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Cablegate: Madrid Economic Weekly, October 26-30

VZCZCXRO4754
RR RUEHLA
DE RUEHMD #1061/01 3031409
ZNR UUUUU ZZH
R 301409Z OCT 09
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 1395
INFO RUEHLA/AMCONSUL BARCELONA 4182
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 MADRID 001061

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 EINV ENRG KGHG SP
SUBJECT: MADRID ECONOMIC WEEKLY, OCTOBER 26-30

REF: MADRID 1040

Contents:

ECON/EIND: GOS Extends Municipal Stimulus, Auto Incentives
EFIN: BoS to Require More Provisions Against Banks' Housing
Assets
ECON: GDP Decline Slows in Q3: 0.4% from Q2, 4.1% from Year
Ago
ECON: Prices Rise in October, Still Below Last Year's Level
EINV: EC Tells GOS to End Tax Break for EU Acquisitions
EINV/ENRG: Acciona To Develop 500 MW Solar Project for U.S.
Army
ENRG/KGHG: IEA Economist Criticizes Planned Coal Sector Aid


GOS Extends Municipal Stimulus, Auto Incentives

1.(U) The Council of Ministers approved on October 23 a new
5-billion-euro municipal spending plan that will start in
2010. While the 8-billion-euro 2009 municipal spending plan
that is coming to an end concentrated on public
infrastructure, the new Social Fund for Sustainability and
Employment will finance projects in areas such as social
spending (one billion euros), technological initiatives,
renewable energy, the environment, and energy savings. Some
of the spending may help compensate municipalities for the
impact of lower tax receipts on the amount they could
otherwise expect to receive from the central government. The
GOS plans to approve projects in December so work may begin
in January of 2010. Separately, Industry, Tourism, and
Commerce Minister Sebastian announced that the GOS would
extend until the end of 2009 temporary auto purchase
incentives and that it proposed to include similar, though
not-yet-finalized, incentives in the 2010 budget. (Comment:
While the domestic market is important to Spanish auto
producers (including Ford and GM/Opel), most of Spain,s auto
production is exported to other European countries.
Incentives in the second half of the year in other European
countries and Spain have helped reduce the drop in sales of
Spanish-made vehicles. End Comment.) (Presidency Statement,
10/23; ABC, 10/23; Europa Press, 10/24)

BoS to Require More Provisions Against Banks' Housing Assets

2.(U) In a step that will force banks to acknowledge sooner
their losses from construction and real estate loans, the
Bank of Spain will require banks to set aside provisions for
20% of the value of housing, commercial property, and land
they have held on their books for more than a year. At
present, banks are only required to set aside provisions for
10% of the value at the time of acquisition. Spain,s
housing collapse has led many banks to take property rather
than having to declare in default loans to construction and
real estate companies. Between December 2007 and June 2009,
savings banks ("cajas") had acquired some 26 billion euros
worth of housing and land, and banks had acquired another 10
billion euros worth. Many of these properties are believed
to be worth significantly less than the values the banks are
claiming on their books.

3.(U) The measure, which is expected to enter into force in
several weeks, could encourage banks to sell assets they have
been holding. If the volume of sales is significant, it
could drive down housing prices, which have still not fallen
as much as many analysts expect, and speed up the housing
sector's adjustment. The increased provisioning should make
2010 an even more difficult year for cajas and banks than was
already expected; Moody's predicts that several could report
losses in the coming quarters. These losses could increase
pressure on troubled cajas to merge; so far, mergers have not
taken place as quickly as the central bank had hoped. (El
Confidencial, 10/26; El Pais, 10/27)

GDP Decline Slows in Q3: 0.4% from Q2, 4.1% from Year Ago

4.(U) The economy shrunk by 0.4% in the year's third quarter,
according to a Bank of Spain estimate. While this
contraction was smaller than those of any of the previous
four quarters (which saw GDP fall by 0.6%, 1.1%, 1.6%, and
1.1%, respectively) it still meant that third quarter
production was 4.1% below its third quarter-2008 level. The
central bank noted that temporary measures such as the
government's municipal infrastructure spending package and
incentives for auto purchases had prevented the contraction

