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Cablegate: Madrid Economic Weekly, October 5-16

VZCZCXRO2119
RR RUEHLA
DE RUEHMD #1015/01 2891455
ZNR UUUUU ZZH
R 161455Z OCT 09
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 1342
INFO RUEHLA/AMCONSUL BARCELONA 4154
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 MADRID 001015

SIPDIS

STATE FOR EUR/WE, EEB/IFD/OMA
COMMERCE FOR 4212/DON CALVERT
TREASURY FOR OAI/OEE R.JOHNSTON
ENERGY FOR PIA:K.BALLOU

E.O. 12958: N/A
TAGS: ECON EFIN EIND ENRG SP
SUBJECT: MADRID ECONOMIC WEEKLY, OCTOBER 5-16

REF: MADRID 969

Contents:

ECON: EC Calls Spain,s Budget Trends Unsustainable
ECON: Prices Fell 0.2% in September
EFIN: Moody's Warns Banks are Understating Losses
EFIN: International Firms Playing Role in Caja Restructuring
EIND: Job Cuts Key as Opel Talks Continue
EIND/ENRG: Renault to Invest 500 Million Euros in Valladolid
Facility
ENRG: CNC Opens Sanctions Proceedings Against Electric
Companies


EC Calls Spain,s Budget Trends Unsustainable

1.(U) A European Commission study says the GOS needs to make
serious budgetary adjustments to assure long-term
sustainability. Over the past three years, Spain,s
sustainability indicator (S2), which measures the impact of
debt and spending, has grown from 3% of GDP to around 12%,
nearly twice the EU average. Without significant budgetary
modifications, the study estimates that Spain,s public debt,
now not far over 50% of GDP, will grow to 528% of GDP by
2050. The EC recommends increasing revenues, cutting
spending, and reforming the public pension and health
systems. (El Pais, 10/15)

Prices Fell 0.2% in September

2.(U) The National Statistics Institute confirmed that
consumer prices fell 0.2% in September after rising 0.3% in
August. Prices in September were 1.0% below their level of
September 2008. Underlying inflation (not including energy
or food prices, which are more volatile) dropped to a
year-on-year rate of 0.1%. (National Statistics Institute,
10/13)

Moody's Warns Banks are Understating Losses

3.(U) Spanish banks are risking future growth by not
recognizing the full extent of their losses, according to a
report issued this week by Moody's. Restructuring loans and
accepting property in exchange for unpaid mortgages are
keeping defaults off the books. Moody's warns that failure
to address the situation more directly could hamper recovery
from the economic crisis. Rigorous banking regulations,
requiring significant reserves, have provided a good buffer
thus far. However, given the continued economic downturn,
Moody's says current reserves would cover less than half of
an estimated 108 billion euros in losses. Should the economy
continue to deteriorate, losses could reach up to 225 billion
euros. The president of the Spanish Banking Association
(AEB) denied that banks are hiding losses and countered that
they are weathering the crisis well, pointing to 8 billion
euros in earnings during the first quarter of 2009. Comment:
The AEB does not represent savings banks ("cajas"), only
traditional banks. (WSJ, 10/13; El Pais, 10/14 and 10/16).

International Firms Playing Role in Caja Restructuring

4.(U) Morgan Stanley, KPMG, and UBS are among those playing a
role in restructuring Spain,s financial sector. Savings
banks ("cajas") have been the financial institutions hardest
hit during the economic crisis, due to their heavy exposure
to the construction and real estate sectors. The Bank of
Spain has called for consolidation of cajas (there are
currently over 40, many small) to make them stronger and more
competitive. Last June, the GOS created the Fund for
Orderly Bank Restructuring (FROB), which will be able to
leverage up to 90 billion euros to facilitate mergers and
other restructuring. Now several significant mergers are in
the works. Morgan Stanley is advising three cajas in the
Catalan region -- Caixa Manresa, Caixa Catalunya and Caixa
Tarragona -- whose merger would create the fourth largest
savings bank in Spain. They are seeking around 1.5 billion
euros from the FROB to effect the merger. KPMG is assisting
Caja Espana, Caja Duero and Caja Burgos, while UBS has been
working with Caja Castilla La Mancha, which authorities took
over in March. (El Pais, 10/14; El Confidencial, 10/16)

Job Cuts Key as Opel Talks Continue

5.(U) National and regional government officials, including

MADRID 00001015 002 OF 002


Industry, Tourism, and Commerce Minister Sebastian, met with
union leaders and Magna representatives during the week to
discuss the plans of the Canadian-Austrian firm Magna for
Opel's Figueruelas plant once Magna completes its proposed
purchase of a controlling stake in Opel from GM. Magna's
current plans reportedly call for cuts of at least 1,350 jobs
from the Figueruelas plant, which currently employs 7,500.
These cuts would also lead to the loss of thousands of jobs
by local suppliers of the plant. Spanish labor
representatives have urged the government to impede signing
if it will mean significant job losses. One article says
union representatives are unwilling to accept cuts of more
than 1,000 jobs. Magna plans to divert some of the plant's
production to Germany's Eisenach plant but has committed to
keep 70% of the plant's production at Figueruelas, to
increase to 72% in 2013. Discussions continue, and a deal is
expected to be signed in the next few days. (Multiple media,
10/16; El Pais, 10/15; El Mundo, 10/15)

Renault to invest 500 million euros in Valladolid facility

6.(U) Renault Spain has announced plans to invest 500 million
Euros in its Valladolid facilities, guaranteeing the plant's
livelihood for the next ten years. Renault plans to build an
electric car there starting in 2011 and a new "ecological
engine" vehicle in 2012; the electric car would be the first
to be mass-produced in Spain. President Zapatero says this
is proof that the Spanish industry remains competitive
despite the automotive slump resulting from the economic
crisis. Renault currently employs 5,000 workers directly at
the Valladolid facility and is indirectly responsible for
another 30,000 jobs in the region. (WSJ, 10/6; El Pais, 10/7)

CNC Opens Sanctions Proceedings Against Electric Companies

7.(U) Spain,s National Competition Commission (CNC)
announced it will begin sanctioning proceedings against nine
major electricity companies, including Iberdrola, Endesa, and
Gas Natural. The CNC says it found sufficient evidence of
anti-competitive practices among the companies during a
preliminary investigation. Specifically, the CNC contends
that between 2004 and 2008, these companies withheld
electricity from the market in order to inflate prices,
supported by actions by their distribution operations. The
decision to open the proceedings demonstrates the CNC's
resolve to address anti-competitive practices as the
electricity market continues the liberalization process
initiated in 1998. (Expansion, 10/5; ABC, 10/6)
CHACON

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