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Cablegate: Madrid Weekly Economic Update -- Sept 2-5

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PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #0972/01 2520557
ZNR UUUUU ZZH
P 080557Z SEP 08
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC PRIORITY 5308
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 3568
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 02 MADRID 000972

SIPDIS

STATE FOR EUR/WE, EEB/IFD/OMA, EEB/ESC/IEC
TREASURY FOR OIA/OEE/W.LINDQUIST
DOE FOR EERE

E.O. 12958: N/A
TAGS: ECON ECPS EFIN EINV ELAB ENRG SP
SUBJECT: MADRID WEEKLY ECONOMIC UPDATE -- SEPT 2-5

REF: MADRID 943

MADRID 00000972 001.2 OF 002


Contents:

ELAB: Unemployment Continues to Rise
ELAB: Labor/Immigration Minister Proposes to Reduce Immigrant
Labor
EFIN: ECB Collateral Tightening Not Expected to Affect
Spanish Banks
EFIN: Corporate Profits Fall for First Time in Four Years
ENRG/EINV: Planned Cut in Solar Electricity Price Guarantee
Sparks Criticism
ENRG/EINV: Iberdrola Receives Final Approval to Buy U.S.
Utility Energy East
ECPS/EINV: Telefonica Raises China Netcom Stake to 12 Percent
in 800M Euro Deal

Unemployment Continues to Rise

1. (U) The number of unemployed increased by 103,085 in
August, bringing the total number of unemployed to 2.53
million, the highest total since 1998. President Zapatero
will appear September 10 in parliament to discuss these and
other poor economic indicators and the GOS response. Spain
has one of the highest unemployment rates in the EU. The
second quarter unemployment rate was 10.4 percent, and EU
figures put the rate at 11% in July. The respected Savings
Bank Foundation (Funcas) predicted that the rate would peak
at 16% in 2010. Comment: Since undergoing a severe housing
downturn beginning in 2007, Spain has experienced rapid
increases in unemployment. The government,s response is
seen as lackluster at best by many Spaniards. (Ministry of
Labor, All Media, 9/2; El Pais, 9/5)

Labor/Immigration Minister Proposes to Reduce Immigrant Labor

2. (U) Minister of Labor and Immigration Celestino Corbacho
said September 3 that because of the high unemployment rate,
the GOS would limit to almost zero the hiring in 2009 of
foreign workers in their countries of origin, allowing only
contracting related to specialized workers and to Spain,s
international commitments. Minister Corbacho,s comments
were heavily criticized by prominent labor unions and
business associations, which noted among other things that
immigration was not the underlying reason behind Spain,s
unemployment problem. In 2007, over 200,000 foreign workers
were hired abroad, and 88,000 were hired between January and
July of 2008. (El Pais, Expansion, La Vanguardia 9/4, 9/5)

ECB Collateral Tightening Not Expected to Affect Spanish Banks

3. (U) Although the international press has suggested that
Spain could be affected by the European Central Bank's
decision announced September 4 to tighten collateral
requirements for its lending, Spanish press, bankers, and
others with whom post has met seem confident that there will
be little impact. A Bank of Spain (central bank) official
noted that although Spanish banks had made increased use of
the ECB window since the start of the financial crisis, what
had happened was that German banks that had been going to the
ECB to finance their purchases of Spanish mortgage-backed
securities had stopped those purchases, so the Spanish banks
had gone directly to the ECB and used the same type of
securities as collateral. Even after the increase, Spanish
banks are only making use of the ECB in proportion to the
size of Spain's economy within the Euro zone, and they have
available collateral that could support three times the
amount of funding they need. (El Pais, 9/5; Bank of Spain
meeting 9/3)

Corporate Profits Fall for First Time in Four Years

4. (U) The economic difficulties are being reflected in
corporate earnings. The Spanish companies that are traded on
Madrid's stock market reported first-half 2008 profits 0.02
percent below their profits for the first half of 2007.
Without one-time items from two companies, the result would
have been a 7 percent decline. A more telling sign of the
impact of the slowdown came in second quarter profits, which
were 6.4 percent below their second-quarter 2007 level, even
taking into account the one-time items. This was the first
quarterly decline in four years. Large companies that make
up the Ibex 35 blue-chip index, many of which have profitable
operations outside Spain, did much better than smaller
companies; Ibex 35 companies' combined profits rose 17

MADRID 00000972 002.2 OF 002


percent in the first half, while other companies' profits
fell 98 percent. Analysts expect results to be worse in the
coming quarters. (El Pais, 9/2)

Planned Cut in Solar Electricity Price Guarantee Sparks
Criticism

5. (U) A European photovoltaic solar energy conference in
Valencia this week (that a dozen USG officials attended)
focused media attention on an impending decline in Spain's
solar electricity incentives. In order to encourage
investment and technological development, the GOS guarantees
high prices to producers of different types of
renewably-generated electricity. To limit costs to consumers
(and itself, as it covers some of the costs), the GOS
guarantees prices only to those projects that connect to the
grid by a certain date. The existing guarantee of 45 cents
of a euro per KwH for solar photovoltaic projects has sparked
a boom in investment, but only projects that come on line
before the end of September will receive it. The GOS plans
to reduce to 29 or 33 cents the guaranteed price for future
projects and to guarantee that price only for the first 300
MW that come on line per year. These prices are still far
above the market price for electricity generated by coal or
gas. Industry representatives have criticized the planned
reduction, saying it will lead companies to halt investment
plans. Environmental NGOs concerned about climate change and
labor groups have also criticized the reduction. GOS
officials are reported to be open to modest increases in the
300MW/year quota but not to changing prices. (El Pais, 9/2;
El Confidencial, 9/4)

Iberdrola Receives Final Approval to Buy U.S. Utility Energy
East

6. (U) New York state,s Public Service Commission (PSC)
approved Spanish energy giant Iberdrola,s proposal to take
over utility Energy East Corp. This acquisition and
subsequent investments would represent one of the largest
investments in the United States by a Spanish company. The
New York PSC,s decision was the final hurdle for the
multi-billion dollar deal, which has undergone scrutiny from
regulators from several states for over a year. Iberdrola
had said earlier in the summer that if allowed to purchase
Energy East, it would invest $2 billion in wind turbines in
New York, doubling the amount of NY wind power capacity
within a few years. The purchase would make it the U.S.,
second largest wind power provider and one of the ten largest
U.S. electricity companies. Iberdrola representatives have
indicated that they will study the conditions imposed by the
state before deciding whether to proceed with the deal, but
press reports suggest that the conditions do not appear to
contain any dealbreakers for the company. (All Media, 9/4)

Telefonica Raises China Netcom Stake to 12 Percent in 800M
Euro Deal

7. (U) Spanish telecoms giant Telefonica announced on
September 4 that it would purchase over 800 million euros
worth of shares of China Netcom, raising its stake in the
company to a total of 12 percent. Telefonica is buying the
shares from US-based fund manager Alliance Bernstein
Holdings. When China Netcom merges with China Unicom,
Telefonica will be the leading partner in the new company.
Comment: Telefonica is diversifying from its traditional
Latin America focus. Encouraging trade with and investment
in China has been a focus of the Ministry of Foreign Affairs
and other GOS players, and we expect additional significant
actions from Spanish companies in the future. End Comment.
(Cinco Dias, 9/5)
Aguirre

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