KINGDOM OF BELGIUM. Federal Government Debt. Federal Public Service FINANCE. General Administration of the Treasury

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1 KINGDOM OF BELGIUM Federal Public Service FINANCE General Administration of the Treasury Federal Government Debt Annual Report 2008

2 2008 ANNUAL REPORT Federal Public Service Finance General Treasury Department 30, avenue des Arts B-1040 Brussels D/2009/0676/2 June

3 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES CONTENTS Foreword by the Finance Minister 4 The key indicators of government debt 6 Part 1: Developments in the economy and in government finance in Developments in the Belgian economy and interest rates Government finance: developments in Part 2: Financing policy in Financing requirements and resources in An issuing policy based on two types of product Liquid products issued on a transparent basis, to a predictable pattern 19 a. Linear bonds 19 b. Treasury certificates 25 c. State notes 28 d. Strips Tailor-made products 31 a. Belgian Treasury Bills denominated in EUR and foreign currencies 31 b. Treasury Bonds - Silver Fund 32 c. Inaugural issue of a USD bond as part of the new EMTN programme General Directives and control of risks Exchange risk The refinancing and refixing risks Credit risk 35 Part 3: Main strategic points Impact of the financial crisis on financing of the Federal State Financing of certain Belgian financial institutions Granting of a State guarantee in the framework of the financial crisis Renewed interest in State notes Treasury analysis of the feasibility of issuing an inflation-linked State note Modification in distribution of Belgian federal debt Launch of the Euro Medium Term Notes programme (EMTN) A new strategy Implementation of this strategy by setting up an EMTN programme 43 2

4 3. Launch of interdealer electronic trading on several platforms Implementation of the double-entry general ledger accounting system for Belgian Federal State debt Performance indicators: a contribution to management control 46 Appendices - Maturity schedule of the Federal Government Long-Term debt in EUR - Weighted average actuarial rate of the debt in EUR - Linear bonds: amounts outstanding, results of issues, trading volumes on the secondary market, repo market - Treasury certificates: amounts outstanding, results of auctions, trading volumes on the secondary market, repo market - Treasury Bonds - Silver Fund: issues and amounts outstanding - Organisation chart of the Debt Agency and the Public Debt Support Service - List of Treasury security brokers for : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES

5 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES FOREWORD BY DIDIER REYNDERS DEPUTY PRIME MINISTER AND MINISTER OF FINANCE AND INSTITUTIONAL REFORMS The year 2008 will go down in history as characterised by an unprecedented crisis of the financial system, the first signs of which had already appeared in the previous half year. Inevitably, after years of constant economic growth on the worldwide level, in most regions of the world this led to a reversal, with the appearance of negative growth. Although even in the first few months of 2008 a resurgence of inflationary pressure occurred due to the rising prices of petroleum products and raw materials, this trend rapidly disappeared and even gave way to a risk of deflation. Just like the other euro zone countries, Belgium has suffered the negative effects of this crisis, with a fall in economic growth and deterioration of public finance. A veritable earthquake took place in the financial markets half-way through the year, and the situation continued to worsen from mid-september onwards with the bankruptcy of a major bank in the United States. The Belgian financial sector imploded, and what had been unthinkable just a few months previously, i.e. the risk of systemic bankruptcies of banking institutions, became a reality. Only the fast decisive actions taken by the Federal State in particular made it possible to avoid the worst, thanks to intervention in two fields: supply of financing to banks in difficulty, and reassurance of deposit holders. Nevertheless the damage had been done and trust in the financial system collapsed, pushing risk premium levels to new heights. Sovereign issuers fully regained their status as "havens of stability". For Belgium, this phenomenon was particularly demonstrated by the issuing in December of State notes, a product aimed at the general public which enjoyed great success, generating revenue of nearly 500 million euros. In addition to its traditional role, the Treasury had to mobilise, within a short timeframe, the considerable amounts required to finance State intervention in favour of the Belgian financial sector, particularly banks. More than 20 billion euros were raised, in addition to the amounts necessary to refinance the 2009 bond maturities and cover the budget deficit. As a result of the deterioration in public finance and the exceptional actions required by the crisis, our country's debt ratio underwent an increase. This phenomenon is not specific to Belgium; all countries have been faced with a strong increase in budget deficits and a rise in their government debt. 4

6 Despite the increased financing requirements and exceptional actions, it was possible to contain their cost for the budget by lowering interest rates, particularly short-term rates, which our country benefitted from, and also thanks to the considerable liquidity of the euro market. In 2008, the proportion of the interest rate burden in the federal budget even dropped spectacularly, falling well below the 20 % mark. Finance Minister, Didier Reynders 5 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES

