Federal Government Debt Belgian Debt Agency

Transcription

1 Federal Government Debt Belgian Debt Agency 2012 annual report 2012 annual report 1

2 2 Debt Agency Kingdom of Belgium

3 Contents Contents... 3 Foreword by Mr Koen Geens, Minister of Finance... 5 Key Indicators of Government Debt... 6 I. DEVELOPMENTS IN THE ECONOMY AND IN GOVERNMENT FINANCE IN Developments in the Belgian economy and interest rates Belgian economy Interest rates Developments in government finances in Developments in the different sub-sectors Revenue and expenditure European comparison II. FINANCING POLICY IN Financing requirements and resources An issuing policy based on two types of products Liquid and standardised products Linear bonds (OLO) Syndications OLO Auctions Non-competitive subscriptions ORI Auctions Buy-backs Strips Treasury Certificates State notes Tailor-made products "Euro Medium Term Notes" (EMTN) Programme "Schuldscheine" Contracts "Belgian Treasury Bills" (BTB) Treasury Bonds Silver Fund General Directives and control of risks The refinancing and refixing risks Credit risk III. MAIN STRATEGIC POINTS 1. Positive developments in the Eurozone Collective Action Clauses (CACs) Short Selling Regulation (SSR) State guarantees and equity in certain financial institutions Dexia guarantee Dexia SA 2011 guarantee FORTIS OUT (RPI) FORTIS IN FORTIS CASHES KBC annual report 3

4 3. Developments in the weighted average life and the duration of the Federal Government debt Distribution of the Belgian federal debt Primary market The primary market for OLOs The primary market for Treasury Certificates The secondary market The secondary market for OLOs The secondary market for Treasury Certificates Holding OLOs and Treasury Certificates Perpetual bonds APPENDICES A. Changes in the Federal Government debt rating B. Securities intermediaries of the Treasury of the Kingdom of Belgium in Primary Dealers Recognised Dealers BTB Dealers Investment establishments (State notes) C. Issuance calendar D. Organisational chart E. Contacts (Debt Agency) Colophon Debt Agency Kingdom of Belgium

5 Foreword by Mr Koen Geens, Minister of Finance Although it was hoped there would be a period of renewed growth after a promising first quarter, 2012 was characterised in Belgium by negative economic growth. This situation is in part the result of the continuing sovereign debt crisis in the Eurozone. Doubts among consumers led to stagnation in domestic demand which, unlike 2011, was no longer able to support the economy. Actual growth of GDP is estimated at -0.3% for In spite of this economic climate, Belgium managed to limit the rise in unemployment. Inflation fell from 3.5% to 2.8%, which was one positive aspect of Public finances have suffered as a result of this economic downturn. The general Government deficit is in fact estimated at 3.9% of GDP. It should be noted that this deficit includes an increase in the capital of Dexia that took place in December Without that, the deficit would amount to 3.1% of GDP. However, the deficit remains below the European average. It is in this difficult economic climate and by efficient management of the debt that the General Treasury Department (Debt Agency) has been able to meet the financing requirements of the Government. In the same vein, in 2012 the Agency issued medium- to long-term bonds mainly in the form of its key instrument, the linear bond (OLO) for more than 48 billion Euros. This total was higher than forecast and allowed a reduction in the short-term debt. The Treasury has therefore profited from the demand from investors for long-term Belgian paper credit that it has been able to issue at historically low rates. By way of illustration, the 10-year OLO rate was 2.10% in December as opposed to over 4% one year earlier. In addition, as in 2011, the Debt Agency has continued to meet the financing requirements of the Government in an optimum manner. In this context, it has also stepped up its buy-back and prefinancing policy. These different elements have resulted in an increase in the duration and the weighted average life of the debt as well as a reduction in the risks of refinancing and refixing rates. We have been able to meet this year s challenges. Minister of Finance, Koen Geens Interest costs rose slightly to 3.5% of GDP, an increase of 0.2 percentage points of GDP. This situation is partly due to the fact that the fall in the interest rates of the debt the weighted average rate is at 3.49% for 2012 as opposed to 3.69% in has not compensated for the increased debt ratio. The debt ratio rose from 97.8% to 99.8% of GDP at the end of 2012, a little more than forecast in the Stability Programme (99.4% of GDP). This increase is partly due to the outlay on aid made by Belgium within the framework of the European Union, with a consequential effect on the debt of 1.5% in terms of GDP. Belgium has, however, managed to keep this ratio below the threshold of 100% annual report 5

6 Key Indicators of Government Debt (in billions of EUR or in %, at 31 December) I. AMOUNTS OUTSTANDING OF THE MAIN FEDERAL GOVERNMENT DEBT INSTRUMENTS 1. Gross federal debt outstanding Treasury financing and investments Financing of other entities Portfolio securities Investment reserve Net federal debt outstanding Debt instruments A. Instruments in EUR: Linear bonds (OLOs) Treasury certificates EMTN Schuldscheine Conventional loans State notes Treasury bonds Silver Fund "Belgian Treasury Bills" in EUR Private loans, interbank loans, etc Debt issued in foreign currencies and swapped into EUR - Borrowings of certain organisations for which the federal government helps service the debt As % of the debt in EUR: - Linear bonds (OLOs) % - Treasury certificates % - EMTN % - Schuldscheine % - Treasury bonds Silver Fund % - State notes % - Others % 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 (in EUR bn) Net balance to be financed Borrowings taken over Exchange gain/loss Interest capitalised Miscellaneous Borrowings of certain organisations Change (in %) Debt Agency Kingdom of Belgium

7 III. CHARACTERISTICS OF THE FEDERAL GOVERNMENT DEBT 1. Ratings issued by the various rating agencies - Long-term ratings (S&P/Moody's/Fitch) AA/Aa3/AA AA/Aa3/AA+ 2. Breakdown by currency - Borrowings in EUR % % - Borrowings in foreign currencies 0.00 % 0.00 % 3. Breakdown by maturity - Long and medium term (> 1 year) % % - Short term % % 4. Breakdown by rate - Fixed rate % % - Variable rate % % 5. Effective duration - of the debt in EUR of the debt in foreign currencies Federal government interest rate burden Weighted average interest rate 3.49 % 3.69 % IV. TRANSITION FROM FEDERAL DEBT (TREASURY) TO GENERAL COVERNMENT DEBT 1. Federal debt outstanding Outstanding debt of other federal entities (*) Debt of Communities and Regions, local authorities and Social Security 4. Consolidation adjustment Other corrections Consolidated general government debt ( ) 7. GDP General government debt ratio (6/7) % % (*) Debt represented by financial instruments as defined for the purposes of the Maastricht Treaty 2012 annual report 7

8 01/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / MATURITY SCHEDULE FOR FEDERAL GOVERNMENT LONG-TERM DEBT IN EUR ( , in billions of EUR) OLOs Other Debt Issued or taken over by the federal government WEIGHTED AVERAGE ACTUARIAL RATE OF THE DEBT IN EUR (in %) Debt Agency Kingdom of Belgium

9 Month Postal account (1) MONTHLY BREAKDOWN OF FLOATING DEBT MONTHLY LIABILITIES IN 2012 (in millions of EUR) Treasury certificates Interbank Treasury bonds + misc. (2) 3 months 6 months 12 months Total in EUR Cash management transactions (4) Total floating debt (5) 01/ / / / / / / / / / / / / / / / / / / / / / / / , (1) Private depositors holdings in postal accounts. (2) Interbank borrowing and lending. (3) Certificates issued by auction after the 29/01/91 reform. The amount shown represents the NET outstanding sum collected by the Treasury, i.e. after deduction of interest and repayments for the month. Including, for the 3-month certificates, maturities under 3 months. (4) Transactions performed to balance the daily cash flow. Cash surplus from tax revenue or from Treasury certificate issues. (5) Total floating debt with (4) deducted annual report 9

10 I. DEVELOPMENTS IN THE ECONOMY AND IN GOVERNMENT FINANCE IN Debt Agency Kingdom of Belgium

11 01/ / / / / / / / / / / /2012 Developments in the economy and in government finance in Developments in the Belgian economy and interest rates 1.1 Belgian economy Inflation decreased in Belgium. It fell from 3.5% in 2011 to 2.8% in 2012 as a result of a more moderate increase in the price of energy products. In addition, in spite of structural reform measures consisting of increasing the effective retirement age and encouraging employment by implementing activation policies and a faster rate of reduction of unemployment benefits, the Belgian employment suffered a loss of 17,000 units during The harmonised unemployment rate therefore rose from 7.2% in 2011 to 7.4% in In spite of an improvement in economic activity at the beginning of the year, the year was characterised by a slowdown in worldwide activity and trade. GDP growth was estimated at 3.2% in 2012, down from 3.9% in Doubts about the fiscal policies of the USA and Japan two countries that have nevertheless achieved positive growth in GDP of 2.3% and 2% respectively together with the slowdown in the emerging economies and the Eurozone crisis are affecting demand and international trade and largely account for the downturn in the global economy. In the Eurozone, tensions arising from the sovereign debt crisis, which particularly affects Spain, Italy and Greece, a fall in external demand and rising prices of raw materials at the beginning of 2012 caused the economy to contract in the second quarter of the year. The improvement in financial conditions in the second part of 2012 due to measures taken previously by the ECB, such as the three-year refinancing operations aimed at providing the financial sector with liquidity and the announcement of the introduction, under stringent conditions, of outright monetary transactions (OMTs) did not alter the downward trend of the economy, marked by the weakness of internal demand. Over the year, the GDP showed a negative rate of change of 0.6%, in contrast to an increase of 1.4% in Interest rates AVERAGES OF 3-MONTH INTEREST RATES AND AVERAGE YIELDS FOR 10-YEAR BENCHMARK BONDS IN 2012 (in %) Belgium has not escaped from this economic slowdown. The recovery that might have been expected after the brief positive period in the first quarter of 2012 did not materialise and growth was negative when taken over the year as a whole, with GDP down by 0.3%. This slight downturn in the Belgian economy is partly due to poor internal demand reflecting the stagnation in real terms of disposable income available to consumers and their concerns about the outlook for the future, particularly in terms of jobs. However, this slowdown was curbed by a positive contribution from net exports. 3 month Euribor 3 month TC Belgium (LT) Germany (LT) USA (LT) Japan (LT) Italy (LT) Interest rates remained low in the USA and, on average, in the Eurozone. However, that was not the case for those countries on the periphery of the zone annual report 11

12 Section I The accommodating nature of the prevailing monetary policies in the USA, Japan and the Eurozone has resulted in a downward trend in short-term interest rates in most of the economies concerned. Given the slowdown in economic activity and the fall in inflation in the Eurozone, the Central European Bank (CEB) reduced its key policy rates by 25 base points at the beginning of July. The main refinancing operations rate in other words the central key rate was therefore reduced from 1% to 0.75%, where it remained until the end of the year. However, the downward effect on short-term interest rates did not spread to some Eurozone countries, leading the CEB to announce an MTO programme in order to re-establish a proper distribution of the monetary policy. The CEB s liquidity injections referred to above and its obvious desire to do whatever it can to preserve the Euro have also had a downward impact on short-term interest rates. 5 INTEREST RATE CHANGES IN THE EUROZONE IN 2012 (in %) January to 0.00% in December. Negative 3 month rates were even recorded during the second semester of Interbank rates also remained fairly low under the influence of the Eurosystem s monetary policy. The 3 month Euribor rate therefore fell from 1.22% in January to 0.18% in December. As far as long-term rates are concerned, the 10 year benchmark OLO rate showed a net downward trend, falling from 4.11% in January to 2.10% in December Compared with 2011, when the yield of the benchmark German Bund and the 10 year OLO reached a peak of 366 base points at the end of November, there was a clear improvement in 2012, particularly during the second semester. At the end of the year under review, this interest rate differential amounted to 75 base points. This improvement was the result of measures taken by the CEB to protect the Euro and by the European authorities to improve economic governance, but also, in the case of Belgium, of budgetary consolidation measures and structural reform, as well as the restructuring undertaken by the financial sector month Euribor 3 month TC ECB central key rate OLO Benchmark Short-term interest rates on Belgian financial markets followed a similar pattern to those of the centre of the Eurozone, i.e. settling at very low levels. 3 month Treasury Certificate rates on the secondary market therefore moved on average from 0.37% in 2. Developments in government finances in 2012 According to the National Accounts Institute (ICN) data for the end of March 2013, the Belgian general Government budget for 2012 closed with a deficit equivalent to 3.9% of GDP. This figure takes account of Dexia s capital increase at the end of December In accordance with the Eurostat decision of March 2013, this operation cannot be considered as a purely financial transaction, but as a capital transfer, with an impact on the financing balance of -0.8% of GDP. Without this correction, the deficit would amount to 3.1% of GDP. 12 Debt Agency Kingdom of Belgium

