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Cablegate: Madrid Weekly Econ/Commercial/Ag Update July 14 -

VZCZCXRO1062
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #0793/01 2001433
ZNR UUUUU ZZH
R 181433Z JUL 08
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 5109
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 3502

UNCLAS SECTION 01 OF 02 MADRID 000793

SIPDIS

STATE FOR EUR/WE AND EEB/IFD/OMA

E.O. 12958: N/A
TAGS: ECON EFIN EINV ENRG PGOV SP
SUBJECT: MADRID WEEKLY ECON/COMMERCIAL/AG UPDATE JULY 14 -
JULY 18

MADRID 00000793 001.2 OF 002


Table of Contents

ECON: IMF revises growth forecasts for Spain downwards
ECON/EFIN: GOS decides not to issue a new 15-year bond
EINV/EFIN: BBVA continues U.S. push
ECON/EINV: Property company Martinsa Fadesa begins largest
bankruptcy proceedings in recent years
ECON/EINV: Large Company layoffs begin appearing in Spain
ECON/ENRG: EU Courts Rule Against Spain on Energy Takeover
Policies
ECON/PGOV: GOS officials continue to espouse positive message
on future of economy
ECON/ENRG: ACS sell-off of controlling stake in Union Fenosa
prompts stock market to rise

IMF REVISES 2009 GROWTH FORECAST FOR SPAIN DOWNWARDS

1. (U) The IMF maintained its 2008 growth forecast for Spain
at 1.8 percent. Growth for the euro zone is estimated at 1.7
percent. However, for 2009 the IMF has revised downwards its
growth forecast for Spain by half a percentage point - it
estimates Spanish growth will be 1.2 percent. The Fund
estimates that euro zone growth in 2009 will be 1.2 percent.
(Comment: There is a significant risk that these IMF growth
forecasts for Spain may not be met and that future forecasts
may be revised downwards additionally. Second Vice President
and Finance Minister Pedro Solbes told the Ambassador on
7/17/08 - see septel - that Spain was facing a "perfect
storm" of negative circumstances. BBVA's lead economist told
DCM that BBVA's 1 percent forecast for Spanish growth in 2008
may be overly optimistic as the bank's bias tends to be on
the upside.) (El Pais, 7/18/08)

GOS DECIDES NOT TO ISSUE A NEW 15-YEAR BOND

2. (U) Second Vice President and Finance Minister Pedro
Solbes confirmed on 7/11/08 that Spain would not float a
15-year bond. Solbes said that market conditions were not
"appropriate." Currently, Spain would have to pay 0.29
percent more to issue Spanish government bonds than Germany
does to issue German Bunds, up from only a few hundredths of
a percentage point in 2007. The four countries in the EU
paying the highest premium over German government bonds are
Greece, Italy, Portugal, and Spain. Spanish companies are
also paying more than they did last year to issue bonds.
(Comment: Clearly, there is less confidence in the Spanish
economy's prospects as revenues decline, the housing market
stagnates, inflation is relatively high, unemployment
increasing, and there is a continued high current account
deficit. CharGing more for bonds is also one way markets can
differentiate among countries belonging to a currency union.)
(WSJ, 7/14/08)

BBVA CONTINUES U.S. PUSH

3. (U) Since 2004, BBVA has invested more than USD 12.2
billion in the U.S., principally in Sun Belt states with a
focus on the Hispanic market. BBVA is now preparing to
rebrand its network of about 650 branches using the name of
BBVA Compass, and the bank is aiming to target non-Hispanic
customers as well. BBVA is convinced that its form of retail
banking with a strong focus on relationship banking can work
in the U.S. During the first quarter of 2008, BBVA derived
six percent of its revenues from the U.S., but it wants to
increase this percentage. (WSJ, 7/14/08)

