###POV. WHAT HAPPENS IF PORTUGAL IS.......>

EGB FLOWS: ###POV. WHAT HAPPENS IF PORTUGAL IS UPGRADED TO IG BY FITCH?

- On Friday, Fitch could update its rating for Portugal and many investors hope

for an upgrade to IG and inclusion in some bond indices should unlock a new

customer base for PGBS. Where will these bonds come from? What might happen to

spreads?

- Portuguese bonds are unique amongst the major issuers in that over the past

year MFI's (banks) have bought E3.6bln of them.

- In the 12 month period to October banks in Europe have sold E34bln of German

debt, E46bln French, E33bln Italian, E11bln Spanish, E15bln Dutch, E13bln

Belgian, E5bln Austrian, E1bln Finnish and E1.4bln of Irish debt. Naturally,

PSPP is responsible for these sales.

- Approaching year end, when banks' balance sheets get cleaned, the presence of

E3.6bln of extra PGBs is something that needs attention and these may slow down

the expected positive reaction to any upgrade. Room for outperformance is slim:

- 10Y Bund-PGB is already trading at a fairly tight 10bp. Below 5 years, the

Portuguese curve sits atop of the Spanish curve and often through Italy.