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Cablegate: Madrid Economic Weekly, Oct. 27-31

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RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #1141/01 3080750
ZNR UUUUU ZZH
R 030750Z NOV 08
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 5505
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 3632
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 MADRID 001141

SIPDIS

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

E.O. 12958: N/A
TAGS: ECON EFIN ELAB KIPR SP
SUBJECT: MADRID ECONOMIC WEEKLY, OCT. 27-31

MADRID 00001141 001.2 OF 002


Contents:

ECON: GDP Contracts in Q3 and GOS Budget Deficit Continues
Rise
ELAB/EFIN: GOS Considers Labor, Mortgage Measures
ECON: Inflation Drops to 3.6%
EFIN: Stocks Drop but Big Bank Profits Remain Healthy
EFIN: GOS to Start Buying Bank Assets in November
EFIN: Savings Bank Mergers Begin
KIPR: GOS to Host IPR Conference

GDP Contracts in Q3 and GOS Budget Deficit Continues Rise

1.(U) Spain's GDP was 0.2% lower in the July-September
quarter than in the previous quarter, according to a Bank of
Spain estimate. This is the first quarter-on-quarter
contraction since 1993. Private consumption and residential
investment are the two sectors that have slowed the most.
This figure does not include much of the impact of the drop
in confidence resulting from the mid-September financial
crisis. The slowdown is affecting the GOS' fiscal position;
for the year to September, the government's deficit was 1.24%
of GDP. (El Pais, 11/1 and 10/29)

GOS Considers Labor, Mortgage Measures

2.(U) The Labor Ministry met with labor and business groups
to discuss subsidies for firms that hire workers and for the
self-employed. The GOS also is reported to be considering
measures to help the unemployed meet mortgage payments. (El
Pais, 11/1; Expansion, 11/1)

Inflation Drops to 3.6%

3.(U) Inflation fell in October to 3.6% on a year-on-year
basis, according to the official estimate of the harmonized
consumer price index. GOS officials credited declining oil
prices; the rate peaked at 5.3% in July when oil was over
$147/barrel. Secretary of State for Economy David Vergara
told reporters October 28 that inflation would finish the
year close to 3% and could fall below 3% in the first half of
2009. GOS officials expressed hope that declining inflation
in Spain and other countries could lead the European Central
Bank to cut interest rates, as ECB President Trichet
suggested in an October 27 Madrid speech. It is not clear
how much of an effect on inflation the economic slump is
having separate from that of the oil price decline.
(Expansion, 10/30; All press, 10/28)

Stocks Drop but Big Bank Profits Remain Healthy

4.(U) The IBEX-35 blue chip stock index ended its worst month
in the last ten years, falling 17% in October. Many stocks
now have dividend yields greater than low-risk bond or
deposit yields. Spain's two largest banks, Banco Santander
and BBVA, each reported third-quarter profits slighly higher
than their third-quarter 2007 levels. (Expansion, 11/1 and
10/29)

GOS to Start Buying Bank Assets in November

5.(U) The GOS' Financial Asset Acquisition Fund (FAAF)
governing council, chaired by Vice President and
Economy/Finance Minister Solbes, held its first meeting
October 27 and established procedures to purchase bank assets
via auction. In November, the FAAF will buy for up to two
years up to 5 billion euros of mortgage-based assets and
other assets that have been issued since August 1, 2007 and
have credit ratings of AA or better. In December, the FAAF
will buy up to 5 billion euros of new mortgage-based assets
with credit ratings of AAA. One article suggested that
bankers viewed the volumes involved as insufficient to
generate new lending and that banks would use the proceeds to
meet upcoming obligations. (Expansion, 10/27; El
Confidencial, 10/28)

Savings Bank Mergers Begin

6.(U) Savings banks (cajas) in two provinces of the Basque
region approved a merger that will create Spain's fifth
largest caja. BBK and Kutxa will become the Caja de Ahorros
de Euskadi, the Basque Savings Bank. The new entity has
holdings that could be worth up to six billion euros in
companies such as Iberdrola and Enagas. Separately, Catalan
regional president Jose Montilla met with the heads of the
region's ten cajas amid seculation that some of them might
merge. Fitch Ratings lowered its rating of Caixa Laietana, a

MADRID 00001141 002.2 OF 002


small Catalan caja heavily exposed to construction and real
estate, from BBB to BBB, only two steps above junk bond
status. (El Confidencial, 10/28)

GOS to Host IPR Conference

7.(U) The telecommunications secretariat of the Ministry of
Industry, Tourism, and Commerce will host its second annual
international conference on intellectual property November
25-26 as part of the International Digital Content Forum
trade show. The US Patent and Trademark Office will be
represented, and Department of Commerce representation is
possible as well. (El Pais, 11/27; Embassy
AGUIRRE

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