April 2007April 2007April 2007April 2007

Republic of Portugal

The Next Step The Next Step

in the Development of the OT Benchmark Curvein the Development of the OT Benchmark Curve

2

Section 1: New issue summary

• Section 2: Portugal’s Public Finance Reform Programme

• Section 3: Debt management and funding

CONTENTS:CONTENTS:

3

A new OT 2017A new OT 2017OT/PGB yield curve

OT issuance in 2007OT issuance in 2007

€ 12 - 14 billion (gross) to be issued through government bonds (OT)

• Two new benchmarks to be launched through syndication

• Reopening of OT previously issued

ANNOUNCED

ALREADY IMPLEMENTED

THE NEXT STEP: The new OT 2017

€ 1 billion (gross) issued through auction of the OT October 2016

0

1,000

2,000

3,000

4,000

5,000

6,000

OTA

ug

07

OT

Jul0

8

OT

Jul0

9

OT

Ma

y10

OTA

pr1

1

OT

Jun

11

OT

Jun

12

OT

Se

p1

3

OT

Jun

14

OT

Oct

15

OT

Oct

16

OTA

pr2

1

OTA

pr3

7

EU

R m

illio

n

issued before 2007 issued in 2007

4

Issuer: Republic of Portugal

(AA-/Aa2/AA)

Initial size: EUR 3 billion

Launch and pricing: Week of April 23, 2007

Start of book building: Week of April 23, 2007

Maturity: October 16, 2017 (short first)

Joint-Leads Managers: BES, HSBC, Lehman

Brothers, Morgan Stanley,

SG CIB

Co-Leads: The remaining PD

Issue DetailsOT October 16, 2017

A new Euro benchmark bond to

further complete the Portugal’s

maturity curve and to provide

liquidity for investors

To reach a final size no lower than

EUR 5 billion giving enhanced

liquidity to the OT yield curve

Under market-making obligations

on MTS Portugal and EuroMTS

To be admitted as a benchmark

issue by Tradeweb and Bondvision

The new benchmark OT 2017The new benchmark OT 2017

5

The new OT provides an attractive yield pick-up on asset swap basis versus

technically tight core issues

Portugal has a highly liquid and comprehensive yield curve with a government bond

segment up to 30 years

Efficient and liquid secondary market: market-driven borrowing strategy focused on

channelling liquidity into Euro benchmarks

Strong historical performance of OT benchmarks vs. peers

A very internationalized and diversified base of investors in the OT market

Portugal is committed to having manageable amounts of debt due for redemption in

any year; this reduces refinancing risks and aids secondary market performance

A new 10-year benchmark OT will complete and consolidate Republic of Portugal’s

comprehensive and liquid yield curve

Key new issue considerationsKey new issue considerations

6

• Section 1: New issue summary

Section 2: Portugal’s Public Finance Reform Programme

• Section 3: Debt management and funding

CONTENTS:CONTENTS:

7

• The two main political parties have the backing of roughly 80% of the Portuguese

voters and share the objective of budgetary consolidation

• A government with absolute majority in the Parliament since February 2005

• A new President of the Republic was elected in January 2006

• No meaningful elections in the near term (until 2009 for Central and Local

Government and 2011 for the Presidency)

• A high degree of social consensus

Portuguese public finance reform programmePortuguese public finance reform programme

A stable political and social environment

8

Portugal’s public finance reform programmePortugal’s public finance reform programme

The Portuguese government has a strong mandate to put public finances on

a sustainable footing

The Stability and Growth Programme (SGP), 2006 - 2010 (December 2006)

includes a comprehensive set of measures aimed at a major overhaul of

public finances, including the following:

