MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT -

UNCLAS SECTION 01 OF 03 MADRID 001440

SIPDIS

SIPDIS

EUR/WE

E.O. 12958: N/A
TAGS: EAGR ECON EFIN EIND ELAB ETRD KIPR SP EINV UK
SUBJECT: MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT -
JULY 16


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EFIN/EINV: Ambassador hosts Finance Minister Solbes with
AMCHAM
PGOV/ECON: Juan Costa to oversee PP's electoral program
EINV/ECON: Spain 24th in World Technology Competitiveness
league
EINV/EFIN: Possible Real Estate Bubble will not affect all
companies equally
ELAB: Businesses have not yet complied with new gender
equality law
EAGR/BEXP: Aflatoxin inspections to begin on US almond exports
ECPS/EFIN: Telefonica to focus on internal growth
SENV/EINV: Inditex attempts environmentally friendly growth
EINV: New law to reduce minority shareholder's ability to
prevent takeover bids

RAISING THE PROFILE OF ECONOMIC-COMMERCIAL ISSUES IN THE
BILATERAL RELATIONSHIP - AMBASSADOR HOSTS FINANCE MINISTER
SOLBES WITH AMCHAM ON JULY 17


1. (U) In what we hope to be the first of biannual meetings,
the Ambassador led a discussion with Vice President and
Finance Minister Solbes and AmCham board members on economic
issues of interest to the AmCham. Ambassador attended a
similar event with the Minister of Industry on May 10, and we
intend to organize a meeting along similar lines with the
Minister of Agriculture towards the end of the year. The
AmCham members raised the double taxation treaty, holding
company tax issues, public sector contract bidding
challenges, the lack of English proficiency in Spain, and the
difficulty of getting visas for high-tech staff in Spain.
The Minister of Finance was in his element. Without
necessarily agreeing with all of the lunch participants, he
provided perspective and was open to reviewing the AmCham
suggestions. The Minister also said growth would slow down
next year to 3.2% from 4% this year, although that was a good
thing according to him. His main concern is not the effect
of European Central Bank interest rate hikes per se but
rather how the stronger euro might affect the economic
situation. Septel to follow.

OPPOSITION CONSERVATIVE PP PARTY CHOOSES RODRIGO RATO PROTEGE
JUAN COSTA TO OVERSEE DEVELOPMENT OF ELECTORAL PROGRAM


2. (U) The 42 year old Costa is a former Science and
Technology Minister. He will edit the PP's electoral
program. (Comment: The Costa appointment is widely seen as
evidence of resigning IMF Chairman and former Finance
Minister Rodrigo Rato's influence on the PP. The appointment
may presage economics gaining greater prominence in the PP's
message. (Expansion, July 17, 2007)

SPAIN NUMBER 24 IN WORLD TECHNOLOGY COMPETITIVENESS LEAGUE


3. (U) The Economist Intelligence Unit (EIU) says Spain is
ranked 24th in its world technology competitiveness report.
The EU says the UK occupies the number 4 spot, Germany number
16, France number 18 and Italy number 23 so Spain is last
among the big five EU economies. The EIU study was financed
by the Business Software Alliance, which also factored in the
importance of a good Intellectual Property Rights
environment. (Cinco Dias, July 12, 2007)

NOT ALL SPANISH COMPANIES EQUALLY EXPOSED TO POSSIBLE REAL
ESTATE BUBBLE BURST


4. (U) The well known FT commentator Leslie Crawford,
recently said: "Since the start of the year, the Spanish
economy has felt like a huge party on the Titanic, cruising
heedlessly onto an iceberg of corporate debt." She focuses a
lot on the increase in corporate debt and signs that the
housing market is finally cooling down. For instance,
property sales fell 7% in 2006 compared with 2005. Crawford
then goes on to separate Spanish companies into three broad
categories. First, firms that are investing in capital goods
(increased investment in this sector is something the
government likes to trumpet) to meet demand from Germany in
many cases. GE Spain CEO Mario Armero says: "Investment in
capital goods is a new motor of economic growth." Second,
companies, often construction firms, that have bought
controlling stakes in other enterprises such as Ferrovial's
purchase of UK airport operator BAA. Third, construction
groups that have borrowed heavily to buy non-controlling
stakes in other companies - Crawford mentions Sacyr
Vallehermosa, ACS, Acciona and Colonial. She thinks these
companies are very vulnerable to interest rate hikes and a
consequent slowdown in real estate. Crawford concludes that
this economic cycle will not necessarily "end in tears," but
does think that some major Spanish firms are no longer
"masters of their own destiny." (Comment: Interestingly the

