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Cablegate: Ambassador's Meeting with Second Vice President

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

211403Z Jul 05

UNCLAS SECTION 01 OF 02 MADRID 002731

SIPDIS

EUR FOR WE

E.O. 12958: N/A
TAGS: ECON EFIN SP
SUBJECT: AMBASSADOR'S MEETING WITH SECOND VICE PRESIDENT
AND MINISTER OF FINANCE AND ECONOMY SOLBES


1. Summary and introduction: The Ambassador met with Second
Vice President and Minister of Finance and the Economy Pedro
Solbes July 20. Solbes was accompanied by Chief of Staff
Soledad Abad Rico and Secretary of State for the Economy
David Vegara. Solbes provided a fairly comprehensive tour
d'horizon of the Spanish economy that included no surprises -
Spain is doing well; growth for 2005 is expected to be
healthy; areas of concern remain the long term
competitiveness of the economy, the growing current account
deficit, and inflation. Solbes stated that each of these
concerns is manageable, but remains the subject of government
attention. He spoke briefly about the economic aspects of
negotiations between the central government and regional
autonomous communities, notably Catalunya and the Basque
Country, over revenue sharing. In response to questions from
the Ambassador, Solbes said the Spanish banking sector is an
area of strength and he does not believe it is overexposed to
mortgage debt. He seconded the Ambassador's statement on
strong U.S.-Spanish coordination on terror finance issues.
End summary and introduction.

2. Solbes expects GDP growth for 2005 to be between 3.2 and
3.4 percent. (Note: This is in keeping with recent figures
from the IMF and EU, and well above the 2.7 percent
originally forecast by the GOS last year. End note.) The
housing and construction markets remain strong in response to
historically low interest rates. Solbes noted that
non-Spaniards are also active in the Spanish housing market
with significant investment from elsewhere in the EU,
particularly Germany. Tourism also remains a strong
performer in Spain. Solbes then moved to some of the
government's concerns. He restated the Zapatero government's
goals of increasing investment in research and development
and education to improve Spain's long term competitiveness in
the world and European economies. The growing current
account deficit is the most serious short term concern, but
is driven, according to Solbes, by strong internal demand
that has driven imports up and a strong Euro that depresses
exports. Solbes indicated he felt Spain could sustain its
growth rate, even with a growing deficit, for now. He feels
inflation is high, but at between three and four percent not
out of control, and is sustainable for now.

3. A particular area of interest and concern for the
government is immigration - primarily in how to integrate
immigrants into the formal economy. This is a relatively new
issue for Spain, which has become a magnet for large numbers
of immigrants only within the past 10-15 years. Vegara noted
that U.S. success in absorbing and integrating large numbers
of new immigrants could be a useful model for Spain.

4. Solbes noted that although negotiations between the
Spanish central government and the governments of regional
communities - especially the Basque Country and Catalunya -
are primarily viewed as political, there is an important
economic component. This is particularly important with
Catalunya, where the Catalans feel that they are paying far
more into state coffers than receiving in return, and want
the same sort of financial autonomy granted to the Basques.
Solbes noted that Catalunya is historically one of the
wealthiest and industrially developed parts of Spain, and
that there is a long-standing rivalry between Barcelona and
Madrid to be the "primary" city in Spain.

5. Solbes stated that the Spanish banking sector is an area
of strength. The banks are healthy, modern, enjoy excellent
management, and an increasing international profile. In
response to a question from the Ambassador, Solbes and Vegara
stated they felt the banking sector (including the
Spain-centered savings banks) is not overexposed on mortgage
debt. Even if the economy and the housing market slow down
and interest rates rise, they believe most households will be
able to manage mortgage payments. In addition, Vegara noted
that Spanish consumers have not followed the American
practice of extracting equity from their real estate by cash
out refinancing, home equity loans, and multiple mortgages on
property, so most homeowners are less leveraged than
Americans. Solbes added that Spanish banks are subject to
high reserve requirements and that the reserves provide a
reasonable cushion.

6. On terror finance issues, Solbes agreed that the United
States and Spain have an excellent record of cooperation.
Solbes added that Spain takes financial crimes seriously,
whether terror finance, narco-financing, or money laundering,
and that the government closely monitors the banking sector.
However, when queried by the Ambassador about the level of
personal criminal liability for bank officers involved
(wittingly or unwittingly) in money laundering, Solbes and
Vegara were unsure.

7. The Ambassador closed by suggesting that the U.S. and
Spanish business, with many common interests and
complementary advantages, could work together to mutual
advantage in the Latin American market. Solbes agreed.

8. Comment: Solbes is known as a technocrat rather than a
political animal, and his discourse was heavy on economic
details and almost devoid of political commentary. Although
he referred to it only briefly, the revenue-sharing
negotiations with Catalunya are almost certainly a sensitive
issue for his ministry. There is no question that wealthier
regions like Catalunya subsidize government spending in
poorer regions. President Zapatero, however, is dependent on
the Catalan Socialist Party (ERC) to maintain a majority in
the parliament, which limits the PSOE government's ability to
simply say no to Catalan demands. Acquiescence to Catalunya,
however, would only open the way for increased demands for
financial autonomy from other Spanish regions. End comment.

AGUIRRE

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