties increase 0.0 0.1 Social contributions and other 0.0 0.0

Cyclical com ponent and other ( tax refunds) 0 .6 0 .5

Total revenue increase 1 .2 1 .0

19

• The bulk of the adjustment lies on the measures adopted in May 2010 and

the reversion of transitory funds

• Very few items increase in these years, in particular interest payments

and pensions

Decom posing fiscal consolidation in 2 0 1 1 ( I I I )

Source: Ministerio de Economía y Hacienda. Data corresponds to estimations of the effects.

BREAKDOW N OF THE EXPENDI TURE REDUCTI ON OF GENERAL GOVERNMENT

2 0 1 0 2 0 1 1

( % GDP) ( % GDP)

Reversion of tem porary m easures adopted in 2 0 0 9 and 2 0 1 0 0 .2 0.5 Measures adopted in 2 0 1 0 and 2 0 1 1 budgets 0 .8 0 .8

Central Government Budget Bill 0.4 0.2 Autonomous Communities' Budget Bills 0.4 0.6

Extraordinary m easures adopted in 2 0 1 0 1.0 1 .0

Inmediate Action Plan (January 2010) 0.5 0.0 May Extraordinary Measures 0.5 1.0

Cyclical com ponent and other

• 1 .4

0.0

Total expenditure reduction 0 .6 2 .3

BREAKDOW N OF GENERAL GOVERNMENT BALANCE ( % of GDP)

2 0 0 9 2 0 1 0 2 0 1 1 Net effective borrow ing need

• 1 1 .1
• 9 .3
• 6 .0

I nterest Paym ents 1 .8 2 .2 2 .7 Prim ary Balance

• 9 .4
• 7 .1
• 3 .4

Cyclical component

• 1 .4
• 1 .7
• 1 .5

Structural Primary Balance

• 8.0
• 5.4
• 1.9

Transitory measures 2.0 0.7 0.1

Structural Primary Balance excluding Transitory Meaures

• 5.9
• 4.7
• 1.8

20

Consolidation path for the future

• The cyclical component in 2011 adds 1.5% to the deficit
• Once taken into account interest payments, the cyclical component and

transitory measures, the forecasted structural primary balance for 2011 is

• 1.8%

Source: Ministerio de Economía y Hacienda.

21

Pension reform to w arranty fiscal sustainability

• The Government presented the draft of the pension reform. Main

measures included were:

• A gradual increase in the statutory retirem ent age from 6 5 to 6 7

(retirement at 65 is only allowed for long contributing careers)

• Additional restrictions to early retirem ent
• Reinforcing the relation between contributions and benefits:
• the pension is com puted as a function of the last 2 5 years of

career (an increase from 15)

• An increase in the number of years worked (at least 37) to reach

a full pension

• Sustainability factor: Adjustment of the relevant parameters of the

current system to the changes in life expectancy every 5 years from 2027 onwards

22

• Reform s are w orking
• Fiscal consolidation
• Future balanced grow th path
• Funding and Debt Managem ent

• 2.5
• 2.0
• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1.5 2005 2006 2007 2008 2009 2010 SPAIN EURO AREA

• 2.5
• 2.0
• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1.5 2005 2006 2007 2008 2009 2010 SPAIN EURO AREA Source: Eurostat. Source: Eurostat.

GDP volum e m easures. Quarter-on-quarter grow th rates GDP volum e m easures excluding construction. Quarter-on-quarter grow th rates

23

W eak grow th for 2 0 1 0 and 2 0 1 1

• The recovery of the economic activity in Spain was somewhat delayed and

less intense than in the euro area

• However, this is largely related to the adjustment of the housing sector

0% 5% 10% 15% 20% 25% 30% 0% 2% 4% 6% 8% Stock of unsold new houses (% total stock) Mediterranean and Madrid surroundings Other provinces Price adjustment

