MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT -

UNCLAS SECTION 01 OF 02 MADRID 001262

SIPDIS

SIPDIS

EUR/WE

E.O. 12958: N/A
TAGS: EAGR ECON EFIN EIND ELAB ETRD TBIO SP EINV
UK, SMIG
SUBJECT: MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT -
JUNE 18


MADRID 00001262 001.2 OF 002


ECON: Weakening Spanish Economy
ECON: GoS to have Budget surplus for the 4th year
EINV/EFIN: Spain's big banks selling off real estate and debt
EAIR: Spanair for sale
ENRG: Miscalculation causes debate over electricity prices
EAGR: Olive production hits record highs
SOCI: Madrid makes top 30 most expensive city list
ECON: Taxes in Spain


THE STAGE IS SET FOR THE BEGINNING OF THE END OF THE ECONOMIC
BOOM


1. (U) Andrew Garthwaite, Chief Global Equity Strategist,
summarized local opinion in an editorial about the weakening
Spanish Economy. Garthwaite believes that Spain's economic
boom was caused by the ECB interest rate being too low for
Spain's unique economic circumstances. Garthwaite believes
that as interest rates trend upward this will have a negative
effect on consumers who have 75% of their debt at floating
rates.


2. (U) Garthwaite further points out a number of potential
weaknesses in the Spanish economy. First, both businesses
and Spanish consumers have too much debt. Second, the ratio
of housing prices to wages is too high implying that housing
is overvalued. Third, too much of the Spanish economy (20%
of total, and 33% of growth) is dependent upon in the real
estate sector. Spain is also losing its competitiveness in
labor due to growing unit labor costs relative to other EU
countries. Finally, Spain's stock market appears over
valued, including the blue-chip IBEX index.


3. (U) Despite these warning signs, Garthwaite believes that
with government debt being relatively low at 21% of GDP, and
continuing immigration, Spain should have the flexibility to
adjust smoothly to the end of its boom and avoid recession.
(Note: Most Embassy contacts in the private sector continue
bullish on the economy has been overwhelmingly optimistic.
Despite the obvious existence of "weaknesses" and the
weakening housing market, our contacts tell us that the
Spanish economy will avoid serious negative repercussions.
(June 14, Financial Times)

BUDGET SURPLUS DESPITE TAX INCREASE


4. (U) The GoS reports that tax revenues in Spain are
expected to rise by 7% next year and will lead to a budget
surplus for the fourth consecutive year. Despite this
optimistic news, the government reports that it wishes to
continue to be prudent on fiscal matters and maintain a
balanced budget. GoS officials are concerned that increases
in social security costs and other social spending will
stress the spending side of the ledger. The European
Commission indicates that Spain will see a budget surplus of
1.4% of GDP in 2007, a much more optimistic prediction than
GoS' 7% estimate.

SPAIN'S BIG BANKS SELLING OFF REAL ESTATE AND DEBT


5. (U) Following a trend among large banks, Bank of Santander
has decided to sell off nearly all of its real estate, mostly
company offices. In what will be the largest real estate
sale ever in Spain, Bank of Santander expects to make a
profit of about 1.4 billion euros on properties worth an
estimated 4 billion euros. (Comment. Presumably to help pay
for proposed acquisition of Banco Real of Brazil and Banca
Antonveneta of Italy.) In a similar move, BBVA announced that
they decided to sell most of its offices in Bilbao and Madrid
in an effort to relocate its various offices to a centrally
located headquarters in Madrid.


6. (U) In other news, BBVA has decided to auction off 720
million euros of delinquent debt in order to increase
liquidity as well as escape an anticipated rise in delinquent
debt in Spain. This follows a 2005 Banco Santander move to
sell off a Spanish record 1.4 billion worth of delinquent
accounts. Banks are also considering selling some of their
current mortgage loans, also in anticipation of an increased
risk of delinquency of payment in that sector.

SPANAIR FOR SALE


7. (U) The Scandinavian airline SAS has announced that it
will sell Spanair. Spanair Spain's second biggest airline,
has not been profitable under SAS and has generally been
problematic for the company. Gonzalo Pascual, the current
Spanair Chairman, and also president of Marsans said that he

MADRID 00001262 002.2 OF 002


wants to launch a full takeover and will use the funds
generated from the recent sale of Marsans' cruise business to
Royal Caribbean. Pascual was one of the original founders of
the twenty five year old Spanair.

DEBATE ON FUTURE ELECTRICITY PRICES


8. (U) Last week, the Ministry of Industry in conjunction
with the National Commission on Energy announced a 1.8
percent hike for August. GoS recently discovered that
Spanish energy firms had erroneously overcharged clients in
2006 to the tune of 1.1 billion euros (a result of an
accounting issue involving emission credits). Energy
companies will feel the affect of this miscalculation
presumably as the debate on energy prices continues to gain
momentum.

OLIVE PRODUCTION HITS RECORD HIGH


9. (U) Olive production has reached record levels, according
to the Olive Oil Agency in a record harvest. The large
supply has pushed down prices domestically and of Spanish
exports of olive products.

MADRID MAKES THE TOP 30 MOST EXPENSIVE CITIES LIST


10. (U) Madrid and Barcelona are two of the 30 most expensive
cities in the world for foreigners employed in a foreign
company according to a study from Mercer Human Resource
Consulting. Madrid occupied position 53 last year and jumped
to 26th place. Barcelona moved up 25 places from last years
standings up to 31. The average monthly rent for an
unfurnished two bedroom apartment in Madrid is 1,400 and
1,500 euros in Barcelona. Whereas in Moscow, the city that
holds the number 1 ranking, average monthly rent is 3,036
euros. The reason for this showing is attributed to the
strength of the euro and other European currencies that have
caused European cities, not only in Spain, to have scaled
positions.

TAXES IN SPAIN


11. (U) In 2006 Spain's tax percentage climbed to 36.52% of
GDP, although it still remains below the EU average of 41.2%.
This figure has been rising at about 1% per year throughout
Zapatero's term and is a product of Spain's economic boom and
reduction in unemployment. Although this economic indicator
gives no evidence of an economic slowdown, it is considered
too early for the effects of a slowdown to have shown up in
Spain's tax revenues.
AGUIRRE