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Cablegate: Ambassador's Farewell Lunch with Economy Minister

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

191234Z Nov 04

UNCLAS MADRID 004432

SIPDIS

TREASURY PASS TRACI PHILLIPS

E.O. 12958: N/A
TAGS: ECON EFIN SP
SUBJECT: AMBASSADOR'S FAREWELL LUNCH WITH ECONOMY MINISTER
SOLBES


1. Summary. During a farewell lunch with the Ambassador,
Second Vice President and Minister of the Economy Pedro
Solbes gave a tour d'horizon of the status of the 2005
budget, current and projected growth rates for the economy,
government plans to ease the overheated housing market, and
his take on the strengthening of the Euro against the dollar.
On the housing market, he floated the idea of a sort of
"owner's insurance" to bring more of the vacant rental stock
onto the market. End Summary.

2. Minister Solbes noted that he was planning to return to
Parliament immediately after the lunch in order to see the
vote on the budget and all proposed amendments by the lower
house. He anticipated no difficulties in the lower house
vote. (Note: The budget was approved by the Chamber of
Deputies November 18. End note.) The budget then goes to the
Senate for consideration. Solbes is anticipating difficulty
in getting the budget through the Senate, and believes there
is a real possibility the Popular Party and a Catalan
nationalist party will group together to ensure the budget
does not pass. He noted that even if the budget was rejected
by the Senate, it would return to the lower house and could
be (and would be) passed by the Chamber of Deputies over the
Senate veto. This would not be ideal, of course, and would
cost the PSOE government political capital in the Senate.

3. Minister Solbes noted the "flash" statistics for the
third quarter of 2004 indicate overall economic growth of 2.6
percent. The fourth quarter should show similar figures and
he expects overall growth for 2004 to come in at 2.6 or 2.7
percent. He was much cagier in projecting growth for 2005,
tied in part to the fortunes of Spain's major trading
partners in Europe. He did say that optimists project 2.8
percent growth and the pessimists around 2.5-2.6 percent for
2005.

4. Solbes was fairly sanguine about the valuation of the
Euro against the dollar. He noted that 70 percent of Spain's
trade was with Euro zone partners and so Spain is feeling
less immediate pressure than some other Euro zone countries
that export more heavily to the United States. He noted,
however, that softening demand from Germany and other Spanish
trading partners because of their own export woes will
eventually affect the Spanish bottom line. He believes the
Euro will continue to rise against the dollar until one or
the other of the parties takes action.

5. The Ambassador queried Minister Solbes about government
plans to ease the overheated housing market throughout Spain.
Low interest rates on mortgages coupled with low returns on
other investment possibilities have led to heavy demand for
real estate, steep increases in property values, and in
increased mortgage indebtedness of Spaniards. Solbes
indicated he expects interest rates to rise in 2005, although
incrementally and not enough to crash the market.

6. Solbes said one area the government would like to affect
is improving the rental market. Owner/tenant laws favor the
tenant and a great deal of rental stock stays off the market.
Solbes said he was looking for a way to provide rent
insurance for owners and to shift eviction and collection
responsibility to the insurer. He seemed to be trying out
the idea and did not say whether the insurance would be
provided by the private sector, a public/private
partnership, or the government. The Ambassador noted that it
might be simpler for owners to take action against defaulting
tenants and evict or recover debts. Both agreed that
bringing the potential rental stock into the market,
especially in Madrid and Barcelona, would effectively slow
the house purchase market. The idea, however, showed the
government may be willing to take a creative (and potentially
expensive) approach to a difficult problem.

7. Comment: Minister Solbes was relaxed and open in his
comments. Given recent events, it was a conversation
refreshingly empty of references to Iraq, U.S.-Spanish
relations, and even the recent U.S. elections. Solbes is
confident of passing the PSOE government's first budget
reasonably intact, which would be a political victory for the
man brought into Zapatero's government to reassure those
worried that a Socialist victory would mean an end to fiscal
responsibility. Although recent local rumors have indicated
Solbes' health was poor and he might leave the government
sooner rather than later, he appeared in fine fettle.
ARGYROS

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