24

Construction adjustm ent is being corrected

• Residential investm ent w eighted 4 .4 % of GDP in 1 9 9 5

and it increased until 9.3% in 2006. I n 2 0 1 0 -Q3 this ratio is 4 .6 %

• Adjustm ent is not over: y-o-y growth residential investment in 2010

(-20.1% ) and 2011 (-5.0% ), taking 1.2 and 0.2 p.p. off GDP growth

• But stock of unsold houses starts shrinking and prices are adjusting

Housing: units started and finished

Source: Ministerio de Economía y Hacienda. 100 200 300 400 500 600 700 800 2005 2006 2007 2008 2009 2010 2011 2012 2013

St art s Finished Housing st ock (Thousand unit s) Real Price adjustm ent by unsold houses ( per province)

Source: Ministerio de Fomento.

50 100 150 200 250 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Tot al wit hout const ruct ion and real est at e Const ruct ion & real est at e services 2 4 6 8 10 12 UK Germ any Euro area France Spain I taly Int erest Int erest & rent payment s

25

Adjustm ent in Real Estate reduces aggregate leverage

• Construction and real estate is intensive in credit
• Compared to other countries, Spanish firms in those sectors were highly
• leveraged. Other sectors do not present m uch difference

Source: Ministerio de Economía y Hacienda.

Corporate leverage: construction & other activities (% of GVA)

Source: Eurostat.

I nterest and residential rent paym ents (% of disposable income)

26

Other com ponents of national dem and are recovering

• Private consum ption is grow ing at an average of 1.2% (from -4.3% in

2009) and investm ent in equipm ent is growing in average 2.3% (from -25% in 2009)

• But the question is whether the economy is in the position of absorbing the

construction adjustment

Source: National Statistics Institute, Spain and Ministerio de Economía y Hacienda.

Macroeconomic evolution (year-on-year growth rates, volume measures)

2010 2011 Q1 Q2 Q3

Final Consumption Expenditure 0.9

• 2.3
• 0.4

1.6 1.0 0.5 0.9

• Private consumption
• 0.6
• 4.3
• 0.3

2.2 1.4 0.5 1.8

• Public Consumption

5.8 3.2

• 0.5

0.1

• 0.1

0.6

• 1.6

Investment

• 4.8
• 16.0
• 10.4
• 6.8
• 7.0
• 8.5
• 1.5
• Equipment
• 2.5
• 24.8
• 4.4

8.7 2.4 1.8 4.2

• Construction
• 5.9
• 11.9
• 11.4
• 11.4
• 11.6
• 11.4
• 0.4
• Other products
• 4.1
• 16.2
• 15.4
• 11.2
• 3.3
• 11.7
• 4.5

Exports

• 1.1
• 11.6

9.1 11.6 8.7 9.3 6.4 Imports

• 5.3
• 17.8

2.3 9.3 3.9 3.3 2.9 Real GDP 0 .9

• 3 .7
• 1 .4

0 .0 0 .2

• 0 .3

1 .3

2008 2009 2010 FORECAST MEH REAL DATA - NATIONAL ACCOUNTS

60 70 80 90 100 110 120 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Spain Germany France US 50 75 100 125 150 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Spain Germany France Unit ed St at es

• Remarkable resilience of m arket share in world merchandise exports and

increase in world service exports

• Most developed econom ies decreased market share

Share in w orld m erchandise exports (Index 2000= 100) Share in w orld service exports (Index 2000= 100) 27

Spanish firm s are com petitive

Source: International Monetary Fund. Source: World Trade Organisation.

28

General com petitiveness and internationalization

0% 1% 2% 3% 4% 5% 6% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 ⎯ Automotive products ⎯ Agricultural products ⎯ Iron and steel products ⎯ Pharmaceutical products ⎯ Chemical products ⎯ Machinery and transport equipment ⎯ Clothing ⎯ Telecomunications equipment ⎯ Fuels and mining products ⎯ Office and telecom equipment ⎯ Electronic data processing and office equipment ⎯ Integrated circuits and electronic components

Source: World Trade Organisation.

