Secretary of State for the Economy
February 2010

• Highlights
• The long growth cycle and the crisis
• Fiscal consolidation and structural reform
• Funding Strategy of the Kingdom of Spain
~ 2009 ~
1

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

• Highlights
• The long growth cycle and the crisis
• Fiscal consolidation and structural reform
• Funding Strategy of the Kingdom of Spain
3

6%
4%
2%
0%
-2%
-4%
-6%
1994-2008: Convergence and Debt reduction
• GDP per capita has leapt forward, exceeding the average of EU-25
• Fiscal rigour during the good times allowed debt to GDP to be more than halved
GDP
(Year on year real growth rates)
Debt to GDP
(% nominal GDP)
Euro-area
Euro-area
Spain
80%
70%
60%
50%
40%
30%
Spain
Source: Eurostat.
Source: Eurostat.
4

Investment binge: housing and beyond
• What has fuelled domestic demand is a soaring investment rate, with the national savings rate staying close to Eurozone average
• The housing boom is part of the story, but not the whole story
Savings rate
(% nominal GDP)
30
25
20
15
10
Belgium Germany Spain France
2000 2005 2009*
Source: Eurostat.
* 2009Q3
Italy
34
30
26
22
18
Investment rate vs. Savings rate
(% nominal GDP)
Savings rate
Source: Eurostat.
Investment rate
5

Investment binge: housing and beyond
• The residential real estate sector grabbed a non-sustainable share of GDP and employment…
Construction Sector: Gross Value Added and Employment
(% Total Value Added and of Total Employment)
14
13
12
11
10
9
8
7
6
Full-time equivalent employees
Source: National Statistics Institute, Spain.
Gross Value Added
6

Investment binge: housing and beyond
• …but Spain has also invested heavily in equipment, infrastructure and Research and Development
Investment in equipment
Public Investment
(% of GDP)
5.0
4.0
3.0
2.0
1.0
0.0
EU-27 GERMANY FRANCE ITALY UK SPAIN
Source: Eurostat.
7

Intensive in employment
12%
10%
8%
6%
4%
2%
0%
• Residential construction attracted low skilled labour, dragging productivity lower
• Labour supply matched this demand with the help of immigration flows
Active population
(Growth rates from 2005Q1 to 2009Q3)
Labor productivity
(Relative to EU-27, PPP)
107
106
105
104
103
102
101
100
Source: Eurostat. Labor Force Survey.
Source: Eurostat. Labor Force Survey.
8

125
120
115
110
105
100
95
Cost competitiveness
• Loss of competitiveness has been moderate in the tradable sector
• Nominal divergence stems from non-tradables (where the bulk of the adjustment is taking place)
Unit labour cost index
(Relative to eurozone 1999=100)
Manufacturing ULC index
(Relative to eurozone 1999=100)
140
130
120
110
100
90
80
Spain
Source: Eurostat.
Italy Germany France
Source: Eurostat
Spain Italy Germany France
9

Exports show underlying improvement in supply
• In spite of brisk domestic demand and waning price competitiveness…
• …Spain's market shares have outperformed most of peers
120
Share in world merchandise exports
(Index 2000=100)
110
100
90
80
70
60
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
United States Spain Germany France
Source: International Monetary Fund.
150
125
100
75
Share in world exports of services*
(Index 2000=100)
50
2000 2001 2002 2003 2004 2005 2006 2007
Spain Germany France United States
Source: World Trade Organisation.
* Services other than transportation and travel.
2008
10

Services Exports’ market share has increased significantly
• Among others, services related to architecture, construction and engineering have more than doubled market share
Share of service exports in the OCDE, by service
10
2000
2007
8
2
0
6
4
Source: OECD.
11

FDI flows have increased significantly
• Outward FDI stock per capita has grown faster in Spain than in the Eurozone
• Remains a major destination of international investment
Top receivers of FDI in 2008
(Stock in millions of US $)
0.90
Outward FDI stock per capita relative to Eurozone
0.85
0.80
0.75
0.70
0.65
0.60
2002 2003 2004 2005 2006 2007 2008
2500000
2000000
1500000
1000000
500000
0
Source: World Investment Report 2009
Source: World Investment Report 2009
12

