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FAQ

I. Public debt and Deficit

What are the differences between public debt and budget deficit?
What are the other factors that may vary the public debt?
Why should public debt growth be controlled?

II. Public Debt Instruments

What kind of advantages do I have in acquiring public debt, in comparison to investing in any other financial instrument available on the financial markets?
Where may I acquire the different public debt securities?
Which are the financial instruments that the Portuguese Republic uses to guarantee the financing of the State?

 
I. Public debt and Deficit

 
What are the differences between public debt and budget deficit?

As one may find in the General System Governing the Issuance and Management of Public debt, Law No. 7/98 of 3 February, “the recourse to direct public indebtedness shall conform to the borrowing requirements derived from the performance of the priority tasks of the State, such as defined in the Constitution of the Portuguese Republic, and safeguard the trend balance of government accounts in the medium run”. This means that there is issuance of public debt when the budgeted revenues are not enough to finance the country’s fundamental tasks. Hence, the excess of expenditure over budgeted revenues in a given year, which is equivalent to the budget deficit, tends to be equal to the new debt issued in that year. Thus, a flow variable (budget deficit in a certain year) tends to be equal to the difference between two stock variables (the value of public debt in two consecutive years).


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What are the other factors that may vary the public debt?

The difference between public debt stocks in two consecutive years tends to be equal to the budget deficit of that year. However, the difference between budgeted revenue and expenditure is not the only explanation for the variation of the public debt, in the sense that there are other components that change the borrowing requirements and hence translate into an increase or decrease of debt issuance. Thus, apart from the budget deficit, one should consider the following variables:

  • Regularisation of past situations: expenditure corresponding to the previous years, but only accounted in the current year in an extra budget item.

  • Net acquisition of financial assets: this corresponds to the difference between flows registered as expenditure and those registered as revenue resulting from owned financial rights. Among these, one may find the rights resulting from the acquisition/sale of credit securities (bonds, equities, quotas) or from the concession/redemption of loans.

  • Privatisation revenues addressed to the reduction of public debt: the Governing Law of Privatisations establishes the reduction of public debt in the economy as one of the objectives of privatisation operations. Hence, a Cabinet Resolution of the XII Government imposed 40% as a minimum percentage of the privatisation revenues to be applied in the reduction of public debt. The existence of this financial revenue, with no impact on the budget balance, allows the reduction of the volume of new debt issues necessary to finance the borrowing requirements.

There still exist factors, of more limited relevance, that may justify differences between the budget deficit and public debt change. Among these one may find premiums and discounts borne in the issue and (the) redemption of debt, issues of Promissory notes in favour of international organisations and exchange rate fluctuations associated to the non-euro debt.


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Why should public debt growth be controlled?

According to economic theory, Sovereign Countries should guarantee that, both the level and the growth rate of the public debt stock are sustainable, in such a way that the debt service can be satisfied in a broad group of (adverse) circumstances, taking into consideration cost and risk objectives. In fact, excessive levels of public debt, that result in higher interest rates, may have adverse effects on the real growth rate of the economy. On the other hand, the substantial increase of the debt level may carry more refinancing and market risks (both from the interest and the exchange rate) and may imply, in an extreme case, a default (insolvency). Hence, and with the objective of reducing these potential risks, the economic convergence criteria of the European Union limit the public debt of member states to be less than 60% of Gross Domestic Product (GDP).


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II. Public Debt Instruments

 
What kind of advantages do I have in acquiring public debt, in comparison to investing in any other financial instrument available on the financial markets?

Generally, one may say that the public debt securities have the advantage, above other private sector financial instruments, of having lower credit risk. The concept of credit risk is associated to the higher or lower probability of reimbursement of the securities, which for State guaranteed securities is minimal.


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Where may I acquire the different public debt securities?

The subscriptions of Saving Certificates (CA) may be done at any Post Office counter. With respect to OT and BT, and considering that the transaction of small lots is done in the stock exchange segment of the capital markets (Euronext Lisbon), its direct acquisition, or indirect acquisition through investment funds, may be done through specialized financial institutions.


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Which are the financial instruments that the Portuguese Republic uses to guarantee the financing of the State?

The concern with debt liquidity originated the progressive concentration of the financing activity in the issuance of a restricted number of fixed-rate Treasury Bonds (OT), of Treasury Bills (BT) and of Commercial Paper (ECP) or Repurchase Agreements (Financing Repos). According to the long-term strategy defined by the IGCP, E.P.E., the main financing instruments are the OTs, which are medium and long-term fixed-rate securities. In 2005, the financing through OTs represented 51,08% of the total funded debt issues. The IGCP, E.P.E launched in 2003 a regular issuance program of BT, as a new structural component of the State's funding strategy. Specific financing needs are being met through the issuance of Repos, mainly used for intra-annual financing, in coordination with the execution of the OT and BT issuance programme. The remaining part of the financing has been guaranteed by two other instruments, which have as a common feature the fact that they are issued to specific investors. The Saving Certificates (CA), a retail instrument subscribed by individual investors on a continuous basis, and the CEDIC (Special Certificates of Public Debt), exclusively created for public sector investors. IGCP, E.P.E. may also issue medium and long-term non-euro instruments, as a last resort or exceptional solution, in order to met additional intra-annual financing needs.


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