EU SANCTION FORCES SPAIN'S SHIPBUILDER INTO

UNCLAS MADRID 003105

SIPDIS

TREASURY FOR TRACI PHILLIPS

E.O. 12958: N/A
TAGS: ECON EIND ELAB EWWT SP
SUBJECT: EU SANCTION FORCES SPAIN'S SHIPBUILDER INTO
RESTRUCTURING OR BANKRUPTCY


1. SUMMARY. The Spanish press reported late July that the
European Commission has ruled that Spain,s Izar Naval
Constructions, a quasi-public company, violated the terms of
EU aid for the shipbuilding industry and must return EUR 1.1
billion (USD 1.35 billion). This payment return threatens
the solvency of Izar and has prompted the GOS to initiate a
company restructuring, separating the civil and military
sectors. Spanish unions fear this plan will result in a huge
amount of job losses and are considering action to prevent
the dissolution. END SUMMARY.

EC POSITION
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2. The Commission is demanding the payment of EUR 1.1 billion
(USD 1.35 billion) from Izar for the improper use of EU
public aid funding in shipyard restructuring. In 1997, the
Commission and the European Council approved restructuring
aid for the then publicly owned Spanish shipyards amounting
to EUR 1.38 billion (USD 1.69 billion) on the condition that
no further aid would be provided. Between 1999 and 2000, the
State Society of Participating Industries (SEPI),the Spanish
majority shareholder of Izar, granted EUR 500 million (USD
614 billion) in further aid to the civil public shipyards
that are today owned by Izar. SEPI granted aid in the form
of a capital injection worth EUR 252.4 million (USD 309.6
million),a loan worth EUR 192.1 million (USD 235.7 million),
and paid a purchase price allegedly above market value. This
further aid is perceived as giving Izar an uncompetitive
advantage in the shipbuilding industry, and shipyards in
other EU Member States and other Spanish competitors have
filed complaints.

GOS PLAN
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3. Izar is Spain,s leading civil and military shipbuilding
company, created in December 2000 following the merger of
Astilleros Espanoles S.A. and Empresa Nacional Bazan. To
prevent Izar from entering bankruptcy after paying the EC,
the GOS has proposed the creation of a society of naval
shipbuilders, where military activity will be separated from
civil activity. If restructuring does not take place, the
GOS has predicted that Izar will become bankrupt four months
after repayment. This separation would result in the closing
of most of Izar,s facilities, as the GOS has deemed that
only two out of the eight facilities ) Ferrol and Cartagena
) meet a &standard of acceptable activity.8 In addition,
the GOS expects to draw capital from the private sector
through the sale of Izar,s motor production arm from Manises
and its shipyards in Sevilla.

UNION CONCERN
--------------


4. The Spanish press also reported that the General Trade
Union of Workers and the Workers, Commission have announced
that they will attend the next SEPI meeting scheduled for
September 7 to seek clarification on the specifics of the
government plan. Further, they anticipate presenting some
&alternatives8 and &opinions8 to the presumed measures.
If SEPI confirms the separation of civil and military
shipyards, the unions have promised to schedule a series of
demonstrations. Workers fear huge job losses if the civil
and military sectors are separated.


5. COMMENT. Considering that the GOS is a majority
shareholder of Izar through SEPI, it has the power to make
the changes it deems necessary. Izar has a coveted position
in the shipbuilding industry in Europe and the GOS wants to
protect that role even at the expense of some job losses.
Whether the unions have the ability to prevent the government
plan remains to be tested. If the unions rally in September,
this will be a major test of the new Socialist government's
strength over the labor unions. END COMMENT.
MANZANARES