Share in w orld exports by product

• Export perform ance: is widespread and not attributable only to a handful
• f sectors
• Spanish exports are entering in new em erging m arkets: In 2009 (1999)

78.8% (82.5% ) went to OECD and 56.7% (60.2% ) to the Euro Area.

• Large increase in Spanish investment abroad (FDI) in 2009 weights 44.2%
• f Spanish GDP (20% in 90’s).

85 90 95 100 105 110 115 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Spain Italy Germany France Belgium 80 90 100 110 120 130 140 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Spain It aly Germany France

• Between 2000 and 2008, Spain faced an increase in labour costs

relative to its European peers

• Price com petitiveness has been improving since 2009

ULCs I ndexes relative to the Eurozone (Index 2000= 100) 29

I n a particular period of increasing labour costs

Source: Ministerio de Economía y Hacienda.

Export prices indexes relative to the Eurozone (Index 1999= 100)

Source: Banco de España.

• 20
• 15
• 10
• 5

5 10 15 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Germany Greece Spain France Net herlands Port ugal

• 30
• 20
• 10

10 20 2009 2010 Q1- Q3 Germany Spain France It aly Unit ed Kingdom

Recent im provem ent in cost com petitiveness has fostered exports even further

• Net borrow ing of 11.4% of GDP in 2008 Q1 shrinks to 2 .7 %

in 2010

• Q3. Partly attributed to construction adjustment
• Current account deficit is adjusting due to a strong behaviour of
• exports. Exports are now reacting to dow nw ard pressure on domestic

prices and labour costs moderation

Net lending/ borrow ing (% GDP seasonally and calendar adjusted) Exports of goods and services (year on year growth rates)

Source: Eurostat.

30

Source: Eurostat.

31

• The

combination

• f

structural reform s, the correction

• f

m acroeconom ic im balances and the existence of a com petitive body of firm s will sustain a grow th path in the future

• Despite low er grow th this year, projections of the Spanish econom y

in the m edium run are at least in line w ith those of the Euro Area

A sustained grow th path for the future

Sources: Ministerio de Economía y Hacienda, IMF, OECD, European Commission. * Potential output.

Com parison of grow th forecasts

MEH I MF OECD EC I MF OECD EC 2 0 1 1 1.3 0.6 0.9 0.7 1.5 1.7 1.5 2 0 1 2 1.5 1.8 1.7 1.8 2.0 1.8 2 0 1 3 2.1 1.8 2 0 1 4 2.1 1.8 2 0 1 6 -2 0 2 5 * 2.3 1.7 Spain Euro Area

32

• Reform s are w orking
• Fiscal consolidation
• Future balanced grow th path
• Funding and Debt Managem ent

33

Highlights of debt m anagem ent

• Substantial reduction of net issuance
• Lengthening of average life of debt outstanding
• A solid and diversified investor base instrumental in difficult times
• Transparency and predictability highly valued by investors

• Projected at 62.8% at end 2010, Spain’s debt to GDP ratio is 20% lower than the

Euro area average

• A lower debt burden provides resiliency in terms of interest payments and refinancing

needs (< 2.2% of GDP in 2010)

2.4% 2.4% 2.7% 3.0% 3.2% 4.80%

0% 1% 2% 3% 4% 5% 6% Italy Euro Area UK France Germ any Spain

2006 2008 2010 2011

I nterest Expenditures (% of GDP, EDP)

Debt to GDP w ell below EU average

34 Debt to GDP ratios

Sources: Excessive Deficit Notification Tables. Eurostat. 2011: European Commission Autumn 2010 Forecasts. Sources: Excessive Deficit Notification Tables. Eurostat. 2011: European Commission Autumn 2010 Forecasts.