20
The crisis prompts an abrupt adjustment
• Rapid downsizing of residential sector: output, L (mainly in temporary contracts)
• Ripple effects on employment in other sectors
Unemployment rate
(In percent)
16
12
8
Total
Construction
Industry
Services
Sectoral employment
(total number) july 2008
19.382.121
2.361.177
2.731.068
13.150.027
sept 2009
17.935.095
1.752.157
2.377.211
12.599.061
dif
-1.447.026
-609.021
-353.857
-550.966
Sources: Eurostat. Labor Force Survey.
4
2005 2006 2007 2008 2009
Spain Euro area (16 countries)
Sources: Eurostat. Labor Force Survey.
%
(100)
(42,1)
(24,5)
(38,1)
13

Changes in sectoral and external balances
• Large swing in private sector balance: plummeting Investment and soaring Savings
• Government Deficit jumps, but 2.5 points of GDP are one-off
• Current Account deficit has halved in 2009
Sectoral balances
(% of GDP)
%
2
0
-2
-4
-6
-8
-10
-12
-14
8
6
4
1,9
-11,0
2007
Source: National Statistics Institute, Spain.
Public Sector Balance
Private Sector
Balance
-4,1
-5,0
2008
6,5
-11,4
2009
14

• Highlights
• The long growth cycle and the crisis
• Fiscal consolidation and structural reform
• Funding Strategy of the Kingdom of Spain
15

Policy Strategy for Sustainable Growth
• Prudent Macroeconomic Scenario 2010-2013
• Agreement on Fiscal Consolidation to bring the deficit back to 3% in 2013
• Structural Reforms:
• Structural Reforms in the goods markets
• Public Pensions System
• Labour Market
• Banking sector Restructuring
16

The Government’s Macroeconomic scenario
• The output gap will be closed by 2013, after peaking in 2010
• External demand contribution to GDP will gradually wane as domestic demand gathers steam
• Potential growth will recover from a trough of 0.6% in 2010 to
1.6% in 2013
Macroeconomic scenario 2009-2013
(Growth rate in percent)
GDP
Final Consumption Expenditure
Gross Fixed Capital Formation
National Demand (contribution to GDP growth)
Exports of Goods and Services
Imports of Goods and Services
External demand (contribution to GDP growth)
Source: Annual update of the Stability Programme.
2009 2010
-3.6
-2.4
-15.7
-6.4
-12.4
-18.7
2.8
-0.3
0.3
-6.5
-1.4
2.8
-1.3
1.1
2011
1.8
1.7
0.3
1.4
5.2
3.7
0.4
2012
2.9
2.2
4.2
2.6
6.9
5.8
0.3
2013
3.1
2.1
5.9
3.0
7.4
6.8
0.1
17

Fiscal consolidation strategy
• Substantial reduction in Spending and moderate increase in Revenues
• Already in 2010 a 2.2% cut in structural deficit
Fiscal Adjustment Path 2009-2013
(Growth rate in percent)
GDP
General Government Budget Balance (% of GDP)
General Government Gross Debt (% of GDP)
Source: Annual update of the Stability Programme.
2009 2010
-3.6
-11.4
55.2
-0.3
-9.8
65.9
2011
1.8
-7.5
71.9
2012
2.9
-5.3
74.3
2013
3.1
-3.0
74.1
18

Starting and final points of fiscal consolidation
• Temporary measures (changes in tax collection, one off investment funds) account for 2.4% points of GDP in 2009’s total deficit
• Total size of fiscal policy adjustment (structural terms): 5.7% of
GDP
Fiscal position
General Government Balance (1)
Cyclical component (2)
Interest payments (3)
Temporary measures (4)
Structural Primary Balance (1)-(2)-(3)-(4)
Source: Annual update of the Stability Programme.
2009
-11,4
-1,4
-1,9
-2,5
-5,6
2013
-3
0
-3,1
0
0,1
19

Fiscal restraint measures
Measures adopted and announced (% of GDP)
2010 Budget
New Measures*
VAT
Excise Taxes
400€ Tax Rebate Reform
Savings Tax Reform
SME Corporate Tax Reform
Government Expenditure
Additional cut in 2010 Expenditure
Central Government Austerity Plan 2011-2013
Regional and local government Spending cuts
Source: Annual update of the Stability Programme.
Revenues
0.7
0.3
0.4
0.1
-0.1
• Restraint in wage outlays for all public administrations through:
• 10% replacement rate
• No new temporary hiring
• Strong moderation in wages
• Sizable cuts in investment, transfers and subsidies
Expenditures
-0.8
-0.5
-2.6
-0.5
20