MADRID 00001061 002 OF 002


from being worse. The official National Statistics Institute
GDP figure, which will be announced in late November, is
likely to be similar. (Bank of Spain)

Prices Rise in October, Still Below Last Year's Level

5.(U) The National Statistics Institute's preliminary October
inflation estimate suggests that prices rose by some 0.7%
during the month. The headline year-on-year rate was -0.6%,
up from September's -1.0%. Year-on-year rates are expected
to remain negative for another month or two while they still
include the impact of the late-2008 oil price decline. The
final October rate will be announced in two weeks.
(Expansion, 10/29; Embassy calculation)

EC Tells GOS to End Tax Break for EU Acquisitions

6.(U) EC Competition Commissioner Neelie Kroes declared on
October 28 that a tax benefit to Spanish companies making
acquisitions in other EU countries violates EU state aid
rules and has called for the GOS to reclaim the benefits in
some instances. Under the corporate tax provision enacted in
2002, Spanish companies can write off over 20 years the
difference between the price they pay for a foreign company
and its book value. The total amount of indirect public
assistance provided since 2002 for acquisitions in other EU
countries has been estimated at 30 billion euros, but Kroes
ruled that only companies which had made acquisitions after
2007 would have to refund the tax benefit. This exempts major
deals such as Banco Santander's 9.5 billion-pound 2005
purchase of the UK bank Abbey, Telefonica's 27 billion-euro
2006 purchase of O2, and Iberdrola's 17 billion-euro 2007
purchase of Scottish Power. Banco Santander is expected to
have to return any tax deducted as a result of its 1.26
billion-pound 2008 purchase of UK bank Alliance and
Leicester. The EC continues to investigate and discuss with
the GOS the application of the benefit to purchases outside
the EU; this may affect Spanish investments in the U.S.,
though it is not clear whether the EC would have jurisdiction
unless the Spanish purchasers were competing with potential
purchasers from other EU countries. (El Pais, 10/28;
Financial Times, 10/29; El Confidencial, 10/29)
Acciona To Develop 500 MW Solar Project for U.S. Army

7.(U) The Army Corps of Engineers signed an agreement on
October 15 with Acciona Solar Power and the U.S. firm Clark
Energy Group to develop a 500 MW solar power project at Fort
Irwin in California. This will be DOD's largest solar energy
project yet. The project, to be completed between 2013 and
2022, will use concentrating solar power and photovoltaic
technology at five sites. By 2014, the first site is
expected to be able to cover Fort Irwin's total energy needs,
and excess electricity will be sold to regional public
utilities. The $2 billion project will have the capacity to
generate 1,000 GWh of electricity annually. A federal
mandate requires the Army to cover 25% of its energy needs
with renewable energy by 2025. (Business Wire, 10/15; Clark
press release, 10/15)

IEA Economist Criticizes Planned Coal Sector Aid

8.(U) At an October 27 event in Madrid, International Energy
Agency chief economist Faith Birol criticized measures
proposed by the Ministry of Industry, Tourism, and Commerce
to assist Spain,s slumping coal industry. An existing GOS
plan anticipates a gradual decline in production between 2006
and 2012, but consumption of domestic coal has fallen to half
of the expected level this year because of reduced
electricity demand, the price of CO2 emissions permits, and
competition from imported coal. Birol acknowledged Spain,s
interest in guaranteeing security of supply but said that
aiding coal could distort the market and increase CO2
emissions, going against Kyoto and EU aims. An industry
association said that the measures contained in a draft Royal
Decree would provide assistance worth (if electricity prices
remain at current levels) 480 million euros over three years.
It downplayed the CO2 emissions issue, saying much of the
increased coal produced would replace imported coal.
President Zapatero is from Leon, Spain,s principal coal
mining area. (El Pais, 10/28; Expansion, 10/28)
CHACON

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