MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT -

UNCLAS SECTION 01 OF 02 MADRID 001038

SIPDIS

SIPDIS

EUR/WE

E.O. 12958: N/A
TAGS: BEXP EAGR EAIR ECON EFIN EIND ETRD TBIO SP
EINV, UK
SUBJECT: MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT -
MAY 21

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EINV: All time high for Spanish stock market
EINV/ETRD: Decline of the real estate market
EAGR/ETRD: US beef and EUR market
EINV/ECON: US owned Texas Pacific Group teams up to buy Iberia
EINV: Iberdrola to sell 20% for quick cash
EINV/ETRD: Tourism up in Spain
ELAB/EFIN: Degree or no degree - pay gap decreases
SENV: Is the drought finally over?

SPANISH STOCKMARKET IBEX-35 HITS ALL-TIME HIGH


1. (U) Shaking off (at least for now) jitters of a few weeks
ago, the IBEX-35 hit an all-time high on May 23 of 15,229.9
points. The market is up 7.62% so far this year. Despite
fears of a housing market slowdown, even the big construction
firms such as Ferrovial, ACS, FCC, Sacyr and Acciona have run
up stock gains. There may even be room for more gains.
Merrill Lynch, for instance, says Ferrovial's stock is worth
24% more than it is currently traded. Continued strong
Spanish economic growth during the first quarter of 2007
(4.1% on an annualized basis) no doubt helps underpin the
stockmarket. In addition, the Spanish Institute of
Statistics (INE) published numbers on May 23 indicating that
industry and investment are becoming relatively more
important than construction and personal consumption as
growth drivers. Even productivity is up somewhat. However,
all analysts agree Spain still remains vulnerable to
construction slowdown induced lower growth, or even a
recession at some point. (Comment: The INE numbers are
especially important as the government argues that it is
changing Spain's growth model. El Pais, considered close to
the government, comments in its May 24 editorial that there
are some signs the government's economic policies are having
an effect, although Spain still remains dangerously
over-reliant on construction. The newspaper adds that it
will take several years to reduce this reliance and skillful
management of the economy to avoid a "hard landing.")
(Expansion, May 24, 2007; El Pais, May 24, 2007)

DISINFLATION OF THE REAL ESTATE MARKET


2. (U) New data reaffirms the slow but sustained descent of
the Madrid real estate market. The Spanish Mortgage
Association figures show that in 2006, 68.9% of a family's
income went into the purchase of a new home, 3 points less
than the previous year. While a Morgan Stanley study has
dramatically decreased the consequences of increase of the
types of interest of mortgages to Spanish families. Those
who closed before 2003, a supposed 82%, contracted interest
rates at a similar or higher than the current rate.
Concluding that only 18% of families would be seriously
affected by the unstoppable increase of the Euribor in the
last three years. (20 minutos, May 22)

US BEEF MAD COW FREE


3. (U) On May 22, 2007, at the annual meeting in Paris of the
World Organization for Animal Health (OIE),the United States
was recognized as having a controlled risk status for BSE
(mad cow's disease). This decision is important, because it
opens the door for the U.S. Government to request that
countries, which had closed their borders to U.S. meat
exports because of BSE, reopen their markets. Korea is a
prime example and target.


4. (U) While there is some discussion of making a special
effort to present this new international recognition to the
European Commission (EC),with the opportunity of presenting
it to the individual Member States, U.S. meat-access problems
in Europe stem from the EC's unwillingness to open European
borders to U.S. beef produced using synthetic hormones. The
EC lost a WTO case on this issue, but has not relented,
providing U.S. beef exporters a small, overly-managed quota
for non-hormone-treated beef. In addition, the U.S.
Government applied tariff retaliation on specified European
exports to the United States.


4. (U) The U.S. Government is talking to the EC about the
possibility of providing U.S. beef exporters additional
access for non-hormone-treated beef. However, there are
additional market-access problems associated with EC
certification of U.S. meat packing plants, the use of
anti-microbial treatments on carcasses, not to mention that
the requested increase in the quota and the counter-offer are
light-years apart, all of which will likely slow or impede
near-term success on this front.

AIRLINE PURCHASING WARS

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5. (U) Texas Pacific Group (TPG) teams up with British
Airways (BA) and Spanish companies Vista Capital, Ibersuizas,
and Quercus to buy Iberia: Should the takeover bid succeed,
Spanish firms would retain a majority of the voting rights.
This is necessary for Iberia to maintain lucrative routes to
Latin America. Santander is involved in financing the
takeover bid. The American firm is known for having
previously purchased Continental Airlines and recently bought
Alltel together with Goldman Sachs. (Comment: Interestingly,
the TPG/BA bid has not provoked nationalist reactions,
presumably because the majority of the voting rights would
remain in Spanish hands. Nonetheless, if this bid prospers
on one of Spain's "flagship" companies, it would say a lot
about Spanish receptivity to foreign investment.) (Expansion,
May 22, 2007)

RENEWABLE ENERGY BUSINESS FOR SALE


6. (U) Iberdrola to sell 20% of its renewable energy business
and hopes to raise Euros 4 billion on the stockmarket:
Iberdrola needs the money given its recent Euros 17.1 billion
purchase of Scottish Power. The renewables business is
grouped together in the Iberenova subsidiary. Even after the
sale Iberdrola will maintain control of Iberenova. Wind
power is overwhelmingly what Iberenova does in the renewables
area. It already generates a significant share of its
business in the U.S., and its largest expansion plans are in
the U.S. (El Pais, May 23, 2007)

TOURISM INCREASES IN SPAIN


7. (U) In the first quarter of 2007, there was a 2.7%
increase in tourism over the previous year. According to a
GoS FRONTUR survey a total of 14.9 million tourists came to
Spain during the first quarter, primarily to Madrid,
Andalucia, and Valencia. The increases were mainly
attributed to tourists from the US, Portugal and Ireland.

DECREASING PAY GAPS FOR THOSE WITH DEGREES


8. (U) The salary difference in Spain for those with degrees
and those without is decreasing. According to a recent
report by the "Servicio de Estudios de la Caixa" the salary
gap between those with university degrees and those with high
school degrees fell 40% between 1997 and 2004. The study
indicates that the decrease is caused by a saturation of the
market of university degrees without a similar increase in
corresponding jobs. Ten years ago, 19% of Spaniards between
the ages of 25 and 64 had college degrees. In 2004, that
rate increased to 26%. This overabundance of workers with
degrees has decreased the value of a university degree and
forced many to take lower-paying jobs.

RAIN RAIN GO AWAY


9. (U) Unusually high rainfalls over the past few weeks
across Spain have caused flooding in various parts of the
country, particularly in Castilla-La Mancha, the
Mediterranean coast, and Madrid. The rains have affected
railways traffic in such cities as Madrid, Valencia, Alicante
and Murcia. Well-used road-ways in Madrid such as the M-30
beltway, including a number of newly opened Madrid tunnels
have also suffered severe flooding, days before the local
elections. Given that Madrid mayoral candidate and incumbent
Alberto Ruiz-Gallardon (PP) has toted his accomplishments in
public work programs and roadways, it remains to be seen
whether the rains will affect the votes. Despite the heavy
rainfall, reservoirs have still not reached their full
levels, some recent estimates indicating that the reservoirs
were only at 64.8% of total capacity. Previous droughts were
severe enough that even with the recent abundance of rain,
water levels are still below their ten-year average.
AGUIRRE