Can we implement this?
• We have done it in the past, which proves our compromise, the quality of our public finances, and the success of our fiscal discipline.
• Shared commitment to fiscal discipline and margin to secure further reductions in the deficit
Net Lending (+)/Borrowing (-) of General Government
4.0
(% nominal GDP, EDP)
2.0
0.0
-2.0
-4.0
-6.0
-8.0
-10.0
-12.0
-14.0
* Annual update of the Stability Programme.
21

Debt dynamics
• Even after the impact of strong stabilisation policies, Spain's Debt to GDP is significantly lower that the Eurozone average
Gross Debt-to-GDP (%)
2000-2010
90
80
70
France
Germany
Spain
60
50 55.2
65.9
40
39.7
30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
125.0
112.5
100.0
87.5
75.0
62.5
50.0
37.5
25.0
12.5
0.0
Gross Debt-to-GDP (%)
2010F
Eurozone
Average: 84.0%
Spain Ireland France Germany Italy
Sources: European Commission, Annual update of the Stability Programme and International Monetary Fund.
UK USA
22

Lowest interest burden within affordable limits
Ratio of interests to GDP of General Government
(% nominal GDP, EDP)
13
11
9
7
5
3
1
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20
09
*
20
10
*
Spain Germany France Belgium Italy UK
Source: European Commission.
* European Economic Forecast Autumn 2009, European Commission.
23

Structural Reforms in product markets
• Improving the institutional environment for business: by modernizing and simplifying government activities as well as increasing general government discipline
• Fostering competitiveness: by reducing the administrative burden of creating companies and reducing red tape
• Fostering modernization: promoting sectors that are at the base of economic activity (R&D, innovation and training), improving support for their integration into the overall value chain, and facilitating the internationalization of businesses
Estimated impact on GDP ⇨ + 0.32% in Potential GDP
24

Residential Real Estate Sector
• Phasing out fiscal incentives for housing ownership from
2011 (deduction of mortgage payments)
• Removing barriers to the development of the rental market:
• Same fiscal treatment than ownership
• Creation of REITS
• Legal changes to strengthen certainty for landlords
• Tax Incentives for refurbishment provide some support
25

Preventive financial support measures
Credit stimulus
Capital
Reorganization reorganisation
FAAF funding
Bank guarantees
(2008-
2009)
ICO lines
FROB
26

The financial system remains resilient
• Main source of perceived vulnerability regards losses stemming from lending to real estate developers
• Bank of Spain stress test: Operating income over 3
years is able to absorb losses of 40% of the portfolio of lending to real estate developers.
• Extreme assumptions of stress test: PD of 40%(3 times the peak of 1993) and LGD of 100 % (highly implausible)
27

FROB: a tool for restructuring the banking sector
Rationale for the initiative
Overcoming fragmentation in the savings and banks sector.
- Achievement of economies of scale to digest low interest margins and real estate impact.
Governance
- Independent management.
- Strong accountability to Parliament.
- Authorized by DG Competition.
Asset Operations
- Support to integration processes subject to conditions set by the banking supervisor.
- Instrumented through convertible preference shares with market-oriented remuneration.
Funding
- Public-private mix of capital (9 bn€).
- Agency-like coordinated programme.
funding with the programme sovereign
28

Pension System Reform
Proposed Measures:
• A progressive increase in the retirement age (to 67 years)
• Strengthening relationship between contributions and benefits
• A more flexible relationship between complementary social security and the public system
• Possible adjustment of other parameters of the current system
Expected Results: Sustainability of the pension system
29

Labour Market Reform
• Five main guidelines:
• Stability in employment, by reducing market segmentation
• Reform of Collective Bargaining system
• Incentives for young workers’ employment and education
• Promotion of the integration of women in the labour market
• Worker intermediation and greater control of temporary occupational disability claims
30

• Highlights
• The long growth cycle and the crisis
• Fiscal consolidation and structural reform
• Funding Strategy of the Kingdom of Spain
31

• Significant reduction in net funding requirements and persistence of sound risk metrics
• Liquidity, transparency and predictability will continue as guiding principles for the execution of our auction program
• As for syndications, timing is dictated by the limit size of the line to be replaced (16.5 bn for longer tenors) and market conditions.
• Innovations for 2010: 18-month T-bills reappear, Euro inflation linker still a project
• Maintain our stable and diversified investor base
32