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only firm in the capital goods investing category that
Crawford mentions is an American company, GE. That does not
mean there aren't Spanish firms that invest in capital goods.
There are a number, especially in the renewable energies
sector, but it is interesting nonetheless. Spain still does
not have a single really big flagship technology-based
company.) (FT July 14)

EQUALITY LAW UPDATE: BUSINESSES HAVE NOT YET COMPLIED


5. (U) Minister of Labor Jesus Calderon reported this week
that businesses had yet to draft plans that would comply with
the recently passed "equality law" (Ley de Igualdad 2007).
Among other provisions, the law mandates that any business in
Spain with more than 250 employees develop a "gender action
plan" to actively "prevent discrimination based on gender."
The law envisions for example that businesses would provide
additional family benefits such as paternity leave to those
workers who have not traditionally received it, and would
potentially take measures to increase female representation
in higher levels of the corporate world. This law has
received much criticism from local businesses who say it is
unwieldy and interventionist. Though still early for full
implementation, experts worry that the more than 4,700
businesses currently subject to the law will have difficulty
complying with it.

AFLATOXIN INSPECTIONS TO BEGIN ON US ALMONDS


6. (U) Spain is the most important export market for U.S.
almonds, and the Government of Spain (GOS) will start
inspecting all U.S. almond shipments for aflatoxin beginning
September 1, 2007, in compliance with a European Commission
(EC) directive. The inspection rate will be 100 percent for
U.S. shipments that are not exported under the Almond Board's
voluntary aflatoxin sampling program (VASP) and at a five
percent rate for VASP shipments. In a July 18, 2007, meeting
with the health ministry (charged with conducting the
increased inspections),the GOS agreed to provide the U.S.
Government through the U.S. Embassy any and all U.S. almond
inspection-related data beginning September 1, 2007.
USDA/Washington will use the data to monitor aflatoxin levels
in shipments under the VASP, versus those not under the VASP,
and to ensure that the inspection rates are not in excess of
those mandated by the EC.

TELEFONICA SWEARS OFF FURTHER LARGE ACQUISITIONS TO FOCUS ON
INTERNAL GROWTH


7. (U) Spanish telecom giant Telefonica has promised no more
major deals. Although this would fly in the face of industry
trends, for Telefonica the move makes sense. More than 100
billion euros worth of acquisitions over the last ten years
has kept Telefonica a step ahead of rivals through growth
abroad. However, Telefonica has accumulated 55 billion euros
worth of debt. Furthermore, Telefonica faces the industry
wide challenges of poor business in fixed-line phone service,
and high competition in European mobile phone and high speed
internet markets. Telefonica says that now the time is right
to start paying down debt and concentrating internally on
improving its services. Whatever Telefonica's course, the
future looks bright. Analysts believe that estimates of a
14%-20% increase in operating profits this year could be
realistic if Telefonica performs strongly in Mexico and
Brazil. If Telefonica can improve overall service to win
business in Europe and reap the benefits of Latin American
growth, the firm should continue to prosper.

INDITEX ATTEMPTS ENVIRONMENTALLY FRIENDLY GROWTH


8. (U) The Spanish textile group and owner of the Zara
fashion brand is in the process of spending 380 million euros
improving logistical operations from 2006-2008 in order to
facilitate growth, particularly in Europe, but also in
emerging markets. As part of this plan, Inditex expects to
spend 70 million euros in order to obtain 50% of the energy
required to run its logistical operations from renewable
sources by 2010. This will be accomplished through the
installation of solar panels on its logistical operations
centers, the use of bio diesel fuels and low emission
vehicles in its transportation fleet, and by improving energy
efficiency in its stores and factories. Inditex, which
already uses solar power at its headquarters in Arteixo, says
that it expects its investment to be both environmentally
friendly and profitable.

NEW LAW TO REDUCE THE POWER OF MINORITY SHAREHOLDERS TO
PREVENT TAKEOVER BIDS


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9. (U) The GOS is finalizing a new law that will reduce the
ability of a minority shareholder protecting a company from a
potential takeover bid. The new law, scheduled to take
effect on August 13, says that a minority shareholder must
have 30% of the voting rights versus 25% today, in order to
be able to prevent a takeover bid. Another "lesson learned"
from the controversial takeover attempt of the energy utility
Endesa reflected in the new law is the requirement that a
company that decides to defend itself from a takeover bid
must submit to a general meeting of shareholders. (Expansion,
July 17)
AGUIRRE