•Central Government restructuring

•Social Security reform

•Improvement in the use of public resources

•Fight against fraud and tax evasion

2007 Budget Law reaffirms the Government’s commitments and objectives

included in the SGP

9

Public finances in the medium-term: SGP 2006-2010

• Government committed to reduce budget deficit over the coming years

• Deficit reduction based on structural measures rather than on one-off and temporary

measures

• In 2006, the deficit decreased from 6% to 3,9% of GDP, a figure well below the 4,6%

objective pointed in the Stability Growth Programme 2006-2010

• Therefore, the SGP is now under review by the Government in order to adjust public

finances objectives to this better-than-expected result

• However, the Prime Minister has already set the deficit target for 2007 at 3,3% of GDP

(0,4pp below the SGP forecast), which increased the probability of having a deficit below

3% in 2008

• Most recent forecasts from IMF support government’s projections for budget deficit

The Stability and Growth ProgrammeThe Stability and Growth Programme

10

Portuguese economy on recovery pathR

eal

GD

P g

row

thM

on

thly

Co

inc

iden

t In

dic

ato

r

Eco

no

mic

Sen

tim

ent

Ind

icat

or

Source: Bank of Portugal

Source: SGP (December, 2006)

Source: Bank of Portugal

Har

mo

niz

ed

IC

P

Source: Bank of Portugal

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

I II III IV I II III IV Jan Fev Mar

2005 2006 2007

(%, Y

oY

ch

an

ge

)

Portugal

Euro area

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

I II III IV I II III IV Jan Fev

2005 2006 200784

86

88

90

92

94

96

98

100

102

I II III IV I II III IV Jan Fev

3.9 3.9

2

0.8

-1.1

1.2

0.4

1.41.8

2.4

3.0 3.0

-2

-1

0

1

2

3

4

5

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

(% c

han

ge)

Forecast

11

Structural reforms…Structural reforms…

Measures to reduce public expenditure

• Cost control of the human resources expenditures

• New rules and guidelines to improve human resources management

Reforming the Public Administration

Promotion of the sustainability of the social security system, through fundamental changes of applicable rules, in line with major demographic trends

12

Improving the use of public resources

• Streamlining of the fundamental public services (education, healthcare, justice and local

Government), including the harmonization of public health protection systems in line with

the private sector regime

• Rationalization of real-estate properties

Budgetary control

• Review of legislation regarding the framework of Local Authorities financing system,

including the strengthening of financial reporting obligations

• Creation of the position of (strong) Financial Controller in each ministry

• Wage moderation (growth rates in line or below the inflation rate)

Structural reforms…Structural reforms…

Measures to reduce public expenditure

13

… underpinning fiscal consolidation… underpinning fiscal consolidation

Some measures already taken to increase tax revenue and

others in progress

Tax rate increases

• Increase in VAT, as well as in personal income tax rate, with some of the revenue assigned to the social security system

• Tax increase on tobacco and fuel

• New additional personal income tax bracket for the highest incomes

Fight against fraud and tax evasion

• Lifting banking secrecy for tax purposes

• Publication of tax debtors list

• New debt recovery instruments and mechanisms, significant worsening of sanctions for non-compliance with tax obligations)

Reduction of tax benefits and exemptions

14

At least 80% of the revenues will be used to reduce the outstanding government debt, thus reducing the borrowing needs

• Expected privatisation revenues

• Privatisation Programme

(EUR millions)2006 2007 2008 2009

Privatisation revenues 1.600,0 800,0 700,0 600,0% GDP 1.1 0.5 0.4 0.3

Privatisation program for 2006-2007

Sectors Pulp and paper Oil and gas Electricity Electricity transmission Portuguese airlines Air navigation public services

Supported by an important privatisation programmeSupported by an important privatisation programme

15

General government gross debt - 2005

Portuguese fiscal foundationsPortuguese fiscal foundations

Portugal has a lower debt burden than euro area average and better than “core” Europe and other rating peers

Source: European Commission, May 2006

0

20

40

60

80

100

120

GRE ITA BEL GER FRA POR AUS NETH SPA FIN IRE

(As

a %

of

GD

P)

