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Cablegate: Scenesetter for Codel Dodd Visit to Spain Dec.

VZCZCXRO8315
RR RUEHLA
DE RUEHMD #1277/01 3391120
ZNR UUUUU ZZH
R 041120Z DEC 08
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 5717
INFO RUEHLA/AMCONSUL BARCELONA 3690

UNCLAS SECTION 01 OF 04 MADRID 001277

SENSITIVE
SIPDIS

STATE FOR EUR/WE AND H:AMACDERMOTT
PASS TO SENATE FOREIGN RELATIONS COMMITTEE FOR FULTON
ARMSTRONG

E.O. 12958: N/A
TAGS: ECON OREP PREL SP
SUBJECT: SCENESETTER FOR CODEL DODD VISIT TO SPAIN DEC.
10-12

//INTRODUCTION AND SUMMARY//

1. (SBU) Embassy Madrid welcomes your visit. The Spaniards
you meet will be eager to share their assessment of financial
developments, Latin American issues, and bilateral relations.
Our elections were closely followed here, and a strong
atmosphere of goodwill and optimism has emerged for
increasingly closer bilateral relations and cooperation. Our
current relations on counterterrorism, counternarcotics, and
military issues are strong. The end of a long housing boom
and the international financial crisis have led to a severe
economic slowdown that the GOS has been unable to prevent,
costing it public support. The GOS believes Spain,s
cautious banking regulation and the importance of its banks
strengthen its case for continued participation in the G-20
summit process even though it is not a member of the G-20.

//BILATERAL RELATIONS//

2. (SBU) As you are aware from your many years of leadership
of the U.S.-Spain Council, Spain is an important friend and
ally of the U.S., and we value its cooperation. The fight
against terrorism, narcotics, and human trafficking forms one
of the cornerstones of our bilateral relationship, and
Spanish troops are carrying out important missions in
countries such as Afghanistan and Lebanon. Spain has long
fought a domestic terrorist threat from the Basque terrorist
group ETA and suffered tragically from Islamic extremist
terrorism in the 2004 Madrid train bombings. We need to be
innovative in finding new and improved avenues for bilateral
cooperation with this trusted multilateral ally against the
common threats we face. Spanish officials closely followed
our elections and expect relations at the senior levels of
government to improve, giving us the opportunity to
strengthen cooperation.

//POLITICAL BACKGROUND//

3. (SBU) President Zapatero's center-left Spanish Socialist
Workers' Party (PSOE) was the victor in the March 9 general
election, although it remains a minority government (seven
seats shy of a working majority in the 350-seat lower house
of parliament) that depends upon the support of other parties
to pass legislation. The opposition Partido Popular (PP)
also gained seats and retained Mariano Rajoy as party leader,
though the party has suffered from internal divisions.
Zapatero kept most of the key players in his Cabinet in their
posts. First Vice President and Minster of the Presidency
Maria Teresa Fernandez de la Vega is Zapatero's political
deputy, while Second Vice President and Minister of Finance
and Economy Pedro Solbes is his economic deputy. Miguel
Angel Moratinos remained in place as Minister of Foreign
Affairs. The most prominent change was that Carme Chacon
became Spain's first-ever female Minister of Defense; she is
described in the press as a possible eventual successor to
Zapatero.

//ECONOMIC CONTEXT//

4. (SBU) Spain enjoyed one of the fastest growing economies
in Europe for the 15 years through 2007, but the good times
have come to an abrupt halt. A housing boom that contributed
greatly to growth for several years ended suddenly last year;
housing prices have fallen, construction has almost stopped,
and unemployment has risen rapidly to almost 13 percent. The
international credit crisis has aggravated the situation, as
Spain,s high current account deficit leaves it dependent on
now-scarce crossborder lending. It is widely assumed that
the economy is already in a recession, and GDP is expected to
contract further in 2009. Months of worse-than-predicted
economic news have led to widespread criticism of Zapatero
and his economic policymakers for their upbeat predictions
during the campaign and for having downplayed the economic
difficulties long after many others were saying Spain was in
a crisis. Public skepticism has been aggravated by the
failure of a series of GOS measures to noticeably affect the
slowdown and by Zapatero's initial efforts to blame the U.S.
subprime mortgage crisis for all of Spain's troubles. Now
that the budget surplus of the previous four years has become
a rapidly growing deficit, tensions have heightened over
regional government financing issues and the proposed
austerity budget for 2009.

5. (SBU) Despite the economic difficulties, Spain has not
faced the same financial turmoil that other developed
countries have seen. In part this is due to the Bank of
Spain,s cautious regulation, including requiring higher

MADRID 00001277 002 OF 004


reserve provisioning in good times and not allowing
off-balance-sheet SIVs. Spanish financial institutions also
do not own many instruments based on U.S. mortgages.
Although many banks have problem loans to troubled
construction and real estate companies, there have been
relatively few mortgage defaults so far, and no Spanish banks
have gone under, although there is talk that some of the
smaller "cajas" (savings banks) may merge. Spain,s largest
bank, Banco Santander, has taken advantage of reduced bank
stock prices to buy troubled UK banks and to buy the 75
percent it did not already own of the Pennsylvania-based
Sovereign Bank. BBVA, the country,s other large bank, also
has a significant presence in the U.S. through its ownership
of Compass Bank. (These are but two examples of Spain,s
emergence as one of the leading foreign investors in the U.S.
in recent years; other sectors that have seen significant
Spanish investment include wind and solar power, ethanol,
road construction, foods, and insurance.)