120.2% 87.2% 86.8% 83.5% 75.9% 69.7%

0% 20% 40% 60% 80% 100% 120% 140% Italy Euro Area UK France Germ any Spain

2006 2008 2010 2011

1 1 6 .7 3 .4 7 6 .8 6 2 .1 6 1 .6 8 2 .3 5 8 .7 1 5 .2 3 4 .4

20 40 60 80 100 120 140 2009 2010 Jan Project ion 2010 Execut ed Tot al net issuance Medium- and long- t erm issues Let ras del Tesoro net issues

• 46.8%

(-28.7%)

• 9.3%
• 5.1%
• 5.9%
• 10%
• 9%
• 8%
• 7%
• 6%
• 5%
• 4%
• 3%
• 2%
• 1%

0% 1% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2009 2010 Deficit t arget 2010

• Substantial reduction in net issuance: austerity measures and a better-than-expected

performance of tax revenues have reduced the Central Government’s borrowing needs

• Net issuance in 2010 (€62.1 bn) 27% lower than initially projected (€76.8 bn)

35 Funding Program m e. 2 0 0 9 -2 0 1 0 (Net issuance in billion Euro)

Source: Dirección General del Tesoro y Política Financiera.

Effective Net Borrow ing( -) / Lending( + )

• f Central Governm ent 2 0 0 9 -2 0 1 0

(% GDP, EDP)

Source: Ministerio de Economía y Hacienda. Provisional data.

Funding program m e in perspective: 2 0 1 0 vs 2 0 0 9

3.53 3.69 2.15 2.56 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Cost of Debt out st anding Cost at issuance

Cost of debt outstanding and cost at issuance (in percent, up to December 31st 2010) 36

Positive funding execution snapshots

• Support the normalization of market functioning through transparency and

predictability via auctions

• On-going engagement with our investor base to update on the implementation of

policy strategy and economic and budgetary developments

Source: Dirección General del Tesoro y Política Financiera. 2 4 6 8 10 12 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 0.0 0.5 1.0 1.5 2.0 2.5 Euro bn Bid- t o- cover rat io

• Avg. bid- t o- cover

(€ bn.) (Bid-to-cover)

Auctions of Bonos and Obligaciones in 2 0 1 0

Source: Dirección General del Tesoro y Política Financiera.

4.54 4.28 6.52 6.70 1 2 3 4 5 6 7 8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Durat ion Average life

37

Sources: Dirección General del Tesoro y Política Financiera and Bloomberg.

Duration & Average Life to Maturity of the Portfolio (Letras, Bonos and Obligaciones) (in years) Average life to Maturity (T-Bills and medium and long-term euro-denominated debt) (in years)

Lengthening of average life has enabled a prudent debt m anagem ent

• Average life has increased thanks to a reduced issuance of T-Bills and focus on

medium- and long-term supply

• Effort to achieve additional lengthening of average life has enabled prudent debt

management

7.01 6.77 6.70 6.18 6.14 5.90 5.76 5.0 5.5 6.0 6.5 7.0 7.5 France I taly Spain Germ any Portugal Netherlands Belgium

0% 5% 10% 15% 20% 25% 30%

France Benelux Germany Italy Rest of EU Rest of Europe Asia, Africa &

• thers

America

2007 2008 2009 2010

38

Source: Dirección General del Tesoro y Política Financiera.

Geographical distribution of non-resident holders of governm ent bonds (Term investment, % of non-resident portfolio)

A stable investor base

Governm ent Bonds by Holder (Term investment, % of total portfolio)

• Non-resident investors have been of instrumental importance throughout various

periods of uncertainty in 2010

• The geographical distribution of holdings of government bonds has remained

relatively stable during the last two years

Source: Dirección General del Tesoro y Política Financiera. 0% 10% 20% 30% 40% 50% 60%

Credit Institutions Pension, Insurance and Mutual Funds Households & non- financials Spanish

• fficial

institutions Non- residents

2007 2008 2009 2010

39

The funding program m e in 2 0 1 1

• Funding requirement down by 24% in accordance with frontloading of fiscal restraint

measures

• Funding programme does not factor in any potential proceeds from privatisation

processes

Source: General State Budgets Bill 2011.