13 Developments in the economy and in government finance in 2012 The result is less favourable than the objective set by the stability programme of April 2012, which predicted a deficit of 2.8% of GDP for the year under review. The deterioration of the economic situation has had an extremely negative impact on government finances. The budget for 2012 was drawn up on the basis of estimated growth of 0.8%, in accordance with the recommendations of the General Government Financing Requirements department of the High Council of Finance (Conseil Supérieur des Finances - CSF). The downturn in the economic climate over time was taken into account in a number of different fiscal controls. According to the ICN figures for May 2013, economic activity fell by 0.3% in 2012, mainly due to the contraction of internal demand. Despite the recorded deficit, significant structural measures of fiscal consolidation were adopted at various levels of government. According to the NBB, they have enabled the structural primary balance to improve to 0.9 percentage points of GDP, an increase that had not been achieved since Belgium first took part in the Economic and Monetary Union. 2.1 Developments in the different sub-sectors The General Government deficit can be broken down into a deficit of 3.5% for Entity I (Federal authorities and Social security) and 0.4% for Entity II (Communities, Regions and Local authorities). Within Entity I, the federal authorities deficit represents 3.4% of GDP and the Social security represents 0.1% of GDP, taking account of the special allocation from the Federal Government to Social security. With regard to Entity II, the budgets of the Communities and the Regions recorded a deficit of 0.1% of GDP and those of Local authorities amounted to 0.3% of GDP. With regard to the fiscal efforts between the Entities, the April 2012 stability programme relied on the advice from the HCF in March It proposed a fiscal adjustment strategy according to which both of the Entities and each of the subsectors in Entity II (including each Community and each Region) achieve the required balance in For 2012, the HCF started with the planned fiscal objectives of a deficit of 2.4% of GDP for Entity I and 0.4% of GDP for Entity II. The financial results were in line with the objective for Entity II, but were less successful in the case of Entity I. FINANCING BALANCE OBJECTIVES AND ACHIEVEMENTS (IN % OF GDP) Achievements 2011 Objectives Estimates 2012 General Government Entity I Federal authorities Social security Entity II Communities and Regions Local authorities Revenue and expenditure Tax and incidental tax revenue rose strongly in 2012: there was an increase of 1.1 percentage points of GDP to 44.7% of GDP. There was a further increase in the ratio of withholdings on earned income as a proportion of GDP. This was mainly due to social security contributions, but also to personal income tax. This can be explained partly by the higher wage share as a proportion of GDP and by measures taken by the general government authorities. Corporate tax revenue also increased, rising from 3% to 3.4% of GDP. This rise was mainly due to the deferral of advance payments in favour of collection by means of recruitment. Withholdings on other income and assets rose by 0.3 percentage point of GDP to 4.1% of GDP. The withholding tax rate, in particular, was harmonised for most of the 1 HCF recommendations 2012 annual report 13

14 Section I income derived from assets and rose from 15% to 21%. An additional contribution of 4% was also instituted on high income from assets. Taxes on goods and services rose slightly, by 0.3 percentage point of GDP, due to a number of factors. Much of this rise was a result of the payment of nuclear rent. In addition, with regard to VAT, the exemption of certain legal and bailiff services has been withdrawn and the tax on pay TV has been increased. Increased duties on tobacco have also contributed to the growth in revenue. Revenue not originating from general and special taxation represented 6.2% of GDP, an increase of 0.2 percentage point of GDP compared with the previous year. This increase is due to payments made by financial institutions to the deposit protection funds and by repayment of subsidies wrongly received by bpost. Primary expenditure increased by 1.4 percentage points of GDP to reach a historic high of 51.3% of GDP. The increase is particularly clear in the case of social security benefits. Pension spending rose due to welfare adjustment measures and the increasing numbers of pensioners. Sickness and invalidity benefits also rose dramatically. The increase in healthcare spending was more moderate compared with previous years due to various cost-saving measures, particularly with regard to medications. Structural reforms of the labour market resulted in a decrease in spending on unemployment. The growth in benefits also slowed down. GENERAL GOVERNMENT REVENUE AND EXPENDITURE (IN % OF GDP) Achievements Estimates Total revenue (of which general and special tax revenues) Primary expenditure Total expenditure The combination of revenue and primary expenditure resulted in a deficit in the primary balance of 0.5% of GDP in This result was less favourable than the objective stated in the stability programme of a primary balance of 0.7% of GDP for Contrary to previous years, the interest rate burden on national debt, expressed in percentage of GDP, rose slightly. It represented 3.5% of GDP, an increase of 0.2 percentage points GDP in comparison with the previous year. The fall in short-term and long-term interest rates on the debt was not enough to compensate for the increased debt ratio and the fall in revenue from swaps, which was very high in The General Government debt ratio effectively grew again, rising from 97.8% of GDP at the end of 2011 to 99.8% of GDP at the end of This level is higher than the objective stated in the stability programme, which predicted a debt ratio of 99.4% of GDP for The rise in the debt ratio can be explained by internal factors as well as, to a lesser degree, external factors. The worsening economic climate was the main cause of the increase in the debt ratio. The external factors that had a negative impact on the ratio were the financial aid granted as part of the European Financial Stability Facility to European countries in difficulty, the investment of capital in the European Stability Mechanism and the participation in the capital increase of Dexia. On the other hand, the increase in the debt ratio was offset by the early repayment by KBC of the loan granted by the federal authorities, the use of surplus liquidity available at the beginning of 2012 following the successful issue of State notes that closed in December 2011 and by the favourable issue of public debt securities. 2.3 European comparison The average debt ratio in the Eurozone is lower than that of Belgium. It represented 90.6% of GDP in 2012, according to figures published by Eurostat in April The increase in the debt ratio is, however, higher than that recorded in Belgium: it increased on average by 3.3 percentage points of GDP between 2011 and 2012 in the 14 Debt Agency Kingdom of Belgium

15 Developments in the economy and in government finance in 2012 Eurozone, as opposed to 2 percentage points of GDP in Belgium. The gap between the debt ratios has therefore been further reduced TREND IN GENERAL GOVERNMENT DEBT RATIO (in % of GDP) TREND IN GENERAL GOVERNMENT PRIMARY BALANCE AND FINANCING BALANCE (in % of GDP) 20 Primary balance Financing balance annual report 15

16 Euro-Zone Belgium Germany Ireland Greece Spain France Italy Netherlands Austria Portugal Finland Euro-Zone Belgium Germany Ireland Greece Spain France Italy Netherlands Austria Portugal Finland Section I EUROPEAN FINANCING BALANCE COMPARISON (in % of GDP) EUROPEAN GROSS CONSOLIDATED DEBT COMPARISON (in % of GDP) Debt Agency Kingdom of Belgium

17 Review 2012 II. FINANCING POLICY IN annual report 17

18 Section II 1. Financing requirements and resources In 2012 the Treasury bought back a much higher number of securities maturing in 2013 or later than envisaged. This resulted in an increase in the gross financing requirements, which amounted to EUR billion instead of the expected EUR billion. The net financing requirements which in the narrower sense arose from the cash shortfall and the holdings and loans granted to financial institutions and countries amounted to EUR 7.98 billion, as opposed to the predicted total of EUR 7.04 billion. However, long-term debt repayments were lower than predicted in the financing plan at the beginning of December 2011 (EUR billion), after significant buybacks of debt in December 2011 that were a result of the cash revenue generated by the success of the State note issue. Buybacks were again considerable, however, during the year under review, with a total of EUR 7.0 billion, much higher than the EUR 3.36 that had been envisaged. In 2012, the Treasury issued a total amount of EUR billion in medium- and long-term loans, much more than planned and more than enough to cover the financing needs referred to above. As a result, the net short-term debt fell significantly by EUR 7.48 billion (a decrease of EUR 3.39 billion for Treasury certificates and EUR 4.09 billion for other instruments). The Treasury therefore took full advantage of the demand for Belgian public debt, which were at low rates, possibly a record low. The Government also issued OLOs to the value of EUR billion as well as EMTN and Schuldscheine for EUR 3.07 billion. However, the demand for State notes fell due to the significant decrease in the rates. The Treasury Bonds Silver Fund reaching their maturity date were, as usual, refinanced by the same instrument. TREASURY FINANCING IN 2012 (in billions of EUR) 2012 Financing plan Situation on I. Gross financing requirements Federal State budget deficit Budget deficit (stricto sensu) Participation in/loans to financial institutions and sovereign States Transfers to the Silver Fund Debt maturing in Medium- and long-term debt in EUR Medium- and long-term debt in foreign currencies Planned prefinancing of bonds maturing in 2012 and later Buy backs Other financing requirements II. Financing resources 2012 (long and medium term) 1. OLOs Other medium- and long-term financing resources Euro Medium Term Notes/Schuldscheine Securities for retail investors Treasury Bonds Silver Fund Other III. Net change in short-term foreign currency debt IV. Change in Treasury Certificates stock V. Net change in other short-term debt and financial assets Debt Agency Kingdom of Belgium

19 The financing policy in An issuing policy based on two types of products 2.1 Liquid and standardised products Linear bonds (OLO) In 2012 the Treasury issued a total of EUR billion OLO, against a volume of EUR billion in This total included issues by syndication (EUR 12.5 billion), by auction (EUR billion) and by two ORI auctions (EUR 820 million). As usual the Treasury made use of the syndication technique each time when launching its three new benchmark loans. There were three syndications in 2012: one in January and two more in March. During the year under review, the Treasury held 8 auctions out of the 10 that were originally envisaged in the financing plan Syndications OLO 65 Continuing the tradition of the January issue of a linear bond with a 10-year maturity date, the Treasury launched the syndication of a new benchmark bond, the OLO 65. By doing so, the Treasury effectively intended to add a new 10-year benchmark product to its curve. The OLO 65, with a final maturity date of 28 September 2022, was placed by a syndicate whose joint lead managers were the primary dealers Barclays, BNP Paribas Fortis, Morgan Stanley and SG CIB. The other primary dealers and recognised dealers also participated in the investment as co-lead managers and members of the selling group. This issue was launched in a relatively positive market environment, given the low impact of the expected ratings reduction from S&P in the Eurozone. It should be noted that this syndication was the first in Euros to be announced by a sovereign issuer from Western Europe since September 2011 and by Belgium since June It was also the first syndication after the rather difficult period for the Eurozone and for Belgium in November The orders came flooding in to reach EUR 6.5 billion from 170 investors. Given the quality of the books and the significant oversubscription, the Treasury decided to increase the size of the transaction and set it at EUR 4.5 billion, with a minimum objective of EUR 3 billion. The issue spread was set at mid-swap +197 basis points, equivalent to basis points above the Bund 2.00% - January The OLO s coupon was set at 4.25% and the issue price at %, equivalent to a yield of 4.302%. The Treasury issued this transaction with an issue premium of 7 basis points above the previous benchmark 10-year OLO 61 (4.25% ). The Treasury once again used the mixed pot system for the book-building process and the allocation of orders. As in previous syndications, this system contributed to improving the efficiency, transparency and objectivity of the book-building and allocation process. A quality control inspection was carried out on the majority of the subscriptions in order to avoid duplication of subscriptions from investors working with a number of primary dealers. With regard to the choice of orders, the Treasury concentrated on real money final investors, mainly from the Eurozone. Investment in OLO 65 was mainly in Europe, which accounted for more than 90% of the transaction. OLO 66 For the second syndication of the year, the Treasury continued its 2012 issuing programme by launching a 20-year line in March with a maturity date of 28 March This maturity was selected to satisfy the appetite of investors for the longterm segment as well as the considerable interest from German investors looking for yield; all in a positive environment after the progress made in the participation of the private sector in Greece. The issue of a new 20-year line was a first for Belgium annual report 19