The funding strategy
Tesoro Funding in 2010
(Billion euro)
1: Funding requirement = Net Issuance
2: Redemptions bonds 2010
3: Net issuance medium long term
4 = 2 + 3 Gross Issuance Medium-Long Term
5: Net Increase T-Bills
6: Assumption of RTVE debt
7 = 3 + 5 + 6: Net change outstanding debt
8: Forecast Outstanding Central Government Debt at end 2010
Source: General State Budgets Bill 2010
76.8
35.4
61.6
97,0
15.2
1.5
78.3
553.5
33

Funding programme in perspective
• Cut in Net Issuance: lower cash deficit and no exceptional increase in net financial assets
140
Funding Programme. 2010 vs. 2009
(Net issuance in billion Euro)
116.7
2009 2010
120
100
82.3
80
60
76.8
61.6
40
20
34.4
15.2
0
Total Net Issuance Letras del Tesoro net issues
(*) Includes foreign currency issues.
Medium & long term net issues*
Source: Dirección General del Tesoro y Política Financiera.
34

Short-term funding
• Net issuance in 2009 in line with initial announcement: 34.4 bn€.
Gross issuance breakdown:
• 3-month Letras: 19.7 bn€
• 6-month Letras: 31.6 bn€
• 12-month Letras: 58.0 bn€
• Innovations in 2010:
• Calendar change: 3- and 6-month Letras auction 4 th Tuesday
• 18-month T-bills relaunched: auction 3 rd Tuesday
35

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

Diversification of funding sources
• Recent foreign currency issuance:
• Eurobond 2.75% March 2012 ($ 1.0 billion)
• Eurobond 2.00% October 2012 ($ 2.5 billion)
• Tesoro Público is open to additional foreign currency issuance
• Floating Rate Note 3-Month EURIBOR-10 bps, October 2012
(€ 3.0 billion). Possible retapping in 2010
• Projects:
• European inflation-linked issues (HICP-ex tobacco)
• Schuldschein loans
37

Main features of Treasury funding strategy
600 Spanish debt portfolio
( € billion)
475
554
500
400
319 312
307
358
300
229
200
100
0
Foreign Currency Other Letras Bonos y Obligaciones
Source: Dirección General del Tesoro y Política Financiera.
38

0
-25
-50
-75
100
75
50
25
Recent widening might be an opportunity
Spread of the Spanish 10-year bond vs. main European peers
150
(in bps)
125
Source: Bloomberg.
Germany Italy France Belgium Netherlands
39

125
100
75
50
25
0
-25
-50
-75
Cheapening concentrated in the front end
150
Spread of the Spanish 5-year bond vs. main European peers
(in bps)
Source: Bloomberg.
Germany Italy France Belgium Netherlands
40

An atractive market to invest in
Attractive prices Liquid instruments
Solid and efficient infrastructure
Diversified investor base
41

Increase in market liquidity
10
8
6
4
2
0
20
18
16
14
12
Average outstanding size: 13.5 bn €
Target for average outstanding <10 years: 15 bn €
Target for average outstanding >10 years: 15 bn €
3.25% 5.40%
4.10%
5.35%
5.00%
3.90%
6.15%
On-the-run bonds
4.20%
3.30%
4.10%
4.40%
3.15% 5.50%
4.75%
3.80% 4.60%
4.30%
4.25%
2.75%
2.30%
6.00%
4.80%
4.00%
4.20%
5.75%
4.90%
4.70%
Source: Dirección General del Tesoro y Política Financiera.
42

Low Debt Refinancing Risk…
Redemption profile of Bonos & Obligaciones
50.000
(Million Euros)
45.000
40.000
35.000
30.000
25.000
20.000
15.000
10.000
5.000
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020-
2023
Source: Dirección General del Tesoro y Política Financiera.
2024 2029 2032 2037 2040 2041
43

Low Debt Refinancing Risk…
Central Government Debt refinancing risk
(in % of the total portfolio)
50
40
30
20
42
20
21
24
22
21
18 18
10 7
0
1 year or less 1 to 3 years 3 to 5 years
31.12.1995
31.12.1999
Source: Dirección General del Tesoro y Política Financiera.
31.01.2010
44

