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Cablegate: Madrid Weekly Econ/Commercial Update May 26 - May

VZCZCXRO8617
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #0616/01 1541000
ZNR UUUUU ZZH
R 021000Z JUN 08
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 4878
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 3451

UNCLAS SECTION 01 OF 02 MADRID 000616

SIPDIS

STATE FOR EUR/WE AND EEB/IFD/OMA

E.O. 12958: N/A
TAGS: ECON EFIN EIND EINV ENRG KIPR SENV SP
SUBJECT: MADRID WEEKLY ECON/COMMERCIAL UPDATE MAY 26 - MAY
30

MADRID 00000616 001.2 OF 002


Table of Contents:

ECON: Inflation climbs to 4.7%
EIND/ECON: More bad news on sales, housing
EFIN: Government says no 2008 budget surplus
EFIN: Capital markets continue opening to major firms
EFIN/EINV: La Caixa alliance with Carlos Slim to enter U.S.,
Americas
ENRG/EINV: ACS CEO says Iberdrola-Gas Natural merger would
create "national champion"
SENV: Rains diminish drought concerns
KIPR: World Wide Web Consortium (W3C) to meet in Madrid in
2009


INFLATION CLIMBS TO 4.7 PERCENT

1. (U) The official estimate for May consumer price inflation
reached 4.7%, the highest rate since the index began in 1997.
Separately, April's industrial price index was 7.2% above
its April 2006 level, the highest inflation rate since
mid-1995. Increases in the prices of oil and to a lesser
extent food were responsible. (El Confidencial, 5/28; El
Pais, 5/27)

MORE BAD NEWS ON SALES, HOUSING

2. (U) Retail sales in April were 3.4 percent below their
April 2007 level, the fifth consecutive negative month.
Housing continues to be hard-hit, with the number of housing
sales and the number of mortgages issued down almost 40
percent from their 2007 levels. In the year's first quarter,
almost 60% fewer construction permits for new housing were
issued than a year ago. (El Pais, 5/30)

GOVERNMENT SAYS NO 2008 BUDGET SURPLUS

3. (U) The Ministry of Economy and Finance conceded for the
first time on May 27 that Spain will not have a budget
surplus in 2008, largely because tax receipts are down for
the first time in 15 years. During the first four months of
2008, tax receipts were down by 5.2 percent compared with the
first four months of 2007. Value Added Tax collection
reductions are down most. Additionally, high oil prices are
deterring consumers and companies from using petroleum
products, thus lowering tax receipts on oil consumption.
Social Security contributions are still strong, and they may,
in fact, be responsible for the government's consolidated
budget (central government, local government and social
security) not incurring a deficit. The budget had a slight
surplus for the first four months of the year, but the
Ministry now expects no surplus or deficit for the year as a
whole. (Comment: Clearly, the Spanish economy is slowing
down much faster than many observers thought it would,
although it is still not clear that Spain will technically
enter a recession. The tighter budget environment is likely
to lead to political tension over autonomous community
funding issues.) (El Pais, 5/28)

CAPITAL MARKETS CONTINUE OPENING TO MAJOR FIRMS

4. (U) Spain's second largest bank, BBVA, issued 5 billion
euros in mortgage-backed bonds. The country's largest
company, Telefonica, issued 1.25 billion euros in five-year
bonds at 5.58%, a spread of 94 basis points. (El
Confidencial, 5/27)

LA CAIXA ALLIANCE WITH CARLOS SLIM TO ENTER U.S., AMERICAS

5. (U) Criteria CaixaCorp (La Caixa savings bank's investment
holding company) is buying 20 percent of Carlos Slim's Grupo
Financiero Inbursa for euros 1.5 billion. Slim will still
control the Group after this purchase, but La Caixa appears
to have decided to conclude a strategic alliance with the
Slim family, and it seems that they are doing so as equals.
The idea is for La Caixa to use the participation in Inbursa
to make investments in the U.S. and elsewhere in the
Americas. Inbursa manages USD 170 billion and is specialized
in corporate banking, asset custody, and pension fund
management. La Caixa has expertise in retail banking, of
which Inbursa might avail itself to make inroads in the
American market. Reportedly, La Caixa has also left the door
open for Slim to buy a stake in Criteria CaixaCorp if he
decides he wants to enter the Spanish market. (Comment: BBVA
and Santander have used their strong Mexican bases from which
to invest in the U.S., and La Caixa appears to be emulating
this strategy.) (El Pais, 5/27)

ACS CEO SAYS IBERDROLA-GAS NATURAL MERGER WOULD CREATE

MADRID 00000616 002.2 OF 002


"NATIONAL CHAMPION"

6. (U) Gas Natural already tried to take over Iberdrola in
2000 and 2003, but its efforts were thwarted. ACS owns 7.3%
of Iberdrola, but Iberdrola's CEO, Ignacio Sanchez-Galan, has
succeeded in limiting ACS, influence in Iberdrola decision
making Sanchez-Galan is not enthusiastic about merging with
Gas Natural or about being bought by France's EDF, which is
another widely commented upon possibility. However, he has
indicated that his posture depends on what price is offered.
(Comment: Speculation about energy mergers in Spain is
something of a business-political parlor game. There does,
however, appear to be a consensus that consolidation will
happen sooner or later in the Spanish energy sector.) (El
Pais, 5/27)

RAINS DIMINISH DROUGHT CONCERNS

7. (U) A wetter-than-usual May, with rains in many areas of
the country nearly every day of the last two weeks, has
reduced drought concerns. A national meteorological agency
spokesman said that the country's rain deficit had gone from
40 percent on April 1 to 14 percent on May 28. The deficit
likely has been reduced below that level by continuing rains
in the next few days. The GOS is reported to be considering
abandoning its plan to pipe water from other regions to
Barcelona. (20 Minutos, 5/29; TVE, 5/30)

WORLD WIDE WEB CONSORTIUM (W3C) TO MEET IN MADRID IN 2009

8. (U) The April 20-24 meeting will bring together over 2,000
developers, researchers and programmers to discuss ways to
make the internet more efficient for business, learning and
entertainment. (Comment: Embassy will explore how this event
can be leveraged to demonstrate that a flourishing internet
business is consistent with respect for intellectual property
rights.) (El Pais, 5/28; W3C website.)
Aguirre

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