20 Section II This 20-year OLO with a coupon of 4.00% was issued at a price of %, the equivalent of a yield of 4.064%, at mid-swap +133 basis points, corresponding with a cost of 140 basis points above the German instrument Bund 5.50% - January The spread was 44.2 basis points above the OAT 5.750% - October The Treasury issued this OLO at 5 basis points above the interpolated OLO curve. For this syndication, the Treasury chose the following four primary dealers as lead managers: Barclays, BNP Paribas Fortis, Deutsche Bank and JP Morgan. The other primary dealers and recognised dealers also participated in the investment as colead managers and members of the selling group. Investment orders totalled over EUR 6 billion shared between 150 investors. The total finally allocated amounted to EUR 4 billion, 1 billion more than the minimum objective originally set. The Treasury also used the mixed pot system for allocation of the orders. This system contributed to improving the efficiency, transparency and objectivity of the bookbuilding and allocation process. In this case, it also afforded the Treasury better control over orders allocated outside Belgium, thereby broadening the OLO investor base on an international level. In terms of geographical distribution, more than 90% was invested in Europe. As far as distribution by investor is concerned, the Treasury particularly favoured real money final investors, who received almost 75% of the allocation. As hoped, a significant proportion of this transaction was invested with insurers, particularly in Germany. OLO 67, with a final maturity date of 28 September 2019 and a coupon of 3.00%, was issued at a price of %, equivalent to a yield of 3.021% and at mid-swap +98 basis points. This corresponded with a cost of basis points above the German instrument Bund 3.50% - July 2019 and 64.6 basis points above the OAT 4.25% - April The Treasury issued this transaction with a premium of 2.1 basis points above the interpolated OLO curve. For this syndication, the Treasury chose the following four primary dealers as lead managers: Crédit Agricole-CIB, ING, RBS and UBS. The other primary dealers and recognised dealers also participated in the investment as co-lead managers and members of the selling group. Investment orders totalled EUR 6 billion on closure of the books, divided among 180 investors. The Treasury finally allocated a total of EUR 4 billion. The Treasury also used the mixed pot system for allocation of the orders. This syndication was much appreciated by the real money investors, who took more than 75% of the allocation. This included a sizable allocation to the banks (17%) for their ALM and treasury departments. In terms of geographical distribution, the proportion outside of Belgium exceeded 90% of the total allocation. It should be noted finally that a duration manager was appointed for each of these three syndications. OLO 67 For the third and final syndication of the year, the Treasury launched a 7-year OLO during the same month as the previous issue, i.e. March. This maturity was chosen to meet the recent demand from investors in an extremely favourable market environment following the considerable success of the 20-year syndication and the good performance of the OLO curve in general. What is more, this choice was very much in line with the Treasury strategy aimed at extending the duration of its portfolio. Finally, this maturity segment would fit in very nicely with its schedule. 20 Debt Agency Kingdom of Belgium

21 2.22% 0.24% 3.40% 2.75% 2.58% 0.64% 6.71% 0.88% 3.15% 0.00% 18.37% 23.16% 23.97% 33.70% 31.81% 42.07% 46.90% 57.45% 0.00% 4.22% 5.23% 0.25% 2.56% 5.44% 0.00% 3.78% 6.97% 3.94% 13.22% 25.56% 23.97% 37.44% 39.89% 42.22% 37.22% 48.09% The financing policy in % OLOs - DISTRIBUTION BY INVESTOR TYPE IN % 40% 30% 20% 10% 0% OLO65 (4.25% - 28/09/2022) OLO66 (4.00% - 28/03/2032) OLO67 (3.00% ) Others Central Banks and Public Entities Banks Insurance Companies Fund Managers Pension Funds OLOs - GEOGRAPHICAL DISTRIBUTION IN % 60% 50% 40% 30% 20% 10% 0% OLO65 (4.25% - 28/09/2022) OLO66 (4.00% - 28/03/2032) OLO67 (3.00% ) Belgium Eurozone excluding Belgium Rest of Europe USA and Canada Asia Others 2012 annual report 21

22 Section II Syndication Syndication is an issuing technique via which the Treasury makes use of a syndicate of primary and recognized dealers to issue and place its securities. The syndicate is a temporary association of banks, whose common objective is collective placement of the bonds. There are three levels within the syndicate: 1. Lead manager: this is the bank that receives a mandate from the issuer to lead the syndicate. The lead manager underwrites placement of most of the bonds and is responsible for overall coordination and organization 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. Guarantees 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 is made up of the recognized dealers. They are invited to participate but must not underwrite their participation. This participation is in fact limited to placing a small volume of securities. They do not have any other tasks or responsibilities. The co-lead managers consist of other primary dealers, who are not joint lead managers, together with recognised dealers. portion of the OLO allocation without the need to divulge the identity of the buyer to the joint lead managers. The blind retention forms a consideration in return for their efforts in placing the OLOs and Treasury certificates over the course of the previous year; 2. There is a strategic reserve. A fraction of the debt issue is reserved for allocation of certain purchase orders presented by the co-leads and the selling group. In allocating the strategic reserve, the Debt Agency strives to allocate the orders placed by the co-leads and the selling group members on the basis of the following criteria: a) the order is placed by an investor who is not yet registered in the books of lead managers; b) the order is of excellent quality and/or represents true diversification. Duration manager The Treasury generally appoints a duration manager for each auction. The function of a duration manager is to stabilise the market when the issue price of the new OLO is set, by acting as the counterparty for all switch orders placed by the investors in the book, amongst other roles. Switch orders are purchase orders for the new OLO on the condition that another security is sold simultaneously at a predetermined minimum price. This orderly and efficient organisation of investors selling orders is intended to limit erratic movements in the market when the new OLO price is set. 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 identity of the buyer. However there are two differences compared to normal pot syndication: 1). A blind retention is reserved for the co-lead managers. They are guaranteed this OLO Auctions The OLOs are issued through syndications (see above) and auctions. The Treasury publishes a calendar, for the latter type of emission, to inform the financial markets of the timing of issues. These principles of transparency and predictability offered by the Treasury are important for the liquidity of OLOs. On the other hand, the Treasury 22 Debt Agency Kingdom of Belgium

23 The financing policy in 2012 runs a certain risk of dependency in relation to the circumstances and conditions prevailing at the time of auction. The auctions are held on a monthly basis except in December in line with the issue calendar, as has been the case since In theory, the auctions take place on the last Monday of the month except, for the year under review, in April and May, when the auctions have been brought forward by one week, and in August, when the auction has been put back to the beginning of September. In this way, the Treasury takes account of some non-trading days in Belgium, the USA and the United Kingdom, which fall on the last Monday of those months. The Treasury may also decide to cancel an auction when there is a syndication in the month in question. This occurred in January, March and April, when the OLO 65, 66 and 67 were launched OLOs - DISTRIBUTION OF ISSUES BY MATURITY (in 2012, in billions of EUR) 3 years (0 < 4) 5 years (>= 4 < 8) 10 years (>= 8 < 15) >= 15 years There were therefore eight auctions which brought in a total of EUR billion, i.e. EUR billion during the competitive round of auctions and EUR 4.94 billion during the non-competitive round. The average total issued per competitive round amounted to EUR billion. The issue calendar, which is published each year in December, does not indicate which lines will be auctioned in the following year or the number of lines. This information is disclosed one week before the auction, following consultation with the primary dealers. Market demand and market circumstances are analysed in detail during this consultation and a decision is taken on that basis. Three OLO lines were issued during five auctions and four lines in the remaining three auctions. The new 10-year benchmark (OLO 65) which was launched in January was demanded at each auction and offered in such a way that the initial amount of EUR 4.5 billion swelled to reach a total amount outstanding of EUR billion. OLO 66, which was issued in March, was also subsequently offered on two occasions increasing the amount in circulation from EUR 4 to 5.61 billion. Soon after the issue of this new 20-year instrument, the Treasury launched OLO 67, with a 7-year maturity date of 28 March This new benchmark OLO was subsequently auctioned on three occasions. The amount outstanding on the OLO rose from EUR 4 billion after the syndication to EUR 7.19 billion at the end of the year under review. The bid to cover ratio for all eight auctions was an average of 1.89, compared to 2.18 in 2011 and 2.25 in The bid-to-cover ratio is the ratio between the amounts offered and the amounts selected. It is an indicator which makes it possible to determine whether the auction is sufficiently covered by the bids, and therefore, whether there is enough demand for the paper. The level of 1.89 indicates that demand for the OLO is still significantly high. The lowest and highest values recorded for this ratio in 2012 were 1.29 and 2.64 respectively for the auctions of OLO 64 (maturity date 28/03/2026) in May and of OLO 65 (maturity date 28/09/2022) in June annual report 23

24 13/01/ /01/ /02/ /02/ /02/ /02/ /02/ /05/ /05/ /05/ /06/ /06/ /06/ /07/ /07/ /07/ /09/ /09/ /09/ /09/ /09/ /09/ /09/ /10/ /10/ /10/ /10/ /11/ /11/ /11/ /11/ /01/2012 (ORI) 24/01/ /02/2012 (ORI) 27/02/ /03/2012 4/04/ /05/ /06/ /07/2012 3/09/ /09/ /10/ /11/2012 OLO31 OLO44 OLO48 OLO44 OLO63 OLO65 OLO60 OLO63 OLO65 OLO64 OLO63 OLO65 OLO66 OLO63 OLO65 OLO64 OLO67 OLO65 OLO60 OLO63 OLO67 OLO61 OLO65 OLO63 OLO65 OLO66 OLO64 OLO63 OLO55 OLO67 OLO65 Section II The tail is also another indicator for the auction. This is the difference between the limit price and the lowest price offered for the line in question. The tail highlights the quality of the demand: a small tail means that all the bids were competitive whereas a long tail indicates that the bids that were not accepted were too prudent and below the market price. This provides an illustration of the primary dealers interests. OLOs - BID TO COVER RATIO AT THE 2012 AUCTIONS (in billions of EUR) OLOs - ISSUES DISTRIBUTED BY TYPE (in billions of EUR) Syndications Competitive bids Non-competitive subscriptions Auctions Ratio (right-hand scale) The tail of the OLO 65, the 10-year benchmark that was offered at each auction, was relatively stable at 0.35 and 0.47 cent in the first two auctions of the year. It almost doubled in June, rising to 0.81 cent and then fell back in the July, August and September auctions to levels of 0.73, 0.50 and 0.48 cent respectively. The tail reached its lowest level of 0.32 cent in November. Compared to 2011, the relative share of the very long-term segment (more than 10 years) fell from 32.26% to 27.30% and the total issued fell from EUR billion to EUR billion. The relative share of the short- and medium-term maturities rose from 35.74% to 36.39%. Demand for the 10-year segment remained significant with a relative share of 36.30%. It should also be noted that the primary and recognised dealers received the auction results on average 6.34 minutes after the closure of bids. The shortest time was 5 minutes for the June auction. The longest time (8 minutes) was recorded at the auction of 26 November. 24 Debt Agency Kingdom of Belgium