7 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES KEY INDICATORS OF GOVERNMENT DEBT (EUR bn or % at 31st December) I. Amounts outstanding of the main federal government debt instruments Gross federal debt outstanding Treasuring financing and investments Financing of other entities Portfolio stocks Investment reserve Financing of Securities Regulation Fund Net federal debt outstanding Debt instruments A. Instruments in EUR: Linear bonds (OLOs) Conventional loans State notes Treasury certificates Treasury Bonds - Silver Fund Belgian Treasury Bills in EUR Private loans, interbank loans, etc Debt issued in foreign currencies and swapped in EUR Borrowings of certain organisations for which the federal government helps service the debt As % of the debt in EUR: - Linear bonds % % - Conventional loans 0.02 % 0.02 % - State notes 1.77 % 2.20 % - Treasury certificates % % - Others % 9.57 % B. Instruments in foreign currency: Long- and medium-term debt Belgian Treasury Bills in foreign currency II. Changes in net federal government debt outstanding over the year 1. Change (EUR bn) Net balance to be financed Borrowings taken over Exchange gain/loss Interest capitalised Miscellaneous Borrowings of certain organisations Change (%) 8.98 % % 6

8 III. Characteristics of the federal government debt 1. Ratings issued by the various rating agencies - Rating of long-term issues (S&P/Moody's/Fitch) AA+/Aa1/AA+ AA+/Aa1/AA+ 2. Breakdown by currency - Borrowings in EUR % % - Borrowings in foreign currencies 1.45 % 0.33 % 3. Breakdown by term - Long and medium term (>1 year) % % - Short term % % 4. Breakdown by rate - Fixed rate % % - Variable rate % % 5. Effective duration of the debt in EUR Effective duration of the debt in foreign currencies Federal government interest rate burden Weighted average interest rate 4.30 % 4.56 % 8. % ratio of federal interest rate burden over federal expenditure % % IV. Transition from federal debt (Treasury) to general government debt 1. Federal debt outstanding Debt of other federal entities outstanding (1) Debt of Communities, Regions and local authorities Consolidation adjustment Consolidated general government debt ( ) GDP General government debt ratio (5/6) % % (1) Debt represented by financial instruments as understood for purposes of the Maastricht Treaty 7 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES

9 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES 8

10 PART 1 9 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES

11 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES PART 1. DEVELOPMENTS IN THE ECONOMY AND IN GOVERNMENT FINANCE IN Developments in the Belgian economy and interest rates Belgian economy In the context of the worldwide financial crisis which worsened at the end of the third quarter of 2008, following the announcement in the United States that a major bank had filed for bankruptcy, the Belgian economy showed growth in its gross domestic product (GDP) estimated at 1.1% for the year under review, down compared to the previous year (+2.6%). This result must be qualified insofar as it conceals a gradual deterioration, and in the fourth quarter of 2008, a collapse of economic activity. The financial crisis transferred to the real economy, and among other things caused a slowing in trade, a drop in confidence among businesses and consumers, a fall in stock market values, tougher conditions for obtaining loans from banks, and a reduction in demand. This result followed in the wake of the reduction in world growth, estimated at 3.8% (compared to 5% in 2007) and the reduction in euro zone growth, estimated at 0.8% (2.7% in 2007). During the first half of 2008, the rise in inflation was spectacular in Belgium, caused mainly by the strong increase in costs of raw materials, and in particular petroleum products. Accordingly, inflation measured by the increase in the harmonised consumer price index, reached a peak of 5.9% in July. In the second half of the year, the reduction in the prices of raw materials exerted downwards pressure on inflation, which nevertheless stood at 4.5% for 2008 taken as a whole. Interest rates Apart from a few exceptions, interest rates in both the euro zone and the United States showed an upward trend during the first half of 2008, in both the long-term and short-term segments. During the second half-year interest rates fell to a greater or lesser extent depending on the varying perceptions of the severity of the crisis, and according to the monetary policies followed. They followed different trends according to the credit risks. Interbank rates remained relatively high as a result of the financial crisis. They were characterised by high risk premiums. For example, apart from a drop in January, the 3-month Euribor increased, even reaching an average value of 5.12% in October. However it then decreased as a result of the measures taken by the Governing Council of the European Central Bank a policy aiming to fully satisfy liquidity demands, strengthened by successive reductions in the monetary policy guide rates reaching 3.29% in December. United States Due to the impact of the worsening financial crisis which led to a shrinkage of US economic activity in the second half of 2008 growth in the USA only amounted to 1.4% of GDP for the whole of the year under review. It was in this context that, in addition to providing liquidities in various forms to the financial institutions, the Federal Reserve on several occasions reduced its main guide rates. The federal funds target rate dropped from 4.25% at the end of 2007 to a range from 0 to 0.25% in These repeated actions especially at the end of the year, and the worsening of the financial crisis facilitated a reduction in guaranteed rates, while the corporate bond rates continued for their part to include considerable risk premiums compared to Government benchmark bonds. The slope of the US rate curve remained on an upwards trend in 2008, and relatively steep up to the 10-year segment. 10

