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Cablegate: Madrid Weekly Econ/Commercial/Agricultural Update

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RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #0641/01 1610159
ZNR UUUUU ZZH
R 090159Z JUN 08
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 4914
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 3456

UNCLAS SECTION 01 OF 03 MADRID 000641

SENSITIVE
SIPDIS

STATE FOR EUR/WE AND EEB/IFD/OMA

E.O. 12958: N/A
TAGS: EAGR EAID ECON EFIN EIND EINV ELTN ENRG KIPR
SP
SUBJECT: MADRID WEEKLY ECON/COMMERCIAL/AGRICULTURAL UPDATE
JUNE 2 - JUNE 6


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Table of Contents:

ECON: Zapatero defends economic prospects in congressional
hearing
ECON: OECD reduces 2008 growth forecast for Spain to 1.6%
EAGR/EAID: Zapatero on food security in Rome
ENRG: Electricity Prices to Rise, but Deficit Continues to
Grow
EIND: New Auto, Tourism, Regulatory Initiatives
KIPR: Major Chinese audio-visual piracy gang disbanded
ELTN: Department of Transportation and Staffdel Visit
EFIN/EINV: BBVA increases stake in China investments

ZAPATERO DEFENDS ECONOMIC PROSPECTS IN CONGRESSIONAL HEARING

1. (U) During a June 4 congressional hearing, President
Zapatero faced heavy criticism from opposition leaders
regarding Spain's weakening economy. During this hearing,
opposition Partido Popular leader Rajoy highlighted a waning
economy and loss of confidence by businesses and families,
and he suggested that the government was failing to
adequately address the economic downturn. While Zapatero
admitted that Spain was indeed suffering an economic
de-acceleration, he asserted that Spain would be able to
confront this difficulty and move forward. He highlighted
the GOS stimulus package, including the 400 euro tax rebate
to households across the country, an increase in minimum
pension levels, and measures to provide housing assistance.
(Europa Press, 6/5)

2. (SBU) Comment: Recent months have been filled with
negative economic news such as increasing unemployment,
higher inflation and fuel prices, and lower growth
projections. Zapatero and his administration have responded
to these negative indicators with overall optimism, accusing
naysayers of being overly pessimistic and stressing the
beneficial effect that the stimulus package will have on the
Spanish economy. However, it is questionable whether these
measures will overcome the negative economic effects of the
construction sector bust, a sector which represented between
10 and 20 percent of Spain's economy in recent years.
Zapatero responses often include a reference to the broader
global economic downturn and its effect on Spain, and he
often avoids references to weaknesses faced by Spain's own
economy such as its past dependence on the construction
sector and its high current account deficit. End Comment.

OECD REDUCES 2008 GROWTH FORECAST FOR SPAIN TO 1.6%

3. (U) The OECD recently revised its GDP growth forecasts for
Spain, cutting its projections from 2.5 percent to 1.6
percent for 2008 and from 2.4 percent to 1.1 percent for
2009. These forecasts, which are lower than the EU average,
are largely based on the projected effects of Spain's housing
downturn. On June 4, Second Vice President and Minister of
Economy Pedro Solbes described these estimates as overly
pessimistic and charged that the OECD analysis had not taken
into account stimulus measures that the government is
employing. (Comment: The GOS had reduced its own growth
forecast for 2008 from 3.1 to 2.3 percent this past April.)
(El Pais, 6/5)

ZAPATERO ON FOOD SECURITY IN ROME

4. (SBU) Speaking in Rome on June 3 at the FAO meeting,
President Zapatero said Spain would provide euros 500 million
in the next four years to deal with the food crisis,
especially to develop production capacity in affected
countries. Zapatero stressed Africa especially. He also
offered Spain as the venue for a fall 2008 High Level Meeting
to review the application of the food security plan approved
by Rome FAO meeting participants and to approve an
international Food Security Rights Letter. The President
also spoke strongly about the need to conclude the Doha Round
and asked WTO members to demonstrate "flexibility" in "rising
to the circumstances." (Comment: Zapatero does not often talk
about Doha, so his strong support for the Round is
noteworthy, although we are unaware of any particular
activism on the part of the GOS to influence EU external
trade policy in a more flexible direction.) (President,s
Office Website, 6/4)

ELECTRICITY PRICES TO RISE, BUT DEFICIT CONTINUES TO GROW

5. (U) At a June 4 congressional hearing, Industry, Tourism
and Commerce Minister Miguel Sebastian announced an
electricity rate increase of 5 to 6 percent as of July 1.