25 The financing policy in Non-competitive subscriptions After the competitive round of auctions, the primary dealers but not the recognized dealers are entitled to participate in non-competitive subscriptions. They acquire this right through their active participation in the auctions. They can buy securities at the weighted average auction price, based on a predetermined percentage of their bids accepted in the two previous auctions. The right to non-competitive subscriptions for all the primary dealers taken together amounted to EUR 6.96 billion, 68.44% of which (i.e. EUR 4.76 billion) was actually exercised (compared to 50.13% in 2011). The exercise of this right depends on market conditions at the time of the non-competitive round. Some institutions such as the Caisse des Dépôts et Consignations and the Fonds Monétaire also have the option of subscribing to the non-competitive round. But, contrary to the primary dealers, these institutions may only subscribe before the start of the competitive round at the weighted average price (which is not yet known at this time). EUR 177 million was also subscribed in this way, which meant that the non-competitive subscriptions finally amounted to EUR 4.94 billion in LONG-TERM DEBT REPAYMENT SCHEDULE (in billions of EUR) End December 2011 End December annual report 25

26 Section II Issue date Final maturity ISIN Code Outstanding before auction Amount offered RESULTS OF OLO AUCTIONS IN 2012 (IN MILLIONS OF EUR) Amount Exerc. Total Bid to accepted non accepted Cover (Comp/ comp Syndication) Weighted average price / Syndication price Weighted average rate / Syndication Yield Min/max bid AUCTION /01/ /03/2028 BE / /03/2035 BE / ORI /01/ /09/2022 BE SYNDICATION /02/ /03/2022 BE / /03/2035 BE / ORI /02/ /06/2017 BE / /09/2022 BE / /03/2041 BE / AUCTION /03/ /03/2032 BE SYNDICATION /04/ /09/2019 BE SYNDICATION /05/ /06/2017 BE / /09/2022 BE / /03/2026 BE / AUCTION /06/ /06/2017 BE / /09/2022 BE / /03/2032 BE / AUCTION /07/ /06/2017 BE / /09/2022 BE / Stop price Successful bidders 26 Debt Agency Kingdom of Belgium

27 The financing policy in 2012 RESULTS OF OLO AUCTIONS IN 2012 (IN MILLIONS OF EUR) Amount Amount Exerc. Total Bid to Weighted Weighted Min/max bid Stop offered accepted non accepted Cover average price / average rate / price (Comp/ comp Syndication Syndication Syndication) price Yield 28/03/2026 BE / Issue date Final maturity ISIN Code Outstanding before auction AUCTION /09/ /09/2019 BE / /09/2022 BE / /03/2041 BE / AUCTION /09/ /06/2017 BE / /09/2019 BE / /09/2021 BE / /09/2022 BE / AUCTION /10/ /06/2017 BE / /09/2022 BE / /03/2032 BE / /03/2035 BE / AUCTION /11/ /06/2017 BE / /03/2019 BE / /09/2019 BE / /09/2022 BE / AUCTION TOTAL : Successful bidders 2012 annual report 27

28 Section II OLO LINES OUTSTANDING AT Maturity Coupon ISIN Code No. Net available 2 Buybacks in portfolio Stripped securities Strippable? / % BE EUR EUR X 28/ % BE EUR EUR EUR X / % BE EUR X 28/ % BE EUR EUR X / % BE EUR X 28/ % BE EUR EUR X 28/ % BE EUR EUR X /02 FRN 4 BE EUR 28/ % BE EUR X 28/ % BE EUR EUR X / % BE EUR X 28/ % BE EUR X 28/ % BE EUR EUR X / % BE EUR X / % BE EUR X 28/ % BE EUR EUR X / % BE EUR EUR X / % BE EUR EUR X / % BE EUR X 28/ % BE EUR EUR X / % BE EUR X / % BE EUR EUR X / % BE EUR EUR X / % BE EUR EUR X / % BE EUR EUR X EUR EUR 2 Available on the market (amounts issued without buybacks) on Buyback possible 4 Interest rate - 15/11/2012>15/02/2013 (92 days): 0.792% 28 Debt Agency Kingdom of Belgium

29 The financing policy in ORI Auctions Within the framework of its financing strategy, the Treasury introduced a new feature in 2012, the possibility of holding an "Optional Reverse Inquiry" (ORI) auction. This new form of issue appeared after the Eurozone crisis reached its peak at the end of 2011 with high interest rates and significant drop in liquidity. Whenever there proves to be insufficient liquidity on the secondary markets, the ORIs allow the Treasury to respond at given moments to a specific demand from investors. As well as being an OLO auction, an ORI auction also has the following characteristics: The ORI auction is effectively an option for the Treasury. Of course, the Treasury draws up a provisional calendar or schedule for its auctions, but it is the Treasury who decides, at the latest on the day before at around 4 p.m., whether or not it wants to hold an ORI auction. In theory, this type of auction takes place on the second Friday of the month. Reverse Inquiry: the primary and recognised dealers inform the Treasury of the existence of a specific demand for "off-the-run" OLOs. These are OLOs that are not considered to be 5, 10, 15, 20 and 30 year benchmark bonds. The Treasury offers a maximum of two off-the-run OLOs at a fixed rate in an ORI auction. The issue total is limited to a maximum of EUR 500 million per ORI auction for the two OLOs. Participation in ORI auctions is also limited to primary and recognised dealers. In all, there were two ORI auctions that brought in a total of EUR 820 million: EUR 400 million in January and EUR 420 million in February. The OLOs in demand and offered were in the long-term and very long-term segments: OLO 31 (28/03/2028) and OLO 44 (28/03/2035) in January and OLO 48 (28/03/2022) and OLO 44 (28/03/2035) in February Buy-backs The buy-back of an OLO that had not yet reached its maturity has two advantages: - more efficient cash management on the maturity date itself; - prefinancing in the year prior to maturity; the latter allows adjustment of the total to be issued in an OLO if issue conditions are favourable. For the buy-back of its bonds, the Treasury has, since July 2001, had the use of the electronic trading system MTS Belgium (MTSB), which offers liquidity, efficiency and transparent pricing. Buy-backs are performed via a screen ( Belgian Buy-Backs / BBB) which can only be accessed by primary and recognised dealers and on which the Treasury continuously displays purchase prices. In addition to this possibility, the dealers can also contact the Treasury by telephone to be included in the buy-back programme. When an OLO line reaches a date less than 12 months prior to its final maturity, the Treasury offers it for buy-back, which enables investors to divest themselves of their securities in advance. For the Treasury, buy-backs allow planned prefinancing in light of the future OLO maturity dates. During 2011 the Treasury had already begun to buy back the OLO 57 (maturing on 28 March 2012) and OLO 38 (maturing on 28 September 2012) lines, with effect from 29 March and 29 September respectively. The Treasury bought back EUR 443 million of OLO 57 during the first three months of 2012, which took the total amount bought back to EUR 3.69 billion. This sum represented 49.56% of the total amount issued. The Treasury had already bought back EUR 2.19 billion of OLO 38 in 2011 and when this was added to the EUR 3.02 billion bought back in 2012, that meant that the amount to be reimbursed on final maturity had fallen to EUR 7.55 billion, a reduction of 40.85%. In addition, on 7 December 2011, a little earlier than envisaged, the Treasury began to buy back OLO 12 (maturing on 24 December 2012). The success of the State note issue at the beginning of December generated a substantial cash surplus that the Treasury wanted to use efficiently by including, among others, OLO 12 in its buy-back programme at an earlier date annual report 29

30 01/ / / / / / / / / / / / / / / / / / / / / / / /2012 Section II BUY-BACKS CONDUCTED BY THE TREASURY IN 2012 ON A MONTHLY BASIS (IN MILLIONS OF EUR) JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC TOTAL OLO 57 (code 317) 28/03/ OLO 38 (code 298) 28/09/ OLO 12 (code 262) 24/12/ OLO 50 (code 310) 28/03/ OLO 41 (code 301) 28/09/ Monthly total The amount outstanding for this OLO initially amounted to EUR 8.5 billion. During December 2011 a total of EUR 1.64 billion was bought back, and in 2012 a further amount of EUR 1.08 was bought back. It was therefore necessary to reimburse only EUR 5.82 billion on the final maturity date. primary dealers quoted strips with the same maturity as the underlying OLOs even with a very narrow bid-ask spread gave the strips market the essential transparency that it had previously been lacking. Starting on 29 March 2012, the Treasury began to buy back OLO 50 (maturing on 28 March 2013) and starting on 1 October 2012, OLO 41 (maturing on 28 September 2013). In 2012 the Treasury bought back a total of EUR 3.67 billion of OLO 50 with the result that the total amount in circulation was reduced to EUR 9.05 billion. During October, November and December the Treasury bought back EUR 1.23 billion of OLO 41, meaning that the total amount in circulation at the end of 2012 fell to EUR billion Strips The OLO strips market has experienced significant growth since strips with the same maturity date were made exchangeable or fungible regardless of whether or not they represent the principal amount or the interest coupon of an OLO. The nominal amount of both stripped and reconstituted OLOs exceeded EUR 3 billion. Since July 2011, long-term OLOs have been stripped and the strips with short-term maturity reconstituted into OLOs. This explains why there is not much difference between the totals for stripping and reconstitution. The nominal amount of OLO strips at the end of 2012 was in excess of the EUR 10-billion mark. Strips transactions on the secondary market also grew spectacularly, with the primary dealers taking more than EUR 10.6 billion on their own behalf. More than EUR 4.5 billion of this was processed via electronic platforms. The fact that ten OLOs - CHANGE IN THE NET STRIPPED AMOUNT (in millions of EUR) 30 Debt Agency Kingdom of Belgium

31 01/ / / / / / / / / / / / / / / / / / / / / / / /2012 The financing policy in OLOs - STRIPPING AND RECONSTITUTION ACTIVITY (in millions of EUR) Stripping Reconstitution The introduction of fungibility enabled the Treasury to create the framework required for a liquid and transparent strips market. This clearly demonstrates that the Treasury not only wants to develop new financial instruments but also that it is dedicated to taking initiatives aimed at improving the liquidity and transparency of existing products. However, the growth of the OLO strips market would have been even more impressive in 2012 if doubts had not arisen during the second semester about the application of CACs (Collective Action Clauses) 5 to strips. It was finally decided to opt for the measure that was most radical and most transparent and therefore the most efficient as well: OLOs with CACs received a new coupon maturity date. As a result, you can deduce whether or not a strip is subject to a CAC on the basis of its maturity. 5 See section III annual report 31

32 01/ / / / / / / / / / / / / / / / / / / / / / / / /01/ /01/ /02/ /02/ /03/ /03/ /04/ /04/ /05/ /05/ /06/ /06/ /07/ /07/ /08/ /08/ /09/ /09/ /10/ /10/ /11/ /11/ /12/ /12/2012 Section II Treasury Certificates In 2012 the end-of-month outstanding amounts of Treasury certificates varied within a range of EUR 32 to 36 billion. The amounts outstanding increased at the start of the year in order to cover the OLO capital and interest reimbursements in March. They then fell considerably at the end of the year, in part due to the success of the OLO issuing programme that allowed the Treasury to borrow less in certificates. In the year under review, the basic Treasury certificates issue calendar remained unchanged in comparison with the previous year. There were therefore two auctions per month - one at the beginning of the month for 3- and 6-month maturities and the other in mid-month for 3- and 12-month maturities. As in 2011, the Treasury did not issue 1- or 2-month Cash Management T-Bills certificate issues that are added to the programme of conventional issues. More emphasis was placed on the volumes issued during the different auctions while retaining the standard maturities, which explains the variability of the volume of certificates issued in Investors sustained their interest in Treasury certificate auctions, evidenced by the bid-to-cover ratio, which is the amount of bids received divided by the amount of bids accepted at auctions. It should be noted that this ratio was, on average, still greater in 2012 than 2 for the three maturities TCs - "BID TO COVER" RATIO FOR AUCTIONS IN TCs - OUTSTANDING (end of month, in billions of EUR) months 6 months 12 months The average bid-to-cover rate rose to 3.49 for the 3-month segment, with an average bid per auction of EUR 4.15 billion, with a rise to 2.75 for the 6-month segment, with an average bid of EUR 3.37 billion and finally to 2.31 for the 12-month segment, with an average bid of EUR 3.51 billion. The ratios increased in comparison with the previous year, representing a profit for the Treasury. 32 Debt Agency Kingdom of Belgium