6. (SBU) President Zapatero argued that the size of Spain,s
economy, the significant international presence of Santander
and BBVA, and the Bank of Spain,s successful regulation
meant that Spain deserved a place at the November 15 G-20
financial summit even though it was not a G-20 member. He
made it a matter of national pride to attend (risking
political damage if he had failed to be invited) and
succeeded in participating as a result of the intervention of
French President Sarkozy. While domestic press articles have
suggested that UK Prime Minister Brown is likely to invite
Zapatero to the followup summit next April, Spain is not a
member of the Financial Action Task Force that is working on
many of the regulatory recommendations from the November
summit. Zapatero has spoken often of the importance of
coordinated European and U.S. action in facing the financial
crisis.

7. (SBU) The GOS has taken a series of measures over the last
several months to address the economic slowdown. Soon after
Zapatero,s reelection, it implemented his campaign promise
of a 400-euro tax rebate. Since September, the GOS has
increased deposit insurance (reluctantly, as a result of
other countries, increases) and announced plans to buy
Spanish banks, high-quality mortgage-backed assets,
guarantee new debt, and inject capital if necessary. Banks,
reactions have been mixed. Neither the GOS nor the banks say
that new capital is needed, and banks only sold 2.1 billion
euros out of a possible 5 billion in assets that the GOS had
been willing to buy in its first round of purchases last
month. However, it appears that banks are actively seeking
GOS guarantees for their new lending in a first round that
ends December 3. Zapatero also announced on November 27 an
11-billion-euro spending package that features 8 billion
euros for municipal governments for quick-starting new
infrastructure projects aimed at employing many of those who
have lost construction jobs. The remainder will go to the
struggling auto sector, environmental initiatives, research
and development spending, the handicapped, and other sectors.
The aid package will amount to just over 1 percent of
Spain's GDP and is aimed at creating 300,000 jobs in 2009.
These and previous anti-crisis measures will put the public
sector deficit close to 3 percent of GDP in 2008 and 2009.
Press reports have speculated that Second Vice President and
Finance/Economy Minister Pedro Solbes has lost influence with
Zapatero as a result of frustration over the economic
slowdown.

//LATIN AMERICA//

8. (SBU) Spain wields significant influence in Latin America,
where its businesses have invested heavily. Like the U.S.,
Spain wants strong democratic and free market institutions in
the region. We have sharply differing views on Cuba, as
Spain believes it can encourage change via engagement with
the Castro regime, but we seek the same end result. On
Venezuela, Spain appears to be going ahead with the sale of
four ocean-going patrol ships and four Coast Guard-type high
seas patrol ships; plans to sell aircraft to Venezuela were
scuttled when the U.S. objected to the transfer of U.S.
technology in the aircraft. Spanish companies have had major
problems with Argentina,s government, including the ongoing
nationalizations of Areolineas Argentinas from the Spanish
Marsans group and of the private pension funds, one of which
is owned by BBVA. Spanish officials have expressed hope that
the USG will increase engagement with Latin America in the
coming years, sometimes alleging that it was abandoned after
9/11.


MADRID 00001277 003 OF 004


//MILITARY AND SECURITY COOPERATION//

9. (SBU) Spanish military cooperation is important to the
U.S. The southern Spanish bases of Rota and Moron are
strategic hubs, midway between the U.S. and theaters of
operation in Afghanistan and Iraq. Spain has troops in
Lebanon (roughly 1,100), Afghanistan (780), Kosovo (500),
Bosnia (260), and a smattering of others in various UN & EU
observer missions. Although the Afghan NATO mission is not
popular with the Spanish public, the GOS clearly expects the
incoming U.S. Administration to request an increased Spanish
effort there. Defense Minister Chacon has talked publicly of
the need to remove the GOS, self-imposed cap of 3,000 total
overseas military troops deployed, but at the same time GOS
officials have stressed that the solution in Afghanistan
cannot be purely military and that a new strategy is needed.
Elsewhere on the diplomatic front, Spain in recent years has
more often been a follower than a leader, looking to stay
within EU consensus on issues such as Iran and missile
defense. Spain will not recognize Kosovo and is so far
refusing to train or fund Kosovar security forces.
Nonetheless, its commitment to KFOR remains firm. Spain is
supportive of U.S. efforts towards Middle East peace. Driven
by the twin threats of terrorism and illegal immigration,
Spain is also increasing its engagement with the countries of
North and Western Africa. The seizure by Somali pirates of a
Spanish fishing ship earlier this year led to a ransom
payment and sparked GOS interest in addressing piracy. Spain
is planning to send two warships to join an EU mission off
Somalia and already has a patrol plane operating there.