…Thanks to relatively high duration and average life to maturity…
8.0
Duration & Average Life to Maturity of the Portfolio
(Letras, Bonos and Obligaciones)
(in years)
6.69
6.78
5.52
6.0
4.79
4.77
4.0
4.16
2.0
Average life
France
Netherlands
Belgium
Italy
6,24
6,88
5,94
7,07
0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Duration Average life
Source: Dirección General del Tesoro y Política Financiera.
45

…while achieving lower Funding Costs
Average Funding Costs
(in percent)
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
4.32
3.81
3.49
2.27
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Average cost of Debt outstanding Average cost at issuance
Source: Dirección General del Tesoro y Política Financiera.
46

Reliance on foreign funding relatively moderate
External public sector debt in 2009
(% of GDP)
100
90
80
70
60
50
40
30
20
10
0
Source: OECD.
47

Banks financing of government debt in line with
Eurozone average
15
10
5
25
Holdings of government debt November 2009
(% of bank assets)
20
0
Source: Citi.
48

Spanish Banks’ funding from ECB around
Eurozone average
Recourse to ECB funding
(% of total bank assets)
10%
8%
6%
4%
2%
0% jul-08 oct-09
Source: Deutsche Bank.
49

Stable and diversified investor base
Government Bonds by Holder
(Term investment, % of total portfolio)
100%
90%
80%
70%
60%
50%
33.37%
43.94%
40%
30%
20%
10%
0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Dirección General del Tesoro y Política Financiera.
Spanish official institutions
Non residents
Households &
Non financ.
Pension & Mutual
Funds
Insurance
Companies
Credit Institutions
50

Stable and diversified investor base
Letras del Tesoro by Holder
(Term investment, % of total portfolio)
100%
90%
80%
70%
60%
50%
40%
30%
48.97%
20%
35.57%
10%
0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Dirección General del Tesoro y Política Financiera.
Spanish Official
Institutions
Non-Residents
Households & Non financ.
Pension and Mutual
Funds
Insurance companies
Credit Institutions
51

Stable and diversified investor base
Government Bonds by Holder
(Term investment, % of total portfolio)
30%
25%
20%
15%
10%
5%
0%
France Japan Germany Italy BENELUX Rest of EU Asia, Afica and others
2006 2007 2008 2009
Source: Dirección General del Tesoro y Política Financiera.
America Rest of
Europe
52

Top Primary Dealers in 2009
Bonos y Obligaciones
Barclays
BBVA
Calyon
Santander
Société Générale
Letras
BBVA
Santander
Société Générale
53

Thank you for your attention
José Manuel Campa Fernández– Secretary of State for the Economy
Soledad Núñez – Directora General del Tesoro y Política Financiera
DirectorTesoro@tesoro.meh.es
Gonzalo García Andrés – Subdirector General de Gestión y Financiación de la Deuda Pública ggarcía@tesoro.meh.es
José Ramón Martínez jrmartinez@tesoro.meh.es
Rosa Moral rmmoral@tesoro.meh.es
Leandro Navarro lnavarro@tesoro.meh.es
Pablo de Ramón-Laca pramonlaca@tesoro.meh.es
Ignacio Vicente ivicente@tesoro.meh.es
Rocío Chico mrchico@tesoro.meh.es
For more information 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
54

Annex: the Social Security Reserve Fund
50
40
30
20
Social Security Reserve Fund asset holdings
70 (Billon €)
60
10
0
The Social Security Reserve Fund amounted in December 2009 to approximately 5.7%
(€ 60bn) of GDP.
55

Annex: Ley de Economía Sostenible & General
Agreement on Fiscal Sustainability
Competitiveness
- Society of Information.
- Science, R&D.
- Internationalisation of SME’s.
- Education.
- Reduction of administrative burden.
Environment
- Energy Policy.
- CO2 Emission-reduction.
- Efficiency infrastructure.
of transport and
Tax measures
- Rental market: equal treatment with ownership.
- Elimination of tax rebates: i.e. relief on mortgage payments, 400€ rebate on income tax.
- Corporate Income Tax rebates related to R&D and to the environment.
Fiscal Sustainability
- Spanish regions to formulate quarterly reports to the Fiscal Policy
Council.
- Correction and surveillance of fiscal deficits.
- Debt/GDP ratio to reach limit of
60% by 2013.
56