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Cablegate: Madrid Weekly Econ/Ag/Commercial Update Report -

VZCZCXRO3576
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #1404/01 1971227
ZNR UUUUU ZZH
R 161227Z JUL 07
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 3013
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 2916

UNCLAS SECTION 01 OF 03 MADRID 001404

SIPDIS

SIPDIS

EUR/WE

E.O. 12958: N/A
TAGS: EAGR ECON EFIN EIND ELAB ETRD KIPR TBIO SP
EINV, UK, SMIG
SUBJECT: MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT -
JULY 9

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EFIN: High corporate debt levels prompt tougher credit
conditions
EFIN: Holding companies are rigorously inspected by tax agency
EINV/ENRG: CNE approves Enel and Acciona's bid for Endesa
SENV/BEXP: Chinese toothpaste seized due to contamination
EAGR/BEXP: Bad year for U.S. wheat exports to Spain
EFIN: Opposition conservative pary offers tax cuts
ECIN: Egyptian Minister promotes economic cooperation
EAIR/ELAB: SpanAir strike over
ECON: 2008 Budget: More R&D and infrastructure investment
ENRG: Expert Spanish wind power companies armed and ready to
tackle U.S. market


HIGH SPANISH CORPORATE DEBT LEVELS PROMPT TOUGHER CREDIT
CONDITIONS

1. (U) Standard & Poor's says Spanish corporate debt is at
106% of GDP, compared with a 70% Eurozone average. The
result is that banks are having a harder time syndicating
loans. Colonial's (a major Spanish real estate group) chief
financial officer says there has been a "radical change in
the perception of Spanish country risk." A year ago, banks
were reportedly willing to lend up to 120% of a real estate
group's net asset value; now they are only willing to lend up
to 30% in most cases. (Comment: There is a sense that higher
interest rates will at least slow down Spain's
construction-led boom. But many analysts remain bullish,
noting that even with recent interest rate hikes, Spanish
businesses and consumers can handle the more expensive money
because it still remains much cheaper than it was prior to
Spain's entry into the euro.) (Financial Times, July 10).

SPANISH TAX AGENCY INSPECTS SPANISH ENERGY HOLDING COMPANIES'
DEDUCTIONS MORE RIGOROUSLY

2. (U) The Spanish Tax Agency believes that some holding
companies have taken undue advantage of a 1996 law that
provided tax benefits for holding companies. The idea was to
attract foreign investment, and the law did, in fact, do
that. Apparently some Tax Agency inspectors believe that the
financial cost deductions taken by holding companies may be
excessive. (Comment: The reason this is interesting to us is
that American holding companies have complained that the
Spanish tax authorities have effectively changed the rules
retroactively for holding companies. We are encouraging the
GOS to study the issue with a view to maintaining a good
investment climate. The Spanish Tax Authority is, however,
not necessarily amenable to political direction so this will
be a challenging issue to manage.) (Expansion, July 9)

CNE APPROVES ENEL AND ACCIONA'S BID FOR ENDESA

3. (U) The Spanish National Energy Commission (CNE) approved
this past week Enel and Acciona's bid to buy major Spanish
energy utility Endesa. The approval came with twelve
conditions attached, including stipulations that Endesa
preserve its brand identity and headquarters in Spain and
that the CNE maintain the ability to veto decisions which
could endanger the Spanish national interest. Enel is
required to maintain Endesa as a separate company and not
absorb it. Furthermore, CNE maintained that a separate
management team must be set up within Endesa to manage
nuclear power operations, and thereby keep Enel, in which the
Italian government holds a significant stake, from gaining
too much control over Spain's nuclear plants.

CONTAMINATED TOOTHPASTE HITS SPAIN

4. (U) Spanish authorities seized approximately 100,000 tubes
of contaminated toothpaste on July 6 originating from China.
After further investigation, local authorities determined
that the toothpaste was contaminated with the same chemical,
diethylene glycon, as the contaminated Colgate tubes
discovered in the United States. The affected products
seized in Spain were of a non-name brand toothpaste commonly
distributed in local hospitals and on airplanes.

SPANISH WHEAT MARKET SURPLUS TO LIMIT US EXPORTS

5. (U) The prospects for U.S. high-quality Hard Red Spring
and durum wheat sales to Spain appear to be greatly reduced
this year, when compared to previous marketing years. Now,
approaching the end of the grain harvest, it appears that
Spanish grain yields and production have reached record
levels, as a result of the timely and plentiful springtime
rains and dry harvest-time weather. Among the various grains
produced in Spain, the improvements in wheat and barley

MADRID 00001404 002.2 OF 003


yields and production, over those of previous years, have
been especially significant. In addition, grain quality is
reported to be extremely good, which will likely result in
reduced demand for high-quality wheat imports from North
America because Spanish millers will require less
high-protein wheat to mix with the normally poorer-quality
Spanish soft wheat. Spanish pasta makers will also have
plenty of local durum wheat, so as not to require high
quality imports.