PROMINANT PROPERTY COMPANY MARTINSA FADESA IN BANKRUPTCY
PROCEEDINGS

4. (U) This past week, news that Spanish property company
giant Martinsa Fadesa had filed for credit protection
reverberated in the press and fueled a heavy sell-off on the
Madrid stock exchange - especially affecting other companies
linked to the construction sector. With 5 billion euros
worth in debt, the Martinsa Fadesa bankruptcy proceedings is
one of the largest seen in recent years in Spain. It is a
result not only of Spain's housing downturn, but also of the
tight credit and confidence issues facing the country. The
company decided to file for credit protection after failing
to raise the 150 million euros needed for a 4 billion
refinancing agreement made earlier this year. Officials from
the Ministry of Housing have made clear that the government
does not intend to step in to assist, for example by
extending credit through the Official Credit Institute (ICO).
(All Media, 7/15/08)

SPANAIR TO LAY OFF OVER 1,000 - MASS LAYOFFS BEGIN APPEARING

5. (U) On July 17, Spanair announced that it would

MADRID 00000793 002.2 OF 002


decommission 15 planes (about a quarter of its fleet) and lay
off more than 1,000 employees, about a third of its
workforce. After Iberia, Spanair provides the second largest
level of service to the Spanish domestic market which has
been hit hard by high fuel prices, a slowing economy and the
introduction of more high-speed trains. (Comment: Spain's
jump in unemployment to date had been characterized by
layoffs of low-skilled workers directly linked to the
flailing residential construction sector. The Spanair
announcement along with two other recent mass layoffs by
prominent Spanish companies Roca and Martinsa-Fadesa signal a
shift in the unemployment problems Spain is facing. Official
GOS unemployment rates for the second quarter are expected to
be released July 24, and are expected to be higher the first
quarter level of 9.6%.) (All Media 7/17/08)
EU COURTS RULE AGAINST SPAIN ON ENERGY TAKEOVER POLICIES

6. (U) On July 17, the European Court of Justice ruled
against the authority of Spain's National Energy Commission
(CNE) to place restrictions on takeovers, particularly in
relation to the CNE's past involvement in the takeover bid of
former Spanish national energy champion Endesa. Endesa,
which is currently co-owned by Acciona and Enel, was the
subject of an intense and controversial takeover bid process
in 2007. At the time, Spain's energy commission placed
restrictions on the bid placed by German energy company E.ON,
which critics characterized as a protectionist move intended
to conserve Endesa's Spanish identity. The Court of
Justice's ruling included a determination that the CNE's role
in approving takeovers did not conform with EU law and
constituted a "restriction on the free movement of capital".
(Note: Part of the CNE's role is to ensure energy security
for Spain. The court's ruling will result in a modification
of the CNE's role). (Paris AFP, 7/17/08)

GOS OFFICIALS CONTINUE TO ESPOUSE POSITIVE MESSAGE ON FUTURE
OF ECONOMY

7. (U) During an event celebrating the 120 year anniversary
of one of Spain's most prominent labor unions, President
Zapatero pledged to be on the side of laborers, irrespective
of the economic situation, and to continue his efforts
towards social policy advances. Although recognizing the
difficult economic situation, Zapatero nonetheless warned
that "pessimism does not create jobs". In a radio interview
the same day, Second Vice President and Minister of Economy
Pedro Solbes denied that Spain was facing a recession but did
admit the extent of the difficult situation, which he said
was complicated by numerous factors. (El Pais, 7/18/08)

ACS SELL-OFF OF CONTROLLING STAKE IN UNION FENOSA PROMPTS
STOCK MARKET TO RISE

8. (U) The decision by construction company ACS to sell its
controlling stake in the electricity firm, Union Fenosa,
prompted the Ibex-35 to rise by 3.14 percent on 7/17/08.
(Comment: The jump in the stock market is probably temporary.
Energy companies might see more permanent gains though.
There has been a lot of speculation about consolidation in
the energy sector in Spain, which is the reason for the high
interest in energy stocks.) (El Pais, 7/18/08)


Aguirre

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