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This follows a 3.3 percent increase at the start of the year.
The combined increase is well above the rate of inflation
but is not enough to prevent the GOS' obligation to the
electric companies from continuing to grow. Since the Aznar
government, the GOS has not let companies charge prices that
are determined by an agreed-upon formula; it is required to
make up the difference to the companies. Industry sources
have indicated that an increase of 23 to 26 percent would be
needed to catch up, and any smaller increase means that the
obligation will continue to grow. The National Electricity
Commission had proposed an 11 percent increase, but President
Zapatero reportedly ruled out an increase that high.
Minister Sebastian announced that rates would be adjusted so
that per-kilowatt costs would increase as consumption
increases, which the GOS hopes will encourage conservation.
Households with particularly low electricity consumption
capacity would be exempted from one electricity charge, which
could save them up to 10%. (El Pais, 6/5; Metro, 6/2)

NEW AUTO, TOURISM, REGULATORY INITIATIVES

6. (U) Minister Sebastian also announced to the congress a
series of 15 measures to stimulate economic activity. The
Plan VIVE (Innovative Vehicle-Ecological Vehicle) will
subsidize consumers who buy new cars and scrap cars older
than fifteen years; a similar program expired recently.
Interestingly, Sebastian's ministry had to open a 1.5 billion
euro line of credit with the Official Credit Institute
because the expenditure would not fit in the general budget.
He also proposed a tourism program to encourage retirees from
other European countries to visit Spain for three months or
more during the low season. He announced he would negotiate
with autonomous community governments a reform of laws
affecting retail shops in order to comply with an EC services
directive (the Bolkenstein Directive), and he announced that
his ministry would open five new Spanish commercial offices
overseas. (ABC, 6/4; Confidencial, 6/6; El Pais, 6/5, 6/6)

MAJOR CHINESE AUDIO-VISUAL PIRACY GANG DISBANDED

7. (SBU) The Spanish National Police,s Intellectual Property
Rights Group has arrested 32 Chinese nationals involved in
the "screening" of movies (illicit use of videocameras to
record films at movie theaters); copying of DVDs and CDs; and
distribution of such products. The police also confiscated
more than 300,000 CDs and DVDs, which were found in
factory-like centers in Getafe, Parla and Leganes, as well as
large warehouses in Leganes and Alcala de Henares. These
sites are all in the greater Madrid area, but the gang also
had links with piracy operations in Cordoba, Avila,
Guadalajara, Segovia, Burgos, Soria, Aranda de Duero, Irun
and Seville. On June 4, the Minister of Culture, Cesar
Antonio Molina, and Ministry of Interior Secretary of State
for Security, Antonio Camacho, held a joint press conference
congratulating the police on the arrests. The Culture
Minister said that "citizens should be told not to buy these
products because they harm culture," which he said represents
5 percent of the country,s GDP. (Comment: Once again, the
Spanish police appear to have conducted an exemplary
anti-piracy operation. The question is, what happens next?
Rights-holders typically praise Spanish police efforts, but
say that the judiciary does not issue deterrent-level
sentences. The sheer scale of this particular Chinese
gang,s activities, however, should permit Spanish courts to
impose stiffer than normal sentences.) (El Pais, 6/5)

DEPARTMENT OF TRANSPORTATION AND STAFFDEL VISIT

8. (U) Department of Transportation officials and House and
Senate staff met with prominent Spanish construction
companies, Ministry of Infrastructure railroad officials and
Madrid city officials during their visit to Spain May 28 to
June 2. Included in the visit were Acting Federal Highway
Administrator James Ray, Acting Assistant Secretary of
Governmental Affairs Simon Gros, and four Senate and House
staffers. GOS officials discussed Spain,s focus on
expanding its high-speed rail system, particularly as a way
of reducing traffic congestion and CO2 emissions in the
coming years. In subsequent meetings, Spanish infrastructure
companies such as Abertis and Cintra explained public private
partnership (P3) agreements to develop toll roads and other
infrastructure projects. Spain,s experience in P3
partnerships is extensive, and as a result various Spanish
companies have become leaders in the P3 arena. The U.S.
connection with P3 projects and Spanish companies is growing.
Last month Spanish company Abertis was awarded concession
rights to the Pennsylvania turnpike for $12.8 billion. Other

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Spanish companies, such as Cintra, are also involved in
high-profile multi-billion-dollar concessions in the U.S.,
including the Indiana toll road, Chicago,s skyway toll
bridge, and other projects in Texas. This is the sixth
official visit post has received in the past 14 months that
has focused on road and/or rail transportation.

BBVA INCREASES STAKE IN CHINA INVESTMENTS

9. (U) There are actually two transactions involving the
expenditure of euros 800 million. BBVA will increase its
stake in the Hong Kong-listed Citic International Financial
Holdings Ltd. from 15% to 30%. The Spanish bank will also
increase it presence in China Citic Bank Corp. from 5 percent
to 10 percent. BBVA and China Citic Bank Corp. (the Chinese
government controls China Citic Bank Corp, which in turn
controls Citic International Financial Holdings Ltd.) plan to
take Citic International Financial Holdings Ltd. private.
(Comment: It is interesting that BBVA would agree to purchase
a minority stake in a government-controlled bank. This
suggests that BBVA views its investment as a long-term
strategic play.) (WSJ, 6/4)
Aguirre

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