12 G1. Average 3-month interest rates (%) and average yields of 10-year benchmark bonds in Japon Japan (LT) 5 Etats-Unis United States (LT) (LT) 4 Germany Allemagne (LT) (LT) Belgique (LT) Belgium (LT) J08 F M A M J J A S G2. % changes in interest rates in 2008 (euro zone) O N D 3 C.T. month 3 mois Treasury certificates 3 Euribor month 3 EURIBOR mois Euribor 3 month à EURIBOR 3 mois Certificats 3 month Treasury de Trésorerie certificates à 3 mois Main Opérations ECB refinancing principales operations de refinancement (BCE) Benchmark OLO 10-year benchmark OLO à 10 ans G3. Daily rate spreads between the 10-year Bunds and OLOs in 2008 ( asset swap spreads ) (basis points) January - December : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES

13 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES Euro zone Unlike the monetary policy followed since late 2007 in the USA contributing to a relaxation, in the euro zone the guide rates remained unchanged during the first half of Due to a deterioration in inflationary expectations, the minimum bid rate for the principal refinancing operations was raised from 4% to 4.25% in July In the second half of the year, when the financial crisis worsened, the European Central Bank (ECB) decided to make its monetary policy more flexible by progressively lowering its guide rates, in addition to injecting liquidities to remedy the deficiencies of the interbank market. So the main guide rate was brought down in four steps from 4.25% in October to 2.5% in December The changes in monetary policy and the worsening of the crisis therefore had a downward influence on short and long-term rates. The rate curve slope remained on an upwards trend in 2008, at least up to the 15-year segment. Belgium On the Belgian financial markets, the rates underwent similar changes to those of the euro zone: in general, an increase in the first half-year followed by a decrease during the second half of the year under review. On average the rates for the 3 month Treasury certificates therefore rose on the secondary market from 3.92% in January to 4.32% in August. They then fell, reaching an average of 1.92% by the end of Interbank rates fell later on during the year. So the 3- month Euribor rose on average from 4.48% in January to 5.11% in October, only to fall again, settling at 3.29% by the end of the year. It should be noted that the spreads between Euribor and the certificates remained at high levels, to the advantage of the Treasury. So during 2008, on average the 3 month spread amounted to 97 basis points, peaking at 201 basis points in October, and then dropping and reaching 137 basis points at the end of the year. Concerning long-term rates, on average the rate of the benchmark 10 year OLO rose from 4.25% in January to 4.85% in July, subsequently falling to reach 3.87% in December The interest differential between Belgian and German 10 year benchmark bonds calculated in terms of asset swap spreads increased in 2008, from 16 basis points at the start of the year to 89 basis points at the end of December. This increase can be explained by the climate of crisis which led investors to embark on a flight to quality. They demonstrated a mounting aversion to risk-taking and preferred German bonds since they enjoy the greatest liquidity within the euro zone. 2. Government finance: developments in 2008 In 2008, the general government budget recorded a deficit equivalent to 1.2% of GDP. According to the stability programme, a balanced budget should have been achieved. In addition this objective was associated with continuation of the reform programme designed to stimulate economic activity and employment, an improvement in social policy and a series of initiatives in high priority fields. The recorded deficit can be partly explained by factors linked to the economic situation. Following the intensification of the financial crisis, the year 2008 was characterised by a sudden dramatic deterioration in the economic environment. The macro-economic assumptions underlying the 2008 budget were adopted with reference to the January 2008 economic budget. 1.9% growth in GDP and a 3% inflation rate were forecast. These assumptions, entirely valid at the time, were revised in the budgetary review of July This was based on the estimates for the June 2008 economic budget, with GDP growth reduced to 1.7% and an inflation rate increased to 4.6%. The commitment to achieve a balanced budget was confirmed, thanks to strict control of department expenditure. 12