33 3/01/ /01/ /01/ /02/ /02/ /03/2012 3/04/ /04/2012 8/05/ /05/2012 5/06/ /06/2012 3/07/ /07/ /07/ /08/2012 4/09/ /09/2012 2/10/ /10/2012 6/11/ /11/2012 4/12/ /12/ /01/ /01/ /01/ /02/ /02/ /03/ /04/ /04/ /05/ /05/ /06/ /06/ /07/ /07/ /07/ /08/ /09/ /09/ /10/ /10/ /11/ /11/ /12/ /12/2012 The financing policy in 2012 The movement of the end of year bid-to-cover ratios reflects the good performance of the Treasury s financing plan which, as mentioned above, meant that the Treasury was able to reduce its issue of Treasury Certificates in December. The ratio for the 3- month segment was therefore at the first auction in December, while the amount withheld totalled only EUR 368 million. Contrary to the previous year, at the time of the auctions, the average spread between the limit rate and the lowest offered rate was favourable and for most 3-, 6- and 12-month maturities was 2 basis points, reflecting renewed confidence in the markets by investors TCs - WEIGHTED AVERAGE RATES OF TREASURY CERTIFICATES IN 2012 (in %) The graph below illustrates changes in the spread between the weighted average rate of Treasury Certificates and the Euribor for issues of 3-, 6- and 12-month lines. These spreads decreased in parallel for the 3- and 6-month maturities, reflecting an improvement in the performance of the interbank market in The spreads for the 12-month segment also decreased, although they stayed relatively stable throughout the year under review. On average, 60% to 70% of primary dealers participated in auctions for all of the terms. In 2012, in terms of volume, primary dealers used 17% of their entitlement to obtain Treasury Certificates at the weighted average auction rate by means of noncompetitive subscriptions. It should be noted that the exercise of the entitlement of primary dealers to non-competitive bids depends on market conditions TCs - ISSUE SPREADS BETWEEN THE AVERAGE WEIGHTED RATE OF TREASURY CERTIFICATES AND EURIBOR IN 2012 (in basis points) months 6 months 12 months The weighted average rates resulting from the auctions and covered in the graph above fell in 2012, reaching levels near zero from July for 3- and 6-month maturities, with the 12-month segment developing in the same way, showing a decrease of more than 1% over the year. From July, the 3-month rates even became negative and remained so until the end of the year. The rates for 6- and 12-month segments were negative for the last auction of the year. The Treasury had foreseen these developments and modified its auction method, which is now based on prices rather than rates months 6 months 12 months 2012 annual report 33

34 Section II Auction date Amount at maturity Maturity date ISIN BE0312 Month RESULTS OF TREASURY CERTIFICATE AUCTIONS IN 2012 (in millions of EUR) Amount Exerc. Weighted Amount Total Bid to accepted Non average offered accepted Cover (Comp) Comp rate Outstanding before auction Weighted average price Euribor Spread Min/max bid Limit rate/price Successful bidders 3/01/ /04/ / /06/ / /01/ /04/ / /01/ / /01/ /05/ / /07/ / /02/ /05/ / /02/ / /02/ /06/ / /08/ / /03/ /06/ / /03/ / /04/ /07/ / /09/ / /04/ /07/ / /04/ / /05/ /08/ / /10/ / /05/ /08/ / /05/ / /06/ /09/ / /11/ / /06/ /09/ / /06/ / /07/ /10/ / Debt Agency Kingdom of Belgium

35 The financing policy in 2012 Auction date Amount at maturity Maturity date ISIN BE0312 Month RESULTS OF TREASURY CERTIFICATE AUCTIONS IN 2012 (in millions of EUR) Amount Exerc. Weighted Amount Total Bid to accepted Non average offered accepted Cover (Comp) Comp rate Outstanding before auction Weighted average price Euribor Spread Min/max bid Limit rate/price Successful bidders 13/12/ / /07/ /10/ / (*) 18/07/ / /07/ /11/ / (*) 17/01/ / /08/ /11/ / (*) 15/08/ / /09/ /12/ / (*) 14/02/ / /09/ /12/ / (*) 19/09/ / /10/ /01/ / (*) 14/03/ / /10/ /01/ / (*) 17/10/ / /11/ /02/ / (*) 18/04/ / /11/ /02/ / (*) 14/11/ / /12/ /03/ / (*) 16/05/ / /12/ /03/ / (*) 19/12/ / (*) = auction on price 2012 annual report 35

36 Section II State notes The Belgian Government issued State notes for the seventeenth consecutive year. State notes are fixed-interest medium- and long-term loans with annual coupons, in EUR. They are placed through investment institutions bound by contract to the Treasury. On the primary market, this product is targeted at private investors, and certain other investor categories: foundations, non-profit organisations, churches or institutions classified as religious bodies in the national register of legal persons, entities established in the European Economic Area which are similar to the entities listed above and which benefit from the same subscription rights by virtue of community law. It remains possible to opt for a subscription by name in the Treasury s Ledger of the national debt, at no cost. The registered form is also possible for purchase on the secondary market. It should be noted that within the Treasury Department there exists a project concerning the modernisation of the Ledger Service. This project has a number of stages, the first of which concerns the subscription of State notes on the primary market. To this end, since the December 2012 issue, the Treasury has made it possible for private investors to subscribe State notes on line at the Ledger Service web site by means of an electronic identity card or a token. The modernisation of the Ledger Service will continue through 2013 with the aim of offering citizens a service that combines sociability with quality. Given the low level of rates, the Treasury was only able to issue two types of State notes, the 5-year and 8-year notes in the March, June and December campaigns. In September, the Treasury offered only the 8-year note. The low level of rates also had an impact on the amounts taken. Although the Treasury was able to collect EUR 60 million from the first issue of the year under review, it was able to achieve no more than EUR 14.4 million in the December issue. The total amount of State note issues for 2012 amounted to almost EUR 142 million, a substantial fall in comparison with STATE NOTE ISSUES IN 2012 Issues State notes Coupon Price Total subscribed SN 5 years 2.35 % 100 % EUR SN 8 years 3.10 % 100 % EUR Total EUR SN 5 years 2.25 % 100 % EUR SN 8 years 3.00 % 100 % EUR Total EUR SN 8 years 2.10 % 100 % EUR Total EUR SN 5 years 1.00 % 100 % EUR SN 8 years 1.80 % 100 % EUR Total EUR EUR With regard to the secondary market, the State notes are quoted on the Euronext Brussels continuous market and the liquidity is provided by a liquidity provider, Florint BV. In addition, in order to facilitate liquidation and tax payment of State notes, they are included in the Belgian National Bank s X/N liquidation system. 2.2 Tailor-made products OLOs are the Treasury s most important financing instrument as they cover 90% of the long-term financing requirements. In addition, the Treasury also offers flexible financing instruments such as the EMTN (Euro Medium Term Notes) and the Schuldscheine. These two products are issued at the request of investors with the 36 Debt Agency Kingdom of Belgium

37 The financing policy in 2012 objective of providing a broader diversification of the investor base. As these are flexible issues, made to measure for the investor, these instruments can only be issued if they are shown to be cost effective. This means that the issue price must be lower or equal to that of an OLO with the same maturity. These two instruments must therefore be considered as a supplement to the standard programme and must not in any way compromise the liquidity of the OLOs. A total of 24 transactions were concluded in 2012 in EMTN/Schuldscheine for a counter value of EUR billion, an amount slightly below that forecast in June 2012 (EUR 3.5 billion) "Euro Medium Term Notes" (EMTN) Programme Unlike with their 2011 issues, the EMTN issues were extremely successful in Nine transactions were carried out for a total amount of EUR billion. Eight of the transactions were in Euros at floating rates. The operations concluded at the beginning of the year had a maturity of 3 to 5 years and were linked to bank loans from the CEB within the framework of the LTRO programme. From the end of June to the end of August, 4 specific EMTN operations were concluded with the same maturity (10 years), the same floating interest rate and the same final investor. The introduction of OMT by the CEB and the clear statements by Mr Draghi concerning the preservation of the Eurozone also had a positive influence on Belgium. The reestablishment of confidence in the Eurozone meant that the dollars market was once again accessible to Belgian sovereign debt. By means of a syndication led by two banks, Crédit Agricole and JP Morgan, a 3-year transaction in USD was concluded for a total amount of USD 1.25 billion, equivalent to EUR million after swap. There was a diverse range of investors. The geographical distribution was fairly evenly balanced between the Eurozone, non-euro Europe (principally the United Kingdom), the Middle East and Africa. With regard to the type of investor, they were mostly bank treasury departments (43%), followed by central banks (31%) and fund managers (14%). This transaction was interesting in several respects: the reopening of the US market after a two-year absence on the part of Belgium from this market, diversification of the investor base and good cost efficiency in relation to the OLO curve. EMTN ISSUES IN 2012 Value Amount Exchange value Maturity Rate type EUR EUR Floating EUR EUR Floating EUR EUR Floating EUR EUR Floating EUR EUR Floating EUR EUR Floating EUR EUR Floating EUR EUR Floating USD EUR Fixed EUR "Schuldscheine" Contracts The Schuldscheine documentation was ready from the beginning of December 2011, and continuing along the successful route started at the end of 2011, the Treasury concluded 15 transactions in 2012 for a total amount of EUR million. This success once again demonstrated the considerable interest that German investors have in both the product and the issuer, the Kingdom of Belgium. Eight of the ten transactions had a maturity of more than 16 years. Half of the transactions, especially those with a very long term, were lightly structured, callable instruments with a 10- or 18-year call. These transactions also met the criteria required for flexible products, which is to say that they had good cost efficiency as well as diversification. There is no doubt that the inclusion of this product in the Treasury s panoply of financial instruments contributed to the interest of German investors in OLOs, as illustrated by the extremely successful placement in Germany of the 20-year OLO annual report 37

38 01/ / / / / / / / / / / /2012 Section II SCHULDSCHEIN CONTRACTS CONCLUDED IN 2012 Value date Amount Maturity EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR BTBs - DEVELOPMENT OF THE OUTSTANDINGS IN 2012 (in millions of EUR) EUR CHF Treasury Bonds Silver Fund "Belgian Treasury Bills" (BTB) In comparison with 2011, the Treasury had limited use of the Commercial Paper programme in This situation was largely due to the normalisation of the Treasury Certificates market. In view of the front-loading policy instigated at the time of the development of the OLO programme, it was not necessary to launch any major CP issues to finance the OLO coupon maturities of 28 March and 28 September. As in previous years, the foreign currency debt was absorbed by CP issues. The debt in CHF remained at the same level and was refinanced at negative interest rates. No new resources were allocated to the Silver Fund in The Treasury Bonds Silver Fund are zero-coupon bonds. The interest, determined upon issue based on the OLO rate curve, is capitalised up until the final maturity date. The securities are included in the Government debt and the value posted takes into account the interest accrued. Two Treasury Bonds - Silver Funds matured in The Silver Fund replaced the capital and interest with three new Treasury Bonds Silver Funds with their final maturities in 2024 and 2025 respectively. On 31st December 2012, the reserves in the Silver Fund invested in Treasury Bonds Silver Fund amounted to EUR billion and had maturities extending from 2013 to More detailed information is available on the Fund s website: 38 Debt Agency Kingdom of Belgium

