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Cablegate: Madrid Weekly Economic Update - Oct 13-17

VZCZCXRO8514
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #1101/01 2911950
ZNR UUUUU ZZH
P 171950Z OCT 08
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC PRIORITY 5457
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHAS/AMEMBASSY ALGIERS 4020
RUEHRB/AMEMBASSY RABAT 6118
RUEHLA/AMCONSUL BARCELONA 3605
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 02 MADRID 001101

SENSITIVE
SIPDIS

STATE FOR EUR/WE, EEB/IFD/OMA, EEB/ESC/IEC
TREASURY FOR OIA/OEE/W.LINDQUIST
DOE FOR EERE

E.O. 12958: N/A
TAGS: ECON ECPS EFIN EINV ELAB ENRG SP PGOV
SUBJECT: MADRID WEEKLY ECONOMIC UPDATE - OCT 13-17

REF: 08 MADRID 1080

MADRID 00001101 001.2 OF 002


CONTENTS

ECON/EFIN: GOS, Following Eurozone Lead, to Guarantee Bank
Borrowing
ECON/PGOV: President Zapatero and Opposition Leader Rajoy
Discuss Economic Measures in Historic Meeting
ECON: Economic Status Update - Inflation down, but Housing
Market Downturn Still a Problem
EINV: Santander Buys Remaining 75% of U.S. Bank
EFIN: Chairman of Spain's Largest Bank Speaks Out on
Financial Market Turmoil
EFIN: Spaniards Affected By Lehman Brothers Bankruptcy
Protest Spanish Banks


GOS, Following Eurozone Lead, to Guarantee Bank Borrowing

1. (SBU) President Zapatero announced October 13 that the GOS
will guarantee up to 100 billion euros in bank borrowing this
year. This initiative is part of a decree approved that day
by the Council of Ministers that incorporates measures agreed
over the weekend by heads of state of the euro nations. The
decree also includes a "preventative" clause allowing the GOS
to buy equity in banks if necessary. Zapatero echoed Second
Vice President and Economy/Finance Minister Solbes' October
12 statement that he did not think any Spanish banks would
need the GOS to purchase equity. Perhaps heeding criticism
that he has been overly optimistic during Spain's growing
economic difficulties, Zapatero said that the recovery of
economic activity would take time and effort, because the
situation was "very grave." In a Congressional hearing the
following day, Zapatero warned of likely mergers or
restructurings of smaller Spanish banks and savings banks
(cajas). (Embassy, All Media, 10/14/08, 10/15/08)

President Zapatero and Opposition Leader Rajoy Discuss
Economic Measures in Historic Meeting

2. (U) During a historic meeting October 14, President
Zapatero and opposition Partido Popular leader Mariano Rajoy
discussed measures to address Spain's flailing economy.
Zapatero and Rajoy's relationship to date has been
characterized by partisan and bitter exchanges, especially
regarding the state of the economy. During this rare
coming-together, Rajoy conditioned his support for Spain's
financial markets measures on greater oversight on the 100
billion euro inter-bank loan guarantee fund and the 30-50
billion euro asset/equity fund (ref). Zapatero agreed to
Rajoy's demand, committing to greater transparency, rigor,
and oversight. The two leaders also agreed to work together
over the next two months to develop a bi-partisan plan on
economic structural reforms, an area in which the two parties
have traditionally been at odds. Despite these significant
agreements, Rajoy and Zapatero continued to be in opposition
on the 2009 proposed budget. Zapatero's public statement
after the meeting was one of optimism, Rajoy's was one of
cautious expectations. (El Pais, 10/15/08)

Economic Status Update - Inflation down, but Housing Market
Still a Problem

3. (U) Economic information from the past week (October
13-17) indicates that Spain's economy continues to face
significant challenges. According to Spanish real estate
appraisal company TINSA, the glut of unsold new properties
from Spain's housing bubble will likely reach 930,000 by the
end of 2008, a level much higher than earlier anticipated.
Related to the residential construction market, cement
consumption is down from the year before by 25% in the first
9 months of 2008. In a radio interview October 16, Minister
of Labor Celestino Corbacho stated that negative job growth
will continue to occur in the upcoming months (latest
estimate for Spain's unemployment rate is over 11 percent).
In more upbeat news, the National Institute of Statistics
reports that Spain's September inflation rate (CPI) decreased
by -0.4 from the year before to 4.5%. GOS expectations are
that this rate will continue to decrease over the upcoming
months, ending the year at 3.5%. (El Pais, Confidencial,
Cinco Dias, 10/14/08-10/17/08)

MADRID 00001101 002.2 OF 002

Chairman of Spain's Largest Bank Speaks Out on Financial
Market Turmoil

4. (U) According to Emilio Botin, Chairman of Banco
Santander, the financial market crisis is a manifestation of
various excesses and cannot be blamed on any one market (such
as the U.S.) or on any one cause. This assertion, publicized
widely in the Spanish press, is being portrayed as a
contradiction of President Zapatero's statement blaming the
U.S. for the current economic malaise. Botin praises the
actions of the Spanish government and eurozone leaders, but
repeats the message of Second Vice President and Minister of
Economy Pedro Solbes in saying that Spanish banks are faring
well and do not need the GOS to take ownership stakes as
other governments have done. Botin also emphasizes the
importance of liquidity, avoiding moral hazard, and
reinforcing transparency and supervision. Comment: Botin has
a strong standing in Spain, and any comments made by him
carry significant weight in the local arena. His comments
were taken from a recent speech and an opinion piece he wrote
in the Financial Times. (All Media, 10/16/08, 10/17/08)

Santander to Buy Remaining 75% of U.S. Bank

5. (U) On October 13, Banco Santander announced that it would
purchase the 75% it did not already control of the
Pennsylvania-based Sovereign Bank. The purchase will be
carried out by a stock swap of several billion euros.
Santander had paid about $2.4 billion for its previous stake
in Sovereign, plus a $1 billion capital increase earlier this
year. Sovereign has suffered from poorly performing
mortgages and auto loans and the government takeover of
Fannie Mae and Freddie Mac, in which it held stock. It has
750 branches and 12,000 employees in the northeastern U.S.
(El Pais, 10/14/08, 10/14 Santander press release)

Spaniards Affected By Lehman Brothers Bankruptcy Protest
Spanish Banks

6. (U) On October 13, between 50-100 protestors gathered in
front of Spain's central bank (Bank of Spain) to demand an
investigation into Spanish banks for selling Lehman Brother's
bonds to low risk profile investors and not mentioning these
investments. Earlier in September, the Bank of Spain had
asserted that Spanish banks had minimal exposure to Lehman
Brothers and remained healthy. However, recent news about
Banif's exposure, which some speculate is as high as 800
million euros, has caused concern about the health of that
particular bank. (El Pais, 10/14/08; Confidencial, 10/17/08)


AGUIRRE

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