14 The economic forecasts had to be revised downwards on several occasions during the year. When drawing up the 2009 budget in the autumn of 2008, the budget forecasts for the 2008 budget were brought up to date, giving rise to an estimate of a 0.3 % deficit of GDP. Given the circumstances, the possibilities of intervening on the 2008 budget appeared to be relatively limited. It was decided to rule out the initial objective, which could only have been achieved through exceptional operations or budget restriction measures likely to accentuate the ongoing economic downturn. The rate of growth of GDP gradually weakened during the first 3 quarters of 2008, and even became clearly negative in the 4th quarter, with a drop of 1.7% compared to the previous quarter. According to the latest estimates from the National Bank of Belgium in March 2009, economic growth in 2008 is set to reach just 1.1% of GDP, while inflation is forecast to stabilise at 4.5%. The deterioration of the economic situation has had a considerable impact on expenditure and tax revenues. The discrepancy compared to the forecasts is particularly clear with regard to revenues from VAT and from early payments by companies and the selfemployed. In addition, the reduced growth in tax revenues can be explained by the partial anticipation of the indexing of tax scales. Concerning expenditure, a relatively large transfer of expenditure was also absorbed, following an acceleration in the rate of payment of invoices at the end of Developments in the different sub-sectors The data available in March 2009 break down the general government deficit into a 1.2% deficit in Entity I (Federal authorities and Social Security) and balanced books in Entity II (Communities, Regions and Local Authorities). The outturns therefore fall short the objectives set for both Entity I and Entity II. T1. Financing balance objectives and achievements (% of GDP) General government Entity I Federal authorities Social security Entity II Communities and Regions Local authorities In Entity I, the Federal Authorities recorded a deficit equalling 1.7% of GDP, whereas Social Security achieved a surplus of 0.5% of GDP. In addition to the factors already mentioned, the Federal Authorities' deficit can be attributed to the strong rise in transfers in favour of the Communities and Regions and to Social Security. The growth in revenues from social security contributions and the drop in unemployment benefit expenditure also explain the surplus generated for Social Security. In Entity II, the accounts of the Communities and Regions and the Local Authorities are almost balanced. The change compared to 2007 is partially due to the fact that the Flemish Regional Government has taken responsibility for part of the debt of the municipalities under its authority. Revenues and expenditure Achievements Objectives Estimates General and special tax revenues showed a slight increase, moving from 43.3% of GDP in 2007 to 43.7% of GDP in This rise was brought about exclusively by the rise in withholdings on earned income, despite the introduction of new reductions in labour charges, such as the rise in the percentage of tax-exempted income or the increase in the employment bonus. However the other categories of tax revenues recorded a decrease, in the context of the financial crisis and sluggish economic activity. 13 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES

15 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES The increase in withholdings on earned income is in fact due to the increasing proportion of this income in the GDP and the progressiveness of the taxation system. In a context of accelerating inflation, revenues from withholding tax on labour increased more rapidly than earned income, since the tax scales are indexed on the basis of the inflation rate observed in the previous year. However early indexing of these tax scales in October 2008 made it possible to moderate this growth. In addition, social security contributions from the self-employed showed a clear rise due to the introduction of minor risks in the mandatory health care insurance scheme. T2. General government revenues and expenditure (% of GDP) Achievements Estimates Total revenues of which general and special tax revenues Primary expenditure Total expenditure Primary expenditure increased considerably compared to the previous year, standing at 46.1% of GDP. This rise can be explained essentially by the fact that the growth in prices that determine general government expenditure was greater than that of the GDP deflator. The combination of primary expenditure and revenues gave rise to a stagnation in the primary balance at 2.5% of GDP. This result fell short of the stability programme objective. The interest rate burden on national debt represented 3.7% of GDP, down just 0.1% compared to This slight reduction in the interest rate burden on the debt is due to two factors. Firstly, the implicit interest rate on the debt fell slightly: it was possible to more than compensate for the rise in short-term interest rates by continuous reduction of the implicit long-term interest rate on the debt. In addition, the debt ratio went down during the year, prior to intervention by the Belgian government as from late September to support the financial sector in the context of the financial crisis. The result of these operations, mainly consisting in injections of capital into financial institutions, was to increase the debt ratio of all sections of government, and also to limit the drop in the interest rate burden. At the end of 2008, this debt ratio amounted to 89.7% of GDP, compared to 84.0% in The impact on the debt ratio of the measures to support the financial sector is equivalent to 6.3% of GDP. In the absence of this intervention, the debt ratio would have continued to decrease, representing 83.4% of GDP. European comparison Despite the budget deficit of 1.2 % of GDP in 2008, the Belgian general government financing balance is less than the average financing balance in the euro zone, which shows a deficit of 1.7% of GDP, according to European Commission (EC) estimates in January The primary balance results also reflect better performance. This balance represents 2.5% of the GDP for Belgium whereas the average for the euro zone is 1.3% of GDP. The stability programme The stability programme presents the major guidelines of the Belgian budgetary policy. In the short-term, economic projections are proving to be particularly gloomy and are characterised by numerous uncertainty factors. For 2009, the government took as its starting point a deficit of 3.4% of GDP for all public administrations, in its budgetary review of February Given the context of the economic crisis, a temporary deficit was judged to be acceptable, in order to allow automatic stabilisers to play their role to the full and encourage economic recovery. In addition, in line with the action plan proposed by the EC, a recovery plan was drawn up by the federal government, jointly with the Regions and both sides of industry. 14