39 The financing policy in 2012 TREASURY BONDS SILVER FUND INVESTMENTS STATEMENT ON Treasury Bond Silver Pro rata interest on Amount invested Interest rate Fund Portfolio on Amount at final maturity 21/11/ /04/ (1) /01/ /04/ (2) /01/ /04/ (2) /01/ /04/ (2) /01/ /04/ (2) /01/ /04/ (2) /12/ /04/ (3) /12/ /04/ (3) /05/ /04/ (4) /12/ /10/ (5) /04/ /04/ (6) /07/ /04/ (7) /10/ /04/ (8) /04/ /10/ (9) /10/ /10/ (10) /10/ /04/ (10) /04/ /04/ (11) /04/ /04/ (11) /12/ /04/ (12) (1) Credibe ( ). (2) Belgacom Pension Fund ( ). (3) Fadels ( ). (4) DLU ( ); Credibe balance ( ) ; short term interest ( ). (5) BNB profit ( ); Belgacom Dividend ( ) ; DLU ( ); Credibe balance ( ); short term interest ( ). (6) Fiscal balance 2006 ( ); short term interest ( ). (7) Final maturity BT-FV 15 April 2010 ( ); short term interest t( ). (8) Final maturity BT-FV 15 October 2010 ( ); short term interest ( ). (9) Final maturity BT-FV 15 April 2011 ( ); short term interest ( ). (10) Final maturity BT-FV 17 October 2011 ( ). (11) Final maturity BT-FV 16 April 2012 ( ); short term interest ( ). (12) Final maturity BT-FV 15 October 2012 ( ) annual report 39

40 12/ / / / / / / / / / / / / / / / / / / / / / / / / /2012 Section II 3. General Directives and control of risks CHANGE IN THE 12 MONTH REFINANCING AND REFIXING RISKS OF THE EURO DEBT IN 2012 (in % of the total) 3.1 The refinancing and refixing risks In 2012 the Treasury once again managed to reduce the risks of refinancing and refixing the interest rate on the debt. The 12-month refinancing risk is measured on the basis of the ratio between the debt maturing in twelve months and the net total outstanding amount of the debt. At the end of 2012 this ratio stood at 19.19%, as opposed to 19.89% at the end of In the General Directives, the Minister of Finance set a maximum of 22.50% as a matter of principle, and this limit was generally respected. In addition, the refinancing risk is usually calculated in relation to the GDP. At the end of 2012, the refinancing risk was calculated at 17.4% Refinancing Risk Rate Refixing Risk The Treasury also manages what is called the rate refixing risk: this is quite simply an assessment of how the debt portfolio is affected by variations in the interest rate. It is based on the refinancing risk, but also takes account of variable rate debt (e.g. the Floating Rate Note OLO) as well as interest swaps. In 2012 the 12-month rate refixing risk decreased significantly from 22.30% to 20.27% at the end of December The maximum risk applicable to this debt was 25.00% for CHANGE IN THE 60 MONTH REFINANCING AND REFIXING RISKS OF THE EURO DEBT IN 2012 (in % of the total) The same parameters are also used for debt with a maturity of five years (60 months). They are a good indicator of the risk of the medium-term debt portfolio. The 60-month refinancing risk fell from 56.94% to 55.69%, well below the maximum limit of 60.0% stipulated in the General Directives. There was also a decrease in the 60-month rate refixing risk, which fell from 58.70% to 56.83%, a long way below the maximum limit of 65.0% The changes in these parameters highlight the relative long time period of the new financing performed by the Treasury. 55 Refinancing Risk Rate Refixing Risk 40 Debt Agency Kingdom of Belgium

41 The financing policy in Credit risk Credit risk is determined by the potential loss to the Treasury if one or more of its counterparties fail to fulfil their contractual payment obligations. The Treasury s credit-risk management principles remained largely unchanged in Throughout the year, the Treasury therefore maintained its 2008 and 2011 decisions to limit the volume and time credit 6 for its banking counterparties and the Eurozone countries. In view of the fact that the ratings of a whole range of financial institutions and countries of the Eurozone continues to fall in 2012, the total amount of a certain number of lines of credit also decreased during the year under review. At the same time, the Treasury also deleted fourteen lines of credit (mainly of Italian and Spanish counterparties) because their ratings no longer met the minimum requirements of the Treasury 7. However, two new counterparties were granted a line of credit for the first time in As part of its liquidities management, the Treasury concludes transactions on the interbank market. Cash surpluses are placed with financial counterparts. As in previous years, the Treasury maintained its decision to make use of reverse repos exclusively for placements greater than one week, and in general to grant preference to conclusion of reverse repos for shorter maturities. For the reverse repo period the Treasury receives an OLO and/or a Treasury certificate as collateral, which limits the credit risk of these operations. In order to conclude these repo operations, in 2012 the Treasury also agreed an EMA 8 contract with an additional counterparty. For the second consecutive year, the daily amount invested by the Treasury decreased. The decrease was, however, smaller in 2012 (-9%) than in 2011 (-14%). This decrease was largely due to the 20% fall in the daily average amount of ordinary investments. The daily average amount of reverse repos remained relatively stable and the share of reverse repos in total investments rose slightly from 50% in 2011 to 56% in The credit limits of the Treasury s bank counterparties are calculated on the basis of their regulated capital and ratings. 7 The Treasury only accepts counterparties with a minimum credit rating of A for its new transactions. 8 See Annual Report on the Federal Government debt 2007, Part 3, point 3 for an explanation of the EMA framework agreement. The increase in the credit risk for derivative products observed in 2011 disappeared completely in At the end of the year under review this credit risk reached a similar level to that at the end of On 31 December 2012, the total credit risk for derivative products amounted to EUR 2.1 billion, a decrease of 17% in comparison with the end of the previous year (EUR 2.6 billion). The Credit Support Annex (CSA) agreements that the Treasury concluded 9 with all of its primary dealers and with some other counterparties enabled the Treasury to partially cover itself against credit risk. At the end of 2012, it had received collateral of EUR 1.4 billion, as a result of which the net credit risk in derivative products amounted to EUR 0.7 billion, a decrease of 30% in comparison with the end of the previous year (EUR 1.0 billion) SHARE OF INVESTMENTS AND REVERSE REPOS. AVERAGE DAILY AMOUNTS PLACED (in millions of EUR) The decrease in the foreign currency swaps credit risk (before collateral) (EUR -0,4 billion) and the other derivative products 10 (EUR -0.4 billion) was the cornerstone of the decrease in the total credit risk in derivatives. On the other hand, the rate swaps credit risk rose by EUR 0.3 billion, as a result of a series of rate swaps 11 reaching their 9 In 2012, Credit Support Annex (CSA) agreement was concluded with an additional recognised dealer. 10 Fx swaps. 11 With negative exposure. Reverse repos Placements 2012 annual report 41

42 01/ / / / / / / / / / / / / / / / / / / / / / / /2012 Section II final maturity in 2012 and of the downward trend in interest rates. Other than a few foreign currency swaps reaching their final maturity, the main factors in the decrease in foreign currency swaps credit risk were the increase in the foreign currency exchange price of the US dollar and the yen and the fall in interest rates. In view of the fact that at the end of 2012 there were only a few FX-swaps in circulation, the credit risk in other derivative products virtually disappeared at that time. When the rating of a swap counterparty drops below the A threshold, the Treasury has the right to cancel the existing derivatives with this counterparty on the basis of a clause included in the ISDA 12 contract. This clause in the ISDA contract, called the Additional Termination Event (ATE), is an entitlement that only the Treasury can benefit from, to the exclusion of its counterparties. It should be noted that invoking the ATE does not constitute an obligation MONTHLY CHANGES IN THE SHARE OF INVESTMENTS AND REVERSE REPOS (Average amounts placed daily, in millions of EUR) When the rating of a counterparty fell below A in 2012, the Treasury decided not to invoke the ATE clause and therefore not to cancel the derivative products in progress with the counterparty in question. In return, the Treasury received financial collateral that it could retain until the maturity of the last position in derivatives. As long as the rating remains below the A limit, the counterparty cannot conclude any further transactions with the Treasury. At the end of 2012, more than half of the total credit risk in derivatives was composed of transactions with a residual duration of at least 10 years. The share of these transactions in the total credit risk in derivatives increased from 38.7% at the end of 2011 to 55.5% at the end of The 2008 annual report on the debt stated that following the bankruptcy of Lehman Brothers Holdings Inc., the Treasury held a (doubtful) credit claim of EUR 9.2 million 13 against Lehman Brothers International (Europe). In 2012 the Treasury was able to recover a first segment of 25% of this claim (EUR 2.3 million). The Treasury expects to receive further amounts in the future. Reverse repos Placements As was the case in 2011, again in 2012 the rating of a counterparty with an existing position in derivative products fell below the A threshold that applies to the conclusion of new transactions. The share of such counterparties in the net credit risk in derivative products consequently increased from 0.9% to 1.6%. At the end of the year, 98.4% of the net credit risk in derivative products still related to counterparties with an A rating. 12 International Swaps and Derivatives Association. The ISDA Master Agreement is a framework agreement for the conclusion of transactions in derivative products. 13 This claim results from the anticipated closure of an interest rate swap that the Treasury concluded at that time with Lehman Brothers International (Europe), a subsidiary of Lehman Brothers Holdings Inc. 42 Debt Agency Kingdom of Belgium

43 The financing policy in 2012 CREDIT RISK FOR DERIVATIVE PRODUCTS BY RATING LEVEL AT Rating(*) No. of transactions % Total risk before collateral % Collateral Total risk % AAA % % % AA % % % A % EUR 98.8 % EUR EUR 98.4 % <A % EUR 1.2 % EUR EUR 1.6 % Total % EUR % EUR EUR % (*) Quotation of the counterparty or parent company CREDIT RISK FOR DERIVATIVE PRODUCTS BY RATING LEVEL AND BY PRODUCT AT Rating(*) Interest rate swaps % Foreign currency swaps % Other derivatives % AAA % % % AA % % % A EUR 97.9 % EUR % EUR % <A EUR 2.1 % % 0.0 % Total EUR % EUR % EUR % (*) Quotation of the counterparty or the parent company DISTRIBUTION OF CREDIT RISK FOR DERIVATIVE PRODUCTS BY RESIDUAL MATURITY AT Total Interest rate swaps Foreign currency swaps Others < 1 year 21.2 % 16.8 % 27.2 % % 1 to 5 years 14.4 % 4.3 % 28.2 % 0.0 % 6 to10 years 8.8 % -7.3 % 30.7 % 0.0 % >= 10 years 55.5 % 86.1 % 13.9 % 0.0 % Total % % % % 2012 annual report 43