Euro area average = 70.8%

16

CONTENTS:CONTENTS:

• Section 1: New issue summary

• Section 2: Portuguese Public Finance Reform Programme

Section 3: Debt management and funding

17

Aiming at building up a Portuguese benchmark yield curve

A market driven borrowing strategyA market driven borrowing strategy

• Size

• Tradability – Efficient and standard market conditions

The most important driving factor:

LiquidityLiquidity

A market oriented borrowing

strategy

A market oriented borrowing

strategy

Active debt management -

derivatives and buy-backs

Active debt management -

derivatives and buy-backs

Priority to the development of a government benchmark yield curve

Interest rate and refinancing risk management

• Predictability Predictability

• TransparencyTransparency

• AccountabilityAccountability

The main pillars:

18

OT launched through syndication…

Building up an international and diversified investor base

Benchmark size: € 3 billion

Allowing the benchmark OT to be traded in MTS Portugal with quoting obligations from start

…and increased through auctions up to € 5 or € 6 billion

OT syndication process

PD are the only underwriters

PD committed to place bonds in high quality investors

IGCP is the active manager

E-book building

OT issuance processOT issuance process

Syndicate +1stauction

+2ndauction

+3rdauction

EU

R b

illi

on

1 bln

1 bln

1 bln

3 bln

Co-Leads

Joint-Leads

Full pot

Retention+

Co-lead pot

19

Participants in MEDIP/MTS Portugal

An efficient and liquid secondary marketAn efficient and liquid secondary market

ABN Amro Bank Banco Espírito Santo Barclays Bank PLCBNP Paribas Caixa Geral de Depósitos Citigroup Global Markets CALYONDeutsche BankGoldman Sachs InternationalHSBC FranceLehman Brothers InternationalMorgan StanleySociété GénéraleHVB

Banco Millennium BCPIFortis BankING Bank NV

Banco Santander C. HispanoCCCAMCECACommerzbankCredit SuisseDresdner Bank JP Morgan SecuritiesLandesbank B-WMitsubishi UFJ Securities Int. plcNatixisNomura InternationalWestLB

17 M

arke

t M

aker

s12

Mar

ket

Dea

lers

14 O

EV

T/

Prim

ary

14 O

EV

T/

Prim

ary

Dea

lers

Dea

lers

All OT listed in Lisbon on MEDIP/MTS Portugal

In parallel quotation with EuroMTS

MEDIP/MTS Portugal a regulated “local” market

Driven by market-making obligations from Primary Dealers

Market-making obligations in line with other MTS platforms

Prices spreading over other market segments

Trading spreads within a narrow range and similar to market peers

Settlement through Euroclear/Clearstream

Prices disclosed in real-time to non participants: Reuters PT/MTS1 and Bloomberg

Daily turnover, reference prices and a daily fixing

in www.mtsportugal.com

OT secondary market driven by MTS Portugal

20

10-year bid-offer spreads

An efficient and liquid secondary marketAn efficient and liquid secondary market(as of April 13, 2007)