//COUNTERTERRORISM COOPERATION//

10. (SBU) Spain is an al-Qaeda target and a critical player
in U.S.-EU counterterrorism efforts due to its proximity to
the Maghreb and a population that includes more than one
million Muslims, mostly immigrants. Senior Al-Qaeda leaders
often call for attacks to recapture the medieval "Al
Andalus," and the Spanish enclaves of Ceuta and Melilla in
North Africa are a fixation for Al-Qaeda in the Maghreb and
other extremists. The March 11, 2004, train bombings killed
191 persons and injured nearly 2,000 more, making it the
second-deadliest terror attack in European history. The
Spanish government considers the threat from Islamic
terrorism to be one of its top national security priorities
and has identified numerous Islamic extremist groups
operating within its borders. The Spanish are actively
pursuing Islamic extremism terrorism-related investigations
and have scores of suspects in jail. Public opinion polling
shows nearly three-quarters of Spaniards are worried about
the threat of Islamic fundamentalism, more than in the U.S.
or Europe as a whole.

11. (SBU) Bilateral cooperation is strong. Spain pursues an
aggressive agenda in law enforcement, judicial, and
information-sharing efforts, at least with us. One example
is the HSPD-6 agreement we signed in 2007 to facilitate the
sharing of information between our national counterterrorism
authorities. Spain also is a founding member of the
Proliferation Security Initiative and has participated
actively during its five-year existence. Spain has hosted a
number of Global Initiative to Combat Nuclear Terrorism (GI)
events in 2008 and has been at the forefront of efforts to
expand membership. Spanish officials recently have given
indications that Madrid wants to deepen bilateral cooperation
-- especially emergency preparedness operational exercises --
to combat nuclear terrorism in the coming year. Our
Consulate General in Barcelona is increasing its staff size
as part of an inter-agency initiative to host a
jointly-coordinated counterterrorism, anti-crime, and
intelligence center to combat the target-rich environment of
terrorist and criminal activities in the region, which has
been the site of more than a dozen raids on suspected radical
Islamists since 9/11, including the dismantlement in January
2008 of a cell with ties to Al-Qaeda that intended to attack
Barcelona's subway system

//TOPICS YOU MAY BE ASKED ABOUT BY THE PRESS//

12. (SBU) Overflights - The issue of so-called "illegal CIA
flights" carrying terrorism suspects to Guantanamo has been
prominent in the Spanish media in recent days. The reports
are muddled and contain a fair amount of innuendo. They
suggest that the Aznar government allowed the transport of
terrorism detainees to Guantanamo via Spain. The reports
also confuse the so-called CIA flights with routine U.S.
military flights via Spain (roughly 4,000 a year). We and

MADRID 00001277 004 OF 004


the GOS have tried to make it clear that the U.S. military
has done nothing illegal and has fully respected our
bilateral agreements regarding military flights, which would
include seeking the informed consent of the Spanish
government for any flight carrying controversial cargo or
passengers. Unfortunately, this controversy often leaves us
in the position of trying to prove a negative. If asked
about this by the media, we suggest making the point that the
U.S. places a high value on relations with Spain and pays
scrupulous attention to the notification and flight clearance
requirements contained in our bilateral agreements

13. (SBU) Possible VP Biden Visit - The Spanish press have
reported extensively on President Zapatero,s lack of a
meeting with President Bush and the lack of a Zapatero White
House visit (until last month,s G-20 financial summit).
They followed closely statements during the presidential
campaign by Senators Obama and McCain and their spokesmen
about the possibility of meeting with Zapatero. The GOS has
made clear its pleasure with the result of the election, and
it may have unrealistic expectations about how soon Obama
will visit Spain or Zapatero Washington. Spanish officials
told reporters recently that Vice President-elect Biden told
Zapatero in a November 17 phone conversation that he would
visit Spain shortly after taking office to discuss the global
financial crisis. The Vice President-elect also was said to
have mentioned the importance the President-elect places on
bilateral relations and highlighted the possibility for
cooperation on Latin America. We have not heard any
confirmation of this from U.S. sources and have told
reporters that we cannot speak for the incoming
administration.

//PERSONAL SECURITY//

14. (U) In general, Spain is safe. However, Madrid and other
large cities attract a large number of criminals and
pickpockets and frequent incidents of crime of opportunity
against the unwary do occur. It is best to carry only
essential items, including a photocopy of your passport's
photo page. Visitors can protect themselves against crime by
being street-smart, alert and aware of their surroundings.
Travelers are encouraged to review the most recent Worldwide
Caution issued by the Department of State. As the Department
of State continues to develop information on any potential
security threats to Americans overseas, it shares credible
threat information through its Consular Information Program
documents, available on the Internet at
http://travel/state.gov. Additional information regarding
safety and security in Spain is available on the U.S.
Department of State's website (www.embusa.es).

//CONCLUSION//

15. (U) Again, we are looking forward to your visit. Amid
the current atmosphere of increased goodwill toward the
United States, we want to set the stage for continuing
improvements in bilateral cooperation. There is much we can
do together.
AGUIRRE

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