44 Section II III. MAIN STRATEGIC POINTS 44 Debt Agency Kingdom of Belgium

45 01/ / / / / / / / / / / / / / / / /2012 Main strategic points 1. Positive developments in the Eurozone In 2012 the European authorities once again took various initiatives to stem the Euro crisis. One of these was the European Stability Mechanism (ESM), launched in October 2012, together with new agreements guaranteeing fiscal discipline and coordination. Spanish banks were promised an aid package and decisions were taken in principle with regard to the centralised and strengthened monitoring of banks, leading to a banking union. In August 2012 the European Central Bank also participated in the launching of "Outright Monetary Transactions" (OMTs), enabling it to buy, under certain conditions, the short-term bonds of Eurozone countries for, possibly, unlimited amounts CHANGES IN 10-YEAR INTEREST RATES IN 2012 Germany Greece Ireland Italy Portugal Spain The above graph gives a comparison between the movements of the interest rates of the peripheral countries and that of Germany for 10-year loans. In spite of the midyear peak, the rates of the peripheral countries were down overall during Toward the end of the year, some countries were once again able to envisage financing themselves in the market for longer terms or even managed to obtain such financing. Differences with the German interest rate, however, remained considerable, due to the fact that German rates again reached record low levels. The aim of the two headings below is to analyse the impact of two direct consequences of European measures on Belgian Government debt; firstly the introduction of Collective Action Clauses (CACs) from 1 January 2013, and secondly measures limiting what is called the "short selling" of State bonds and transactions on "Credit Default Swaps" on State bonds. 1.1 Collective Action Clauses (CACs) The European Treaty instituting the European Stability Mechanism determined that from 1 January 2013, all Eurozone countries must include Collective Action Clauses (CACs) in the documentation of their Sate loans with a term of more than one year. CACs are contractual or regulatory provisions that facilitate the establishment of an agreement on the (eventual) rescheduling of debt between a State and its investors. A qualified majority of bond holders therefore has the right to impose, in a legally binding manner, a change in the issuing conditions on all other investors. In the absence of such clauses it is virtually impossible to obtain any restructuring, given that each bond holder must give his individual agreement. This qualified majority is 75% or 66 2/3% depending on the desired change. During 2012, the Eurozone countries agreed on a standardised wording. It was clear that significant differences in the clauses concerning sovereign securities in different Eurozone States would make comparing the securities problematic and would lead to a decrease in liquidity in the market, something that was to be avoided. However, the sovereign securities already issued could be reopened after 1 January 2013 without the need to include a CAC in their documentation. The Eurozone countries agreed to insert upper limits for the issue of securities without a CAC: for 2012 annual report 45

46 Section III 2013, this limit is 45% of the total number of issues. The percentage for subsequent years will decrease gradually. In Belgium, CACs are included in the documentation of OLOs, EMTNs and State notes. Treasury Certificates and "Belgian Treasury Bills" are not involved, as their maturity does not exceed one year. As for the "Schuldscheine", they are not taken into account because they are loans rather than securities. It should be noted that the introduction of CACs has not had any noticeable impact on the rate of new issues of OLOs in Short Selling Regulation (SSR) The European "Short Selling Regulation" came into force in March The aim of this regulation is to prevent speculative transactions in sovereign bonds. SSR, which has also been applicable throughout the European Economic Area since November 2012, is specifically aimed at (i) what is called the short selling of sovereign securities by counterparties other than the market makers (in the sense that it will no longer be possible to sell sovereign securities that you do not yet own and for which there is no contract relating to delivery of the sovereign securities), and (ii) the purchase of Credit Default Swaps (CDS) when you do not own the sovereign bonds or the assets that are closely linked to the sovereign bonds. It is indeed the opinion of the European authorities that these practises have in the past contributed to causing rapid upward movements of the interest rates of those Eurozone countries having problems. The volumes recorded on the CDS markets for sovereign bonds decreased significantly, something which is due, among other things, to this regulation coming into force. 2. State guarantees and equity in certain financial institutions In order to preserve the stability of the Belgian financial system, the Government decided in 2008 to set up a system for issuing a State guarantee for undertakings contracted by any credit or financial holding meeting the criteria and conditions determined by royal decree. This system has remained in effect in subsequent years. The Treasury was charged with monitoring these cases. This service is provided by the Debt Support Service (Service de Support de la Dette - SSD Debt Guarantee) in close collaboration with the Debt Agency and the Markets and Financial Services Department (MSF - Marchés et Services Financiers). The table below contains an overview by institution of the guaranteed amounts in circulation in EUR on and It should be noted that the RPI (Royal Park Investments) portfolio was sold in GUARANTEED AMOUNTS IN CIRCULATION BY INSTITUTION Outstanding on Outstanding on Dexia EUR EUR Dexia SA EUR EUR RPI EUR EUR FORTIS IN EUR 0.00 EUR FORTIS CASHES EUR EUR KBC EUR EUR SNCB EUR 0.00 EUR EUR EUR In 2012 the Belgian Government received a total of EUR million (Budget des Voies et Moyens Ways and Means Budget, art ) as remuneration for the guarantees referred to above (in comparison with EUR million in 2011). 46 Debt Agency Kingdom of Belgium

47 Main strategic points 2.1 Dexia guarantee 2008 At the end of 2009, Belgium s total commitments could not exceed EUR 60.5 billion. Dexia has made no further issues on this part of the guarantee since June As a result, the guaranteed amount in circulation has been steadily decreasing since that time. The outstanding amount shown in the table represents the share for which the Belgian Government is responsible, i.e % of the total amount outstanding. Each month, Dexia pays the State a guarantee premium. For transactions with a term of less than one year, the premium amounts to 0.50%, while for those over one year it is 0.865%. In 2012, the Belgian Government received premiums totalling EUR million for the 2008 Dexia guarantee. 2.2 Dexia S.A guarantee This is a supplementary guarantee for Dexia S.A. The guaranteed entities are Dexia S.A. and Dexia Crédit Local (DCL). In December 2011 the Belgian Government issued a temporary guarantee of a maximum of EUR 45 billion for a period of six months, valid until 31 May In 2012 this temporary guarantee was increased by EUR 10 billion, bringing it up to a maximum of EUR 55 billion, and it was extended until January The guarantee is shared between Belgium with 60.5%, France with 36.5% and Luxembourg with 3%. In real terms, this means that the Belgian authorities act as guarantor for a maximum of EUR 33,275,000,000. The guarantee premium amounts to: for short-term operations: a fixed share of 120 basis points + a spread (which can vary from 20 to 40 basis points) depending on the rating of the guaranteed entity; for medium-term operations: a fixed share of 50 basis points + a spread (which can vary from 20 to 40 basis points) depending on the rating of the guaranteed entity; for long-term operations, the premium is calculated according to a formula that relies on the 5-year CDS of Dexia Crédit Local (DCL), itraxx Europe, Belgium and the countries of the European Union. In 2012 the Belgian Government received a total of EUR million in commitment fees and premiums for the 2011 Dexia guarantee. 2.3 FORTIS OUT (RPI) This relates to senior receivables held by Fortis Banque S.A. assumed by Royal Park Investments S.A. The guaranteed amount in circulation fell by EUR 198 million in comparison with The guarantee remuneration amounted to 0.70% of the total amount guaranteed. 2.4 FORTIS IN During 2012 the Minister of Finance Steven Vanackere and BNP Paribas Fortis SA concluded an accord concerning the anticipated completion of the State guarantee agreement of 12 May In this agreement, the Belgian Government guaranteed any losses that might be incurred on a specific investment portfolio for a maximum amount of EUR 1.5 billion. The State guarantee came to an end on 18 December 2012, and on 20 December 2012 the Belgian Government received the payment of a final premium for an amount of EUR 17,300,000. It should be noted that the Belgian Government did not have to make any payment at all on account of this guarantee agreement annual report 47

48 Section III 2.5 FORTIS CASHES This concerns the receivables held by Fortis Banque S.A. and assumed by Fortis S.A. on the basis of the Relative Performance Note concluded between Fortis Banque S.A. and Fortis S.A. relating to the CASHES (Convertible And Subordinated Hybrid Equitylinked Securities) issued by Fortis Banque S.A. in December The guaranteed amount in circulation fell from EUR 2.35 billion to EUR million on account of the acquisition by BNPP of 62.94% of the CASHES in February The remuneration for the guarantee amounted to 0.70% of the total amount guaranteed. 2.6 KBC 3. Developments in the weighted average life and the duration of the Federal Government debt Section II.3. of this report dealt with the decrease in refinancing and interest rate refixing risks in This decrease went hand in hand with an increase in the weighted average life of the debt as well as the duration. The weighted average life represents the weighted average of the time between the measurement and the dates of the coupons and of the repayments of the principal of the various debts making up the portfolio. This relates to the losses incurred by KBC Groupe S.A., KBC Banque S.A. and their subsidiaries on a portfolio of financial instruments composed of derivative credit products and collateralized debt obligations (CDOs). The guaranteed amount in circulation fell by EUR 1.51 billion in comparison with WEIGHTED AVERAGE LIFE AND DURATION (DEBT IN EUROS) Weighted average life Duration The above chart highlights the uninterrupted high of this average life since Debt Agency Kingdom of Belgium

49 Main strategic points It exceeded 7 years for the first time since In fact, the decrease seen in 2008 and 2009 was only temporary: it was caused by the relatively high share of the shortterm debt contracted in order to recapitalise and/or finance the financial institutions at the end of 2008 and the beginning of In addition, just after the onset of the crisis, it was difficult for Belgium to borrow over a very long term. The short-term debt then returned to levels close to those prevalent before the crisis. The Treasury was also able to issue a series of long-term and very long-term loans. As a result, the average term of the OLOs issued in 2012 was years. The duration constitutes another measurement of the average life. In the case of the duration, the weighted average of the expected (real) value of the coupons and reimbursements is calculated. A rise/fall in the market rates cause a decrease/increase in the duration, given that the change in the market rates is proportionately more significant for cash flows that lie in the future. Since 2000, there has been an overall decrease in interest rates, and the graph shows that during this period the duration actually experienced a more significant increase than the weighted average life. The weighted average life therefore constitutes a more accurate measurement of the implicit life of the debt portfolio. However, in view of the fact that the duration provides a good indication of the impact of interest rate changes on the market value of a portfolio, interest rate changes are actively monitored, meaning that the Treasury announces the duration as well. The effect of the higher levels of the weighted average life is to reduce the risks related to the Government debt, which is again increasing. Future changes in this life will depend on the strategy followed by the Treasury, but also on future demand for long-term and very long-term investments. 4. Distribution of the Belgian federal debt 4.1 Primary market The primary market for OLOs 14 Demand from investors from the Eurozone (Belgium + the other Eurozone countries) has risen slightly to 56.51% of the total. The amount invested by Belgian investors in 2012 was 16.17% of the total amount invested, a slight decrease in comparison with the previous year. It should however be noted that this decrease followed a steep increase in For the second consecutive year demand from Asia was extremely limited (1.92%), whereas it was still up to 9.92% in Demand from the American/Canadian entity also proved to be limited (1.96%). Demand from other European countries outside the Eurozone fell slightly (38.19% of the total amount invested). The new benchmark 5-year loan (OLO 67) received the most significant interest from these countries (57.5% of the total amount invested). 14 The conclusions are solely based on the figures that the joint lead and co-lead managers supply to the Treasury within the framework of issues by syndication. The Treasury does not have such data for issues by auction annual report 49

50 Section III OLOs - GEOGRAPHICAL DISTRIBUTION (PRIMARY MARKET) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Belgium Eurozone excluding Belgium Rest of Europe USA and Canada Asia Others % 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% OLOs - DISTRIBUTION BY TYPE OF INVESTOR (PRIMARY MARKET) Pension funds Fund managers Insurance companies Banks Central banks and public entities Others 50 Debt Agency Kingdom of Belgium

51 Main strategic points Europe (outside Eurozone) 38.19% OLOs - GEOGRAPHICAL DISTRIBUTION IN 2012 Others 1.43% Belgium 16.17% Asia 1.92% With regard to the different types of investor, it should be noted that demand from banks (33.57%) and pension funds (4.88%) remained relatively stable in comparison with Furthermore, there was a considerable increase in demand from insurance companies and asset managers (together with other fund managers). They were respectively responsible for 20.5% and 37.42% of the total amount invested. On the other hand, the considerable decrease in demand from central banks and other public institutions was worthy of note as it fell from 15.41% in 2011 to 3.55% in The primary market for Treasury Certificates USA and Canada 1.96% Eurozone (except Belgium) 40.34% Treasury Certificates are only issued at auctions during which the primary and recognised dealers take securities on their own behalf or on behalf of investors. The Treasury now has no data that can determine the type of investor or the geographical area of the investment. OLOs - DISTRIBUTION BY TYPE OF INVESTOR IN The secondary market Central banks and public entities 3.55% Others 0.08% Banks 33.57% Insurance companies 20.50% It is very important to note that the conclusions that follow are solely based on figures obtained from primary and recognised dealers. These are the main dealers active on our debt, although they are not the only ones. However, these figures allow us to discern certain trends. It should also be noted that the figures only refer to the purchases/sales of the final investors and therefore not of the interdealer market. Pension funds 4.88% The secondary market for OLOs Fund managers 37.42% As in the four previous years, the volumes traded increased (+6%) on the secondary OLO market in Net purchases of OLOs by investors fell by 15%, but were significantly higher than those for the period annual report 51

