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Cablegate: Madrid Weekly Economic Update - August 18-22

VZCZCXRO6639
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #0921/01 2351330
ZNR UUUUU ZZH
R 221330Z AUG 08
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 5265
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 3552
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 MADRID 000921

SIPDIS

STATE FOR EUR/WE, EEB/IFD/OMA; TREASURY FOR
IA/OEE:W.LINDQUIST

E.O. 12958: N/A
TAGS: ECON EFIN EIND EINV ENRG SP
SUBJECT: MADRID WEEKLY ECONOMIC UPDATE - AUGUST 18-22

REF: A. MADRID 895
B. MADRID 707

MADRID 00000921 001.2 OF 002


Contents:

ECON: Stimulus/Reform Package Approved
EFIN: Loan Delinquency Rates Up Significantly in June
EIND: Industrial Production Down in June
ECON: International Tourism Down in July
ENRG: Industry Minister Plans Significant Fine for Nuclear
Plant Leak Mishandling
EINV/ENRG: FCC Buys Babcock & Brown Wind Farms for 780M Euros


Stimulus/Reform Package Approved

1. (U) On August 18, the GOS published the list of measures
agreed to in the August 14 extraordinary Council of Ministers
session (ref A). The package includes 24 economic stimulus
measures and structural reforms to be implemented with a
specific timeline in 2009 and 2010. Many of these proposals
had been previously announced (ref B), and while considered
to be useful and beneficial by most, are unlikely to have an
immediate impact on the economic slowdown. The measures
include 20 billion euros in credit and loan guarantees line
subsidies for small and medium size business and for those
wishing to purchase government sponsored housing (price
controlled housing meant for lower and middle income
families). The package also includes measures related to
energy and climate change and the transportation, telecom and
services sectors. (All media, 8/18; Moncloa website, 8/18)

Loan Delinquency Rates Up Significantly in June

2. (U) According to the Bank of Spain, June delinquency
levels on loans (defined as 3 months overdue) increased to a
rate of 1.7 percent. While this level overall may appear
low, what is striking is that it represents a significant
increase from June of the year before, when the rate was 0.8
percent. Savings banks ("cajas") have been affected to a
greater extent given that up to 70 percent of their loans are
in some way related to the slowing housing market. According
to the president of the Savings Bank Association (CECA), Juan
Ramon Quintas, the average loan delinquency rate for all
savings banks is expected to reach over 2 percent in 2008 and
potentially over 4 percent in 2009. Comment: Second Vice
President and Minister of Economy Pedro Solbes says the
Spanish financial system is strong and that financial
institutions in Spain have the reserves to deal with these
increases. While it is true that Spain,s central bank
requires all banks to have higher "cushion" levels than are
required in other EU countries, the rapid increase in loan
delinquency rates is still somewhat worrisome. (El Pais,
8/19; Expansion, 8/22)

Industrial Production Down in June

3. (U) Industrial production in June was 9% below its June
2007 level. Production for the first six months of the year
was 2.8% below its level for the first half of 2007. (Cinco
Dias, 8/19)

International Tourism Down in July

4. (U) The number of foreign tourists coming to Spain in July
was 8% below the number in July 2007. For the year through
July, the number was up only 0.2%. Spain is the world's
second leading destination for international tourists.
Arrivals from the UK, France, and Germany -- Spain's top
three sources of tourists -- all fell significantly.
Industry, Tourism, and Commerce Minister Sebastian cited
economic difficulties in source countries as a leading cause
for the poor summer tourism season, while others also say
Spanish tourism is less competitive than it used to be.
(Comment: The stronger euro might play a role in price
competitiveness, both in reducing arrivals from non-Euro
countries and making it more attractive for Euro-country
tourists to go elsewhere.) (Expansion, 8/22; Cinco Dias,
8/20)

Industry Minister Plans Significant Fine for Nuclear Plant
Leak Mishandling
5. (U) Industry, Tourism, and Commerce Minister Sebastian
said his ministry would apply a significant fine, as
recommended by the Consejo de Seguridad Nuclear regulatory
agency, against power company Endesa for mishandling a

MADRID 00000921 002.2 OF 002


November 2007 radioactive leak at its Asco I nuclear power
plant in Tarragona. Sebastian said the MITC would open an
investigation next month to validate CSN,s findings that
Endesa committed a "grave error of the maximum degree" by not
detecting the leak until March 2008 and then waiting nearly a
month to report it to CSN. CSN has recommended that MITC
fine Endesa between 9 and 22.5 million euros (US$13-33
million). Sebastian noted that his ministry has up to three
years to impose the fine, but he intends to act quickly.
(Comment: The Asco leak and Endesa,s mishandling of it are
likely to increase public skepticism over calls to expand
nuclear power. A recent opinion poll indicated that 48% of
the Spanish public is against the expansion of nuclear power
while 40% favors expansion. The Zapatero government plans to
close existing plants as the end of their expected life spans
are reached and does not plan to approve new ones, although
concerns over electricity cost and climate change have
prompted calls for a reconsideration of this policy.)
(Expansion, 8/20; Cinco Dias, 8/20; El Mundo, 8/18)
FCC Buys Babcock & Brown Wind Farms for 780M Euros

6. (U) Barcelona-based FCC, one of Spain,s largest
construction companies, has agreed to acquire the Australian
firm Babcock and Brown,s Spanish wind energy assets for 780
million euros ($1.2 billion). FCC's acquisition, part of a 4
billion-euro initiative to diversify into renewable energy,
energy efficiency and waste-to-power technologies, includes
fourteen wind parks with a combined capacity of 421 megawatts
(MW), and an additional 45 MW currently under construction.
This is about 3% of Spain's total wind power capacity. A new
business unit, FCC Energia, will manage the newly acquired
assets, which the company says it expects to provide
operating margins significantly higher than those of its core
business. (Comment: FCC is following major construction
companies Acciona and ACS in diversifying into renewable
energy.) (El Mundo, 8/21; Bloomberg, 8/21; FCC press release
8/21)
Aguirre

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