5-year bid-offer spreads

30-year bid-offer spreads 15-year bid-offer spreads

0

1

2

3

4

5

Feb

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Mar

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Apr

05

May

05

Jun

05Ju

l 05

Aug

05

Sep

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Nov

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05

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eb 0

6M

ar 0

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pr 0

6M

ay 0

6Ju

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Jul 0

6A

ug 0

6S

ep 0

6O

ct 0

6N

ov 0

6D

ec 0

6Ja

n 07

Feb

07

Mar

07

Apr

07

TicksMaximum B/O spreads of 5 ticks

0

5

10

15

20

Mar

06

Apr

06

May

06

Jun

06

Jul 0

6

Aug

06

Sep

06

Oct

06

Nov

06

Dec

06

Jan

07

Feb

07

Mar

07

Apr

07

Ticks Maximum B/O spreads of 20 ticks

0

1

2

3

4

Feb

05

Mar

05

Apr

05

May

05

Jun

05Ju

l 05

Aug

05

Sep

05

Oct

05

Nov

05

Dec

05

Jan

06F

eb 0

6M

ar 0

6A

pr 0

6M

ay 0

6Ju

n 06

Jul 0

6A

ug 0

6S

ep 0

6O

ct 0

6N

ov 0

6D

ec 0

6Ja

n 07

Feb

07

Mar

07

Apr

07

TicksMaximum B/O spreads of 4 ticks

0123456789

10

Feb

05

Mar

05

Apr

05

May

05

Jun

05Ju

l 05

Aug

05

Sep

05

Oct

05

Nov

05

Dec

05

Jan

06F

eb 0

6M

ar 0

6A

pr 0

6M

ay 0

6Ju

n 06

Jul 0

6A

ug 0

6S

ep 0

6O

ct 0

6N

ov 0

6D

ec 0

6Ja

n 07

Feb

07

Mar

07

Apr

07

Ticks Maximum B/O spreads of 10 ticks

21

An efficient and liquid secondary marketAn efficient and liquid secondary market

OT Daily average turnover in MTS Portugal and EuroMTS

OT Repo Market Daily Average Turnover

• MTSP OT daily average turnover in

2006 : € 444 million

2007 (as of April 13): € 415 million

• A last resort repo window provided by

IGCP to all market makers in MTSP

Very liquid wholesale cash and repo segments

0

150

300

450

600

750

900

2000

2001

2002

2003

2004

2005

J200

6 F M A M J J A S O N D

J200

7 F M

EU

R m

illio

n

Avg OT - EuroMTS

Avg OT - MTS Portugal

0

500

1000

1500

2000

2500

3000

3500

4000

4500

J 20

02 F M A M J J A S O N DJ

2003 F M A M J J A S O N D

J 20

04 F M A M J J A S O N DJ

2005 F M A M J J A S O N D

J 20

06 F M A M J J A S O N DJ

2007 F M

EU

R m

illio

n

0%

200%

400%

600%

800%

1000%

1200%

1400%

as %

of

cash

tu

rno

ver

Daily average turnover

As % of cash turnover

22

Highly internationalised and diversified OT marketHighly internationalised and diversified OT market

*Turnover with final investors reported by PD (excluding intra-PD trading) - 2006

Around 82% of the turnover* in the OT secondary market is generated by non-domestic investors

Fund Manager38.9%

Other3.0%Hedge Fund

2.4%

Banks40.4%

Pension Funds & Insurance

6.1%

Central Bank and Other Public Entity

9.2%

New EU0.1%

France25.0%

Belgium & Luxembourg

5.7%

Spain2.0%

Other EMU1.8%

Other countries2.8%

Italy3.5%

Netherlands2.2% Portugal

18.3%

UK29.3%

Germany9.3%

23

Further information on the Portuguese economy can be obtained from:

Tel: +351 21 7923300Fax: +351 21 7993795E-mail:info@igcp.pt

Economic Research and Forecasting Department at the Ministry of Finance

Budget Department

National Statistics Office

Banco de Portugal (Central bank)

Web site: igcp.ptReuters pages: IGCP01

Bloomberg pages: IGCP

Further information on the Portuguese secondary market can be obtained from:

MTS Portugal: www.mtsportugal.com

Reuters pages: PT/MTS1 www.dgep.pt

www.dgo.pt

www.ine.pt

www.bportugal.pt

IGCP:

DISCLAIMERThe information and opinions contained in this document have been compiled or arrived at from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. All opinions and estimates contained in this document are published for the assistance of recipients, but is not to be relied upon as authoritative or taken in substitution for the exercise or judgment by a recipient and, therefore, does not form the basis of any contract or commitment whatsoever. IGCP does not accept any liability whatsoever for any direct or consequential loss arising from any use of this document or its contents.