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Cablegate: Finance Minister Solbes Cleans Up Books

This record is a partial extract of the original cable. The full text of the original cable is not available.

280718Z Jul 04

UNCLAS MADRID 002871

SIPDIS

TREASURY FOR TRACI PHILLIPS

E.O. 12958: N/A
TAGS: ECON EFIN SP
SUBJECT: FINANCE MINISTER SOLBES CLEANS UP BOOKS

REF: MADRID 00162

1. SUMMARY: Finance Minister Pedro Solbes announced July 16
his intention to add EUR 6.14 billion (USD 7.4 billion), or
0.78% of GDP, of non-performing government investments to the
2004 budget. This is predicted to give Spain its first
budget deficit (at 1.2% of GDP), since 1999. These
liabilities result from several failed government investments
such as the liquidation of the Andalusian Government debt,
investments in Radio-Television Espanola, and loans to
Argentina. Solbes' report also called for transparency
reforms that will increase the amount and clarity of budget
information to the public. The opposing Popular Party (PP)
has criticized Solbes' move as an attempt to tarnish the
former PP administration's image. END SUMMARY.

2. Pedro Solbes, Second Vice-president and Minister of
Economy, has revised Spain's 2004 budget accounting by adding
EUR 6.14 billion (USD 7.4 billion) in non-performing debts to
government liabilities. In his July 16 report to the Council
of Ministers, Mr. Solbes revealed that this change will
increase Spain's projected 2004 deficit from 0.4% to 1.2% of
GDP, and for the first time in three years Spain will report
a budget deficit. (The Social Security payments account will
add 0.5% of GDP surplus, which originally would have left the
government with a budget surplus of 0.1%). Despite this new
revised 2004 budget, Solbes projected a GOS budget surplus of
0.1% of GDP in 2005, if the autonomous regional governments
maintain balanced budgets.

3. For further background on Solbes' position, we spoke with
Jose Luis Kaiser Moreiras, former PP finance advisor and
currently in the Ministry of Economy, and Alvaro Sanmartin
Antelo, a current Solbes advisor. They explained that EU
rules allow certain government investments, known as
contingent liabilities, to be kept off the books as long as
there is credible evidence of return on those investments.
Solbes has decided that some of these investments now show no
future feasibility, and has to report them as government
expenditures in 2004. Examples of these ventures include the
liquidation of debt with the Andalusian government, failed
investments in Radio-Television Espanola, and loans to
Argentina during its 2001 financial crisis.

4. Solbes also accounted for budget losses of ailing
government-owned companies in 2004. If the results of
state-owned enterprises do not permit future profitability,
then Eurostat requires those losses to appear in the
government budget, as Solbes has done. Losses by companies
like RENFE (state-owned railroad), AENA (state-owned aviation
administration), and the state-owned water company appeared
in this new deficit figure.

5. Solbes' report called for greater transparency in the GOS
budget. He called for an amendment to the already existing
Balanced Budget Law, which would require increased
transparency and public information. The transparency
amendment would require the GOS to make more information
public, require the National Statistics Institute and the
Bank of Spain to open their books, and standardize the
budgetary schedule and information provided to the public.

6. Mariano Rajoy, Secretary General of the opposition PP,
dedicated almost an entire press conference on July 21 to
criticizing Solbes' move to include these new deficit figures
in the 2004 budget. Rajoy claimed that Solbes is trying to
blame the PP administration for "hidden deficits," in spite
of the fact that Solbes refuses to use the term to describe
PP budgeting. Rajoy added that some of these enterprises
might still become profitable in the future, or had already
appeared in previous years' budgets. Solbes was head of
Eurostat, the EU body that validates all EU state budgets and
finances, before taking the Spanish Finance Minister
position. He approved the 2004 GOS budget while in that post
and Rajoy criticized Solbes for not taking action previously
if a deficit problem existed.

7. COMMENT: The PSOE government may not be trying to portray
the former PP government as having "hidden" budget deficits,
despite sensationalist press reports to the contrary. The
timing of these adjustments, post-EU parliamentary elections,
may indicate that this is not strictly a campaign tactic.
Solbes may be loading up the 2004 budget with deficit
liabilities so that the PSOE can claim 2005 and other future
budget surpluses on its record. Adjusting the government
accounts at this time is also a positive move for Solbes'
image. He can portray himself as a fair and respectable
Finance Minister who displays prudent budgeting practices.
MANZANARES

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