52 Section III OLOs - NET PURCHASES - GEOGRAPHICAL DISTRIBUTION (in billions of EUR) Belgium Other Eurozone Countries Other EU Countries Americas (North & South) Asia Other OLOs - NET PURCHASES - DISTRIBUTION BY TYPE OF INVESTOR (in billions of EUR) Commercial banks Central banks Pension funds Insurance companies Fund managers Hedge funds Private savers Companies Debt Agency Kingdom of Belgium

53 Main strategic points OLOs - VOLUME EXCHANGED ON THE SECONDARY MARKET (in billions of EUR) OLOs - NET PURCHASES ON THE SECONDARY MARKET (in billions of EUR) In spite of this decrease it is clear that there is a range of investors for whom the net purchases have increased, so for instance the net purchases for investors from other Eurozone countries rose by 25%. Asian and American (north and south) investors also increased their involvement in the secondary market for OLOs. Although they were still net sellers in 2011, they became net buyers for considerable volumes. The increase was particularly apparent from June onwards. Net purchases by Belgian investors decreased. It should however be noted that this decrease followed a strong rise in 2010 and As in 2011, non-eurozone European investors remained net sellers of OLOs. Net purchases by commercial banks (-43%) and insurance companies (-37%) experienced a significant decrease. Fund managers (+149%) and central banks (+67%), on the other hand, bought considerably more OLOs than in Pension funds, hedge funds and private savers were net sellers of OLOs TCs - VOLUMES EXCHANGED ON THE SECONDARY MARKET (in billions of EUR) TCs - NET PURCHASES ON THE SECONDARY MARKET (in billions of EUR) The secondary market for Treasury Certificates The volumes of Treasury Certificates traded on the secondary market remained almost unchanged (+1%). Net purchases of Treasury Certificates rose by 4%. There were significant net purchases of Treasury Certificates, mainly on the part of investors from the other Eurozone countries and non-euro Europe. After a fall in 2011, net purchases of Certificates once again rose from Asia, reaching 2010 levels. We can also see a decrease in net purchases by American and Belgian investors annual report 53

54 Section III TCs - NET PURCHASES - GEOGRAPHICAL DISTRIBUTION (in billions of EUR) Belgium Other Eurozone Countries Other EU Countries North & South America Asia Other TCs - NET PURCHASES - DISTRIBUTION BY TYPE OF INVESTOR (in billions of EUR) Commercial banks Central banks Pension funds Insurance companies Fund managers Hedge funds Private savers Companies Debt Agency Kingdom of Belgium

55 12/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /2012 Main strategic points The central banks remained by far the main net buyers of Treasury Certificates. After a sharp fall in 2011, their net purchases rose by 23%. Commercial banks and fund managers also remained significant net buyers of Treasury Certificates. Net purchases by commercial banks fell by 23%, while those of funds managers remained stable. Pension funds, insurance companies, hedge funds and private savers as usual showed no interest in Treasury Certificates TCs - CHANGES IN HOLDINGS (in % of total) Holding OLOs and Treasury Certificates The volume of OLOs held by foreign investors fell in At the end of December 2012, 42.9% of OLOs were in the hands of foreign investors, continuing the trend begun in mid OLOs - CHANGES IN HOLDINGS (in % of total) Belgium Eurozone (except Belgium) Outside the Eurozone The trend toward greater internationalisation of Treasury Certificates continued in As a result, at the end of December, 91.7% of Treasury Certificates were held by foreign investors. A record high was reached at the end of September, with 94.2% of Certificates held outside Belgium. Belgium Eurozone (except Belgium) Outside the Eurozone 2012 annual report 55

56 Section III 5. Perpetual bonds Perpetual bonds are bonds without a final maturity date that the Government has decided to repay. Repayment of these perpetual bonds has a number of advantages and generates savings in technical, fiscal, accounting and administrative areas for various institutions such as the Fonds des Rentes and the Treasury and especially the Public Debt Support Service and the Ledger Service. That is why the Minister of Finance, as he announced on 26 September 2012, has submitted a draft law in order to be able to repay the following perpetual bonds at their nominal value (100%): The low level of the outstanding amounts of the perpetual bonds constitutes an initial indication of their lack of liquidity. What is more, these bonds are quoted on Euronext Brussels but not a daily basis. The prices are fixed by the Fonds des Rentes on the basis of a virtually non-existent market for this type of bond. Consequently, their prices do not follow market changes to the same extent as the prices of other State bonds. It should also be noted that the "Unified debt 1 st and 2 nd series" perpetual bonds are separate cases. The holders of these instruments can effectively use them to pay inheritance duties at their nominal value (100%). It is for this reason that these two bonds have for some time already been quoted at close to par. Debt 2.5%", code ISIN BE ; "Debt 3.5% 1937", code ISIN BE ; "Unified debt 4%, 1 st series", code ISIN BE ; "Unified debt 4%, 2 nd series", code ISIN BE ; "4% Libération", code ISIN BE The intention is to complete the repayment of these bonds in At the end of 2012, the total amounts in circulation for each bond stood at: Bond Outstanding at "Debt 2.5%" EUR "Debt 3.5% EUR "Unified Debt 4%, 1 st series" EUR "Unified Debt 4%, 2 nd series " EUR "4% Libération" EUR The total amount in circulation on all of these perpetual bonds stood at EUR 38,893, EUR, which represented only 0.011% of the total federal debt at the end of Debt Agency Kingdom of Belgium

57 Main strategic points APPENDICES 2012 annual report 57

58 Appendices A. Changes in the Federal Government debt rating Fitch Ratings 27/01/2012 Rating lowered from AA+ to AA, outlook negative 23/01/2013 Rating AA confirmed, outlook revised from negative to stable S&P 13/01/2012 Rating AA confirmed, outlook negative 29/01/2013 Rating AA confirmed, outlook negative Moody s 16/12/2011 Rating Aa3, outlook negative DBRS 15/02/2013 Rating AA (high), outlook negative Japanese Credit Rating Agency 25/03/2013 Rating AAA, outlook stable Ratings and Investment 04/03/2013 Rating AA+, outlook stable 58 Debt Agency Kingdom of Belgium

59 B. Securities intermediaries of the Treasury of the Kingdom of Belgium in 2013 Primary Dealers BANCO SANTANDER SA, Madrid Ciudad Grupo Santander - Avda. de Cantabria s/n E Boadilla del Monte (Madrid) BARCLAYS BANK PLC, London 5 North Colonnade - Canary Wharf GB-London E14 4BB BNP PARIBAS FORTIS, Brussels Rue Montagne du Parc 3 B-1000-Brussels CITIGROUP GLOBAL MARKETS Ltd, London Citigroup Centre - 33 Canada Square, Canary Wharf GB-London E14 5LB CREDIT AGRICOLE CIB, Paris Quai du Président Paul Doumer 9 F Paris La Défense Cédex DEUTSCHE BANK AG, Frankfurt Taunusanlage, 12 D Frankfurt HSBC France, Paris Avenue des Champs Elysées 109 F Paris ING Bank NV, Amsterdam Amstelveenseweg 500 NL-1081 KL Amsterdam JP MORGAN Securities Ltd, London 25 Bank Street GB-London E14 5JP KBC BANK NV, Brussels Avenue du Port 12 B-1080-Brussels MORGAN STANLEY & Co Int. Plc, London 25 Cabot Square - Canary Wharf GB-London E14 4QA NATIXIS, Paris Avenue Pierre Mendès-France, 30 F Paris NOMURA INTERNATIONAL Plc, London 1 Angel Lane GB-London EC4R 3AB RBC CAPITAL MARKETS, London Riverbank House - 2 Swan Lane GB-London EC4R 3BF ROYAL BANK OF SCOTLAND Plc, London 135 Bishopsgate GB-London EC2M 3UR SOCIETE GENERALE SA, Paris Boulevard Haussmann, 29 F Paris UBS LIMITED, London 100 Liverpool Street GB-London EC2M 2RH Recognised Dealers ABN AMRO BANK NV, Amsterdam Gustav Mahlerlaan 10 - PO Box 283 NL-1000 EA Amsterdam BANCO BILBAO VIZCAYA ARGENTARIA SA (BBVA), Bilbao Plaza de San Nicolas, 4 E Bilbao BELFIUS BANK, Brussels Boulevard Pachéco 44 B-1000 Brussels COMMERZBANK AG, Frankfurt Mainzer Landstrasse, 153 D Frankfurt a/m GOLDMAN SACHS INT. BANK, London Peterborough Court 133 Fleet Street GB-London EC4A 2BB JEFFERIES INTERNATIONAL Ltd, London Vintners Place - 68 Upper Thames Street GB-London-EC4V 3BJ NORDEA BANK FINLAND, Helsinki Aleksanterinkatu, 36 FI Helsinki, Nordea SCOTIABANK, London Bishopsgate 201, 6th Floor GB-London-EC2M 3NS Appendices 2012 annual report 59

60 Appendices BTB Dealers BARCLAYS BANK Plc 5 North Colonnade, Canary Wharf GB-London E144BB BELFIUS BANK NV/SA Boulevard Pacheco 44 B-1000-Brussels BNP PARIBAS FORTIS Rue Montagne du Parc 3 B-1000-Brussels CITIBANK INTERNATIONAL Plc Citigroup Centre, Canada Square, Canary Wharf, GB-London E14 5LB DEUTSCHE BANK AG (London Branch) 77 London Wall, 1 Great Winchester Street GB-London EC2N 2DB GOLDMAN SACHS INTERNATIONAL 120 Fleet Street, River Court GB-London EC4A 2BB KBC BANK NV Avenue du port 12 B-1080-Brussels UBS LIMITED 100 Liverpool Street GB-London EC2M 2RH Investment establishments (State notes) ABN-AMRO Private Banking Roderveldlaan, 5 (Bus 4) B-2600-Berchem BANQUE DEGROOF Rue de l Industrie, 44 B-1040-Brussels BANQUE DE LA POSTE Boulevard Anspach, 1 B-1000-Brussels BELFIUS BANQUE Boulevard Pacheco, 44 B-1000-Brussels BKCP BANQUE Boulevard de Waterloo, 16 B-1000-Brussels BNP PARIBAS FORTIS Rue Montagne du Parc, 3 B-1000-Brussels CREDIT AGRICOLE Boulevard Sylvain Dupuis, 251 B-1070-Brussels DELTA LLOYD Avenue de l Astronomie, 23 B-1210-Brussels DEUTSCHE BANK Avenue Marnix, B-1000-Brussels DIERICKX, LEYS & CIE, Banque de Titres Kasteelpleinstraat, 44 B-2000-Antwerpen GOLDWASSER Exchange Avenue Adolphe Demeur, 35 B-1060-Brussels ING Belgique Avenue Marnix, 24 B-1000-Brussels KBC BANQUE Avenue du port, 2 B-1080-Brussels LELEUX Associated Brokers, Société de Bourse Rue du Bois sauvage, 17 B-1000-Brussels PETERCAM Place Sainte-Gudule, 19 B-1000-Brussels VAN DE PUT & Cie, Banque de Titres Van Putlei, B-2018-Antwerpen VDK SPAARBANK Sint-Michielsplein, 16 B-9000-Gent 60 Debt Agency Kingdom of Belgium

61 Appendices C. Issuance calendar 2013 This calendar is purely a guide. The Treasury reserves the right to change it at any time annual report 61

62 Appendices D. Organisational chart 62 Debt Agency Kingdom of Belgium