47.2

• 46.6

47.2 93.8 0.0 47.2 588.0 5: Net increase in T-Bills 2: Redemptions of medium- and long-term bonds 6 = 5 + 3: Net change in outstanding debt 7 : Forecast Outstanding Central Governm ent Debt at end 2 0 1 1 Tesoro funding in 2 0 1 1 ( Billion Euro) 1 : Funding requirem ent ( = Net I ssuance) 4 = 2 + 3 : Gross issuance of m edium and long- term bonds 3: Net issuance medium- and long-term bonds

Funding Program m e. 2 0 1 0 -2 0 1 1 (Net issuance in billion Euro)

6 2 .1 4 7 .2 5 8 .7 4 7 .2 3 .4

10 20 30 40 50 60 70 2010 2011 Tot al net issuance Medium- and long- t erm issues Let ras del Tesoro net issues

• 24.0%

( - 1 9 .6 % )

Source: General State Budgets Bill 2011.

40

Outlines of the 2 0 1 1 funding program m e

Medium and long term:

• Increased flexibility in auction procedures: Monthly announcements + potential off-

the-run lines announced Friday prior to the auction

• Limit size per line: increased to 16.5 bn € for longer lines

Short term:

• 3- and 6-month Letras auction 4th Tuesday of every month
• 18-month and 12- month T-bills auction 3rd Tuesday of every month

Other funding sources:

• Tesoro Público is open to additional foreign currency issuance
• Floating rate notes have provided in 2009 and 2010 an additional funding source
• Private placements
• Schuldschein loans

Projects:

• European inflation-linked issues (HICP-ex tobacco)

50 100 150 200 250 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2 4 6 8 10 12 14 16 18 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Let ras Bonds and long- t erm loans*

Monthly m aturity structure (in billion Euros)

Source: Dirección General del Tesoro y Política Financiera.

41

Robust Treasury Managem ent System

• Redemption dates of medium- and long-term bonds (principal and coupons) are set

to coincide with biggest inflows of tax revenues

• Liquidity lines with banks
• Transparency: regular and publicly available information about budgetary execution,

change in cash balances, non resident holdings,…

• Issuance schedule based on very conservative assumptions about budget execution
• Excess liquidity is lent in the money market each day through a monthly auction

since 2001

Average seasonal index of tax revenues of the Central Governm ent 2 0 0 8 -2 0 1 0 (Index 100= average)

Source: Dirección General del Tesoro y Política Financiera.

10 20 30 40 50 60 70 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2037 2040 2041 1 8 .5 % 1 7 .4 % 1 3 .3 % 1 1 .9 % 9 .0 %

5% 10% 15% 20% I taly Belgium France Spain Germ any

Redem ptions in 2 0 1 1 , as of January 1 st 2 0 1 1 . (in % of 2010 GDP estimate, Euro-denominated bonds and T-Bills)

Source: Dirección General del Tesoro y Política Financiera for Spain and Bloomberg for other countries.

42

Risk and refinancing m easures

Source: Dirección General del Tesoro y Política Financiera.

Maturity structure of m edium - and long-term bonds. (in billion Euros)

• Refinancing risk remains subdued due to lengthening of average life
• Redemptions of Euro-denominated debt remain well in line with those of peers

43

More and updated info on the Spanish econom y

http: / / www.thespanisheconomy.com /

44

Thank you for your attention

José Manuel Campa – Secretary of State of Economy

Soledad Núñez – General Director of the Treasury and Financial Policy DirectorTesoro@tesoro.meh.es Ignacio Fernández-Palomero – Deputy Director for Funding and Debt Management ifernandez@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

Ignacio Vicente ivicente@tesoro.meh.es Rocío Chico mrchico@tesoro.meh.es Carla Díaz cdiaza@tesoro.meh.es For m ore inform ation please contact: Phone: 34 91 209 95 29/ 30/ 31/ 32 - Fax: 34 91 209 97 10 Reuters: TESORO Bloomberg: TESO Internet: www.tesoro.es For m ore inform ation on recent developm ents: www.thespanisheconomy.com