OPPOSITION CONSERVATIVE PP PARTY OFFERS TAX CUTS

6. (U) PP leader Mariano Rajoy used a July 10 PriceWaterhouse
lunch attended by Spain's business elite to offer to
eliminate the wealth tax; reduce personal income taxes
between 12% and something below 40%; reduce corporate income
taxes to 25% for most companies and 20% for small businesses;
eliminate the tax levied on corporate financial
restructuring; reduce or eliminate taxes on certain legal
transactions; and reform the estate tax. (Comment: This is
clearly an electoral offer - elections must be held by March
2008 at the latest. The tax cut ideas were not followed by
specific plans for savings, something of a disappointment for
fiscal hawks - the PP normally argues for more fiscal
restraint. Interestingly, the proposal to eliminate taxes on
legal transactions would benefit the real estate sector the
most, an area the PP clearly sees might need shoring up given
widespread fears of a real estate bubble. Rajoy's ideas
followed President Zapatero's pledge to pay families 2500
euros for each new baby. Clearly, both political parties are
trying to reach voters through economic proposals, although
terrorism and constitutional issues will still likely
dominate the elections.) On July 11, Finance Minister Solbes
rejected Rajoy's tax cuts because he said they would lead to
a budget deficit on the order of 0.4% of GDP. (Expansion,
July 10;July 11)

EGYPTIAN MINISTER OF FOREIGN TRADE AND INDUSTRY PROMOTES
ECONOMIC COOPERATION IN SPAIN

7. (U) Egyptian Minister of Foreign Trade and Industry,
Rachid Mohamed Rachid, visited Spain in hopes of promoting
investment and economic cooperation between the two nations.
Accompanied by a delegation of representatives from 50
leading Egyptian businesses, the group met with notable
Spanish businesses such as Union Fenosa, Iberdrola, Cepsa,
Corte Ingles, and Banco Santander. Rachid was quoted as
saying that the meetings were very positive, particularly
those meetings with representatives from the energy and
tourism sectors. (Note: Egypt is currently a minor supplier
of petroleum to Spain). During his visit, the Egyptian
Minister also met with Minister of Industry, Commerce and
Tourism Joan Clos, who promised a reciprocal visit to Egypt
in October.

SPANAIR AIRLINE STRIKE OVER

8. (U) SpanAir, one of Spain's most well known airlines,
reached an agreement July 6 with the Independent Union of
Cabin Airline Crew (SITC-PLA) to grant its employees
concessions on work hours and scheduling issues. This
agreement brought to a close employee strikes which affected
over 100 SpanAir flights since the strike's commencement June
25. SpanAir, a member of the Scandinavian travel group Star
Alliance, operates a fleet of over 60 aircraft and employs
more than 3,600 people.

2008 BUDGET: MORE R&D AND INFRASTRUCTURE INVESTMENT

9. (U) The Secretary General of Budgeting at the Ministry of
Economy and Treasury, Luis Espadas, announced that research
and development, infrastructure investment, and social
spending would be the leading priorities in the 2008 budget,
the last budget for this administration. He noted that the
budget ceiling had already been approved by the Council of
Ministers and signed off on by Congress at 152.6 billion
euros, a 6.7 percent increase over 2007. Congressional
discussion on the details of the 2008 budget is expected to
occur late September.


SPANISH COMPANIES EXPERT IN WIND POWER ARMED AND READY TO
TACKLE GROWING U.S. MARKET

10. (U) The United State's recent appetite for renewable wind
energy has created a shortage in the wind turbines needed to
generate the power. Due to the nature of the production of
wind turbines, like airplanes requiring many high-tech

MADRID 00001404 003.2 OF 003


specially made components from many different producers, the
recent jump in demand has left turbine manufacturers with
long order backlogs. Being relatively new to the game,
American renewable energy companies have found themselves at
the back of the line and without the equipment to increase
their wind power generation. This has created a unique
opportunity for European players such as Spain's Iberdrola, a
world leader in renewable energy which holds many of the new
turbine production contracts over the next few years. The
result is that Iberdrola is now being welcomed as it seeks to
acquire U.S. firms in search of turbines. The company has
bought small companies in Pennsylvania, Iowa and Virginia, as
well as Maine utility Energy East for 4.58 billion in June
2007. Similarly, Spanish turbine manufactures Gamesa and
Acciona have been opening plants in the United States in
order to meet new demand. Part of the reason the United
States has lagged behind in wind power has been inconsistent
government support for the technology. That support appears
to be solidifying and old hand European companies are looking
to reap the benefits.
AGUIRRE

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