16 G4. Debt ratio, 1990 to 2008 (% of GDP) G5. Primary balance and financing balance (% of GDP) Primary balance -5-6 Financing balance This plan, which in particular includes measures from the general multi-industry agreement, aims to restore confidence and support economic activity, by strengthening business competitiveness and the population's purchasing power. Despite this deficit, the long-term sustainability of Belgian public finance remains a major objective. In the autumn of 2009, when the government prepares its 2010 budget, it will draw up a multi-year programme in order to gradually achieve a balanced budget as soon as there is a recovery in economic activity. The programme defines a trajectory that will make it possible to absorb the deficits. It is based on the assessment given by the Higher Finance Council (CSF) in March 2009 requested by the federal government, in order to define a budgetary trajectory to respond to the challenge of the ageing of the population. The CSF recommends a return to a balanced budget, preferably by 2013 and no later than 2015, depending on changes in the economic prospects. The proposed scenario takes account of the economic growth process. It envisages an annual structural effort 15 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES

17 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES representing 0.5% of GDP compared to an unchanged policy. This effort is to be increased in the event of greater economic growth. In line with the CSF's recommendations, this effort shall be distributed transparently and in a balanced manner, between the different entities and between revenues and expenditure. The fight against tax fraud and social security fraud shall also be intensified. On the basis of the economic growth assumptions forming the basis for the programme, structural and nominal balance will be achieved in In view of uncertainties about the economic situation, the trajectory may be adjusted according to changes in that situation, and possible adaptations of political choices on the European level. 16

18 PART 2 17 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES

19 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES PART 2. FINANCING POLICY IN Financing requirements and resources in 2008 The financing requirements In 2008, the Treasury had to finance a much greater amount than was initially envisaged. First of all, as a consequence of the rapid worsening of the economic situation, the budget deficit in its strict definition totalled 7.43 billion instead of the envisaged 3.00 billion EUR. In addition, during the fourth quarter of T3. Treasury financing in 2008 (EUR bn) 2008 the Treasury injected via the Société Fédérale de Participations et d Investissement (SFPI) a total amount of billion EUR in the form of shareholdings and loans converted at the current exchange rate with regard to financing in foreign currencies in order to finance various Belgian financial institutions. Given that, as expected, no amounts were transferred to the Silver Fund, the cash shortage in its broad sense amounted for the entire year 2008 to billion EUR, i.e billion EUR more than initially envisaged. Financing Situation on plan (1) 31/12/2008 I. Gross 2008 financing balance Budget deficit: Budget deficit (strictly defined) Transfers to the Silver Fund Participation in financial institutions Debt maturing in Medium- and long-term debt in EUR Medium- and long-term debt in foreign currencies Pre-financing of bonds maturing in Buybacks Other financing requirements II financing resources Medium- and long-term EUR issues Linear bonds Treasury Bonds - Silver Fund Instruments for private investors Miscellaneous Medium- and long-term foreign-currency issues III. Net change in foreign-currency short-term debt IV. Change in Treasury certificate amount outstanding (2) V. Net change in other short-term debt and financial assets (1) As published on 11th December (2) 1st January 2008, the amount of Treasury certificates in circulation totalled billion EUR. 18

20 In addition the Treasury was obliged to refinance longterm debt maturities representing the amount of billion EUR. Finally, prefinancing of the year 2009 taking the form of early redemptions of OLOs totalled 3.28 billion EUR. The last result concerning redemptions corresponded to the initially envisaged amount of 3.50 billion EUR. For 2008, the gross financing requirement therefore totalled billion EUR whereas it had been estimated at the beginning of the year at billion EUR. The financing resources In order to face up to such a large and rapid increase in financing requirements, the Treasury was obliged to issue higher amounts on the short-term debt. The outstanding amount of Treasury certificates therefore increased by billion EUR instead of remaining virtually stable as had been expected. The outstanding amounts of other short-term loans, such as the "Belgian Treasury Bills" and interbank loans, also increased considerably. Some of these were carried out in foreign currencies since the injections of capital and the loans to financial institutions had to be partly carried out in foreign currencies. The Treasury also had to issue a larger amount in OLOs than had been initially envisaged. The substantial demand for sovereign paper even resulted in a record amount of billion EUR in OLO issues, i.e billion more than had been expected. However it was not possible to achieve the objective of issuing 2 billion EUR as part of the new "Euro Medium Term Notes" programme, since the issue only brought in a total equivalent to 1.36 billion EUR. Finally, the success of the fourth issue of State notes in December 2008 made it possible to achieve the objective of issuing 0.60 billion EUR in State notes on an annual basis. 2. An issuing policy based on two types of product 2.1. Liquid products issued on a transparent basis to a predictable pattern a. Linear bonds (OLOs) In 2008 the Treasury issued OLOs for a total of billion EUR. To launch three new benchmark bonds, it made use on two occasions of the syndication technique, and unusually for issue of a new bond, the auction method. During the year under review the Treasury also organised five OLO auctions. Syndications - OLO 52 Continuing the tradition of issuing a bond with a 10 year maturity date in January, the Treasury issued a new syndicated benchmark bond, OLO 52. Apart from investors' demand for this maturity date, the Treasury wanted to add a new 10 year benchmark product to its loan-stock portfolio. The final maturity date of OLO 52 is 28th March It was placed by a syndicate with the primary dealers Citigroup, Fortis Bank, HSBC and UBS as joint lead managers. The other primary dealers and recognised dealers also participated in the placement, as co-lead managers and members of the selling group, respectively. The total amount of the orders was 7 billion EUR and concerned 155 investors. The amount finally issued was 4 billion EUR. Given the market's increased volatility, this result can be considered highly satisfactory. During the first day of issue, the European share markets dropped dramatically leading to a broadening in spreads of European sovereign products in relation to Germany. The continued broadening of spreads after the drop in the Asian share markets led to a modification in the initial price indication. The issue spread was finally set at +30 basis points above the "January 2018 Bund". 19 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES

21 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES Syndication Syndication is an issuing technique in which the Treasury resorts to a syndicate of banks - in fact its primary dealers - for the issue and placement of its securities. The syndicate is a temporary association of banks having as their common objective the collective placement of the bonds. There are three levels within the syndicate: 1. Lead manager. This is the bank instructed by the issuer to head the syndicate. The lead manager underwrites placement of most of the bonds and is responsible for overall coordination and organisation of the issue. In liaison with the issuer, it determines the structure, volume, spread and timing of the operation. Where several lead managers are in charge of the issue, they are called joint lead managers. 2. Co-lead manager. Works one level below the lead manager. Underwrites a small share of the investment. 3. Selling Group. This is the lowest level in the syndication structure. In the case of Belgium, the selling group consists of the recognized dealers. They are invited to participate but do not have to underwrite their participation. This participation is in fact limited to placing a small volume of stock. They do not have any other tasks or responsibilities. Mixed pot syndication In the mixed-pot syndication structure, as in the normal pot syndication, the Treasury has the advantage of total transparency regarding the buyer s identity. However, there are two differences between this and the normal pot syndication system which mean that the supervision of allocation is not complete: 1. The presence of a blind retention reserved for the co-lead managers and the selling group. They are guaranteed this portion of the OLO allocation with no requirement to divulge the buyer identity to the joint lead managers. The co-lead managers and the selling group are respectively primary dealers other than joint lead managers, and the recognised dealers. The Treasury grants this blind retention in consideration for their efforts in placing the OLOs and Treasury certificates during the previous year. 2. The presence of a "strategic reserve". A fraction of the debt issue is reserved for allocation to certain purchase orders presented by the co-leads and the selling group. In allocating the strategic reserve, the Debt Agency endeavours to allocate the orders placed by the co-leads and the selling-group members on the basis of the following criteria: 1. the order is placed by an investor who is not yet registered in the ledger of lead managers, 2. the order is of excellent quality and represents true diversification or is placed by an investor whose loyalty the Agency is particularly keen to secure. 20

22 G6. Geographical distribution of OLO 52 (4 % - 28/03/2018) Other 3% Eurozone excluding Belgium 38% Asia 13% Americas 3% United Kingdom 14% Scandinavia 5% Belgium 24% G7. Distribution of OLO 52 by investor type (4 % - 28/03/2018) Fund managers 36% Insurance companies and pension funds 10% Central banks and public entities 19% ALM/Banks 19% Hedge Funds 4% Financial institutions 12% This contributed to attract more real money investors. This OLO's coupon was set at 4% and the issue price at %. Once again, the Treasury used the technique known as mixed-pot syndication to allocate orders. As in previous syndications, this system contributed to improving the efficiency, transparency and objectivity of both the book-building process and the allocation itself. An in-depth check was conducted on the majority of the subscriptions, thereby avoiding duplication of subscriptions from investors working with several primary dealers. Overall, the process allowed more efficient allocation of orders and enabled the Treasury to better target the placement of its loans geographically and by investor type. Placement was concentrated on the euro zone (62%) with a 24% share in Belgium, in line with the average for syndicated placements in Belgium. In addition, the United Kingdom and Asia took 14% and 13% of the orders respectively. Concerning the distribution by investor, real money accounts represented 84% of the transaction and essentially concerned portfolio managers as well as bank ALM managers. In all, the orders were allocated to 143 different investors. OLO 53 In February the Treasury launched its second benchmark bond using ordinary auction instead of syndication, due to the short maturity of this new line and the strong demand emanating from primary dealers and final investors. This bond was part and parcel of the financing plan that for 2008 envisaged the issue of three new benchmark bonds in order to supply the considerable financing requirements for the year under review. The OLO 53 auction that took place on 25th February made it possible to collect a relatively substantial sum, amounting to 3.55 billion EUR. The maturity was 3 years (28/03/2011) and the coupon was 3.50%. OLO 54 For the second syndication of the year, the Treasury continued its 2008 issue programme by launching a "long 5-year" product in April. It had planned to issue either on the 5-year segment or the 30-year segment, both of which fitted well into the debt maturity schedule. Since the bonds market was not particularly buoyant at that time, it was decided to opt for a 5 year maturity. A "long 5 year period" was chosen to properly fit into the existing OLO curve and to retain it as a 5 year benchmark bond for The final maturity date of OLO 54 issued at a price of % is 28th March 2014 with a coupon at 4.0%. 21 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES

23 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES This price corresponds to a cost of 32 basis points above the German benchmark bond "Bund January 2014" and delivers a yield of 4.22%. The Treasury selected the following four primary dealers as lead managers for this syndication: Barclays, Deutsche Bank, ING and Société Générale. The other primary dealers and recognised dealers also participated in the placement, as co-lead managers and members of the selling group, respectively. The placement orders totalled more than 12 billion EUR (including 10.4 billion from the joint leads) distributed among 175 investors. The final amount allocated totalled 5 billion EUR. Concerning geographical distribution, nearly 60% of the orders were placed in the euro zone. Orders were also placed with the United Kingdom (24%) and Asia (13%). Concerning the investor breakdown, the Treasury favoured real money accounts, who took more than 72% of the allocated orders. For both of these syndications, the Treasury appointed a duration manager: Fortis for OLO 52 and Barclays for OLO 54. The role of a duration manager is to stabilise the market when the issue price of the bond is set by acting as a counterparty on behalf of all the syndicate members for switch orders presented by the G8. Geographical distribution of OLO 54 (4 % - 28/03/2014) United Kingdom 24% Rest of Europe 45% Belgium12% Americas 3% Asia13% Eurozone exluding Belgium 3% investors, i.e. the orders presented on the condition of simultaneous sale of another security at a certain minimum price. G9. Distribution of OLO 54 by investor type (4 % - 28/03/2014) ALM/Banks 9% Financial institutions 21% Insurance companies 8% Hedge Funds 7% OLO auctions Other 1% Central banks and public entities 13% Fund managers 36% Pension funds 5% The first syndication of the year concerned the OLO 52 benchmark bond, and replaced the auction planned for the month of January. The second syndication for the OLO 54 benchmark bond took place in April, a month during which no auctions were scheduled. The Treasury also issued OLO 53 in February, although normally no auction had been planned for that month. However the Treasury was able to carry out five auctions as indicated in the provisional calendar of issues. This provisional calendar does not indicate which lines are to be auctioned or the number of lines. These data are published in agreement with the primary dealers one week before the auction. At a prior meeting, the Treasury and the primary dealers review the market demand and circumstances in detail in order to take a decision about which lines should be auctioned. For the five scheduled auctions, the Treasury offered at least three lines. For the November auction it added a fourth line given the strong interest shown in medium-term maturities. 22

24 The new 10 year benchmark bond, the OLO 52, was offered at each auction, which made it possible to increase its outstanding amount from 4 to 10.1 billion EUR. This line was offered with other short, medium or very long-term lines. For the first auctions in March and May, interest was still being shown in very long maturities, but this was no longer the case for the auctions in July, when interest in these maturities had diminished in favour of short and medium-term products. Each time the medium-term line concerned the 5 year segment. Initially, this was the OLO 50 (28/03/2013) for auction in March. At the November auction, this OLO was auctioned on demand from the market at the same time as OLO 54, the new 5 year benchmark bond. After being syndicated in April, this OLO was proposed each time at the auctions. In this way the amounts in circulation on this OLO rose from 5 billion at syndication to 8.8 billion EURO after three auctions. In the very long-term segment, the Treasury offered OLO 48 (15 years) once and OLO 44 (25 years) once, in May and March respectively. The Treasury's strategy consists in taking into account market demand. Compared to 2007, in 2008 the even stronger demand for shorter maturities should be noted, particularly for the three year segment. More than half the auctioned amounts concerned 3 and 5 year maturities. The segment of very long-term maturities only represented 12% of the total amount with 2.32 billion EUR. By taking into account the six auctions, therefore including the auction for the launch of the 3 year OLO 53, the average bid-to-cover ratio amounted to 1.97 compared to 2.46 in 2007 and 1.94 in This ratio corresponds to the number of bids received divided by the number of bids accepted. It is an indicator which makes it possible to see if the auction is sufficiently covered by the bids, and therefore, whether there is enough demand for the securities in the market. After the competitive round of auctions, the primary dealers but not the recognised dealers are entitled to participate in non-competitive subscriptions in consideration for their active bidding in the auctions. They can buy stock at the weighted average auction price, based on a percentage of their accepted bids. The aggregate entitlement to non-competitive subscriptions for all the primary dealers amounted to 4.08 billion EUR, 60.39% of which was exercised (compared to 43.32% in 2007). Whether this right is exercised depends on market conditions at the time of the non-competitive round. In view of the increase in OLO rates that occurred the day after the auctions in July, September and November, the primary dealers had ample recourse to the exercise of their noncompetitive subscription entitlements. This was the case to a lesser extent for the auctions in February, March and May Buy-back of linear bonds Since July 2001, the Treasury has been using the MTS Belgium electronic trading platform for bond buybacks, as it offers liquidity, efficiency and pricing transparency. The buy-backs are made via an MTS Belgium screen (Belgian Buy-Backs - BBB), to which the primary dealers and the Treasury have exclusive access. The Treasury can only post purchase prices (4 hours per day minimum), but it may also accept the sale prices posted by the primary dealers on this segment. Whenever an OLO line reaches a date less than 12 months prior to its final maturity, the Treasury offers to buy it back, which enables investors to divest themselves of their stock ahead of schedule. Buybacks allow the Treasury to garner early financing for forthcoming OLO maturities. Buy-back of OLO lines 28, 16 and 42 had already begun in 2007 and continued in 2008 up until their final respective maturity dates on 28th March, 29th July and 28th September. The bought back OLOs were not amortised and were kept in the portfolio so as to be used in repo operations, as part of Treasury cash management. 23 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES

25 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES Thanks to the buy-back effect, the amount outstanding on OLO 28 decreased by 2.53 billion EUR to reach 9.86 billion EUR on the maturity date. As for OLO 16, it underwent a fall of 1.66 billion EUR to reach an amount outstanding of 6.62 billion EUR. Finally, OLO 42 saw its outstanding amount diminish by 1.4 billion, to reach 7.61 billion EUR. These decreases represented 20.41%, 16.93% and 10.48% of the respective amounts outstanding of these three OLOs. From 1st April 2008, the Treasury also started to buy back OLO 32 (maturing 28th March 2009). During the nine month period, a total of 3.2 billion EUR was bought back, so that the amount in circulation on this line diminished, reaching billion EUR. The buy back amount was not amortised either. It was kept in the portfolio for repo operations as part of cash management. G10. Breakdown of 3-, 5-, 10-, 15- and 30-year issues at the 2008 OLO auctions (EUR bn) Février Feb Mars May Mai Jul Juillet Sep Sept Nov G11. Bid-to-cover ratio at the 2008 OLO auctions Volumes selected, EUR million (left-hand scale) Bid/cover 3-year OLO 3 OLO ans 5-year OLO 5 OLO ans OLO 10-year OLO ans OLO 15-year ans OLO 30-year OLO 30 OLO ans OLO 53 OLO 50 OLO 52 OLO44 OLO 53 OLO 52 OLO 48 OLO 53 OLO 54 OLO 52 OLO 53 OLO 54 OLO 53 OLO 50 OLO 54 OLO 52 24

26 G12. OLO issues in 2008 distributed by type on a monthly basis (EUR bn) Syndications Competitive Offres compétitives bids Souscriptions Non-competitive non subscriptions compétitives 2 (EUR million) J F M A M J J A S O N D Total OLO 28 28/03/ OLO 16 29/07/ OLO 42 28/09/ OLO 32 28/03/ Total per month b. Treasury certificates T4. Buy-backs effected by the Treasury in 2008 on a monthly basis In 2008, the month-end amounts of certificates in circulation ranged from 30.8 to 45.8 billion EUR. The outstanding amounts increased principally starting in the fourth quarter of the year under review, as a result of Government intervention in favour of certain financial institutions. During the year under review, the basic calendar for issues of Treasury certificates remained unchanged from the calendar introduced in However, for cash management reasons, the Treasury also implemented a programme of Cash Management T-Bills starting from July at 1, 2, 3 and 6 months in order to cover the September OLO reimbursements. It should be noted that the Cash Management T-Bills are issues of Treasury certificates that are added to the volume of the linear programme of conventional certificate issues, and which give this programme a certain flexibility. This same programme was then completed starting in the fourth quarter by additional auctions of certificates held on dates other than those indicated in the issue calendar in order to finance Government intervention in the financial sector, as explained above. 25 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES

27 : : ANNUAL REPORT 2008 : : TABLE OF CONTENTS FOREWORD THE KEY INDICATORS 2008 PART 1 PART 2 PART 3 APPENDICES G13. Month-end Treasury certificate amounts in circulation for 2008 (EUR bn) J07 F M A M J J A S O N D J08 F M A M J J A S O N D G14. Average bid-to-cover ratio for Treasury certificate auctions in mois months 5 6 mois months 3 mois months J08 F M A M J J A S O N D G15. Weighted average interest rates of 3-, 6- and 12-month Treasury certificates in mois months 6 mois months 4 3 months mois J08 F M A M J J A S O N D 26

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