MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT -

UNCLAS SECTION 01 OF 03 MADRID 001734

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TAGS: ECON EFIN EIND ENRG ETRD SP EINV EAGR SOCI
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SUBJECT: MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT -
SEPTEMBER 3

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Table of Contents:

EINV: Macro picture getting a bit cloudier
EFIN: New mortgages declining; evidence of housing market
slowdown
EFIN/SOCI: Employment numbers worsening, definitive data not
available
KIPR/BEXP/BTIO: Meeting with Ministry of Industry Subdirector
General for EU trade policy
SENV: UN Convention to combat desertification
ETTC: GOS to appeal EC decision to fine Telefonica?
ENRG: Algeria's Sonatrech terminates multi-billion dollar
contract with Spanish gas companies
ENRG/EINV: Germany's EON acquires Energi E2 Renewables
Ibericas for 722 million euros
EFIN: Two Spanish women make Forbes 100 list

MACRO PICTURE GETTING CLOUDIER


1. (U) For the first time, on 9/5/07, Economy and Finance
Minister Solbes conceded that there was more "uncertainty"
about prospects for the Spanish economy, although he was
quick to add he still thinks that Spain will grow by "close
to" 3% in 2008, which is still higher than the eurozone
average. Consistent with Zapatero's preferred upbeat
disposition, the Spanish president met with Santander CEO
Botin on 9/6/07, and both men agreed the Spanish banking
sector was well positioned to withstand the fallout from the
U.S. subprime mortgage problem. However, the press continues
to publish stories indicating a slowdown in the housing
market. There are more human interest stories about people
having problems coping with their adjustable rate mortgage
payments, which are rising rapidly as a result of increased
Euro interest rates; on average, Spaniards already devote
almost half their income to mortgage payments. Moreover, the
number of new unemployed people in August, 2007 was about
twice as high as in August, 2006, putting a further damper on
economic optimism. The Ibex-35 rose by 0.76% on Monday and
Tuesday but then dropped by a sharp 2.4% on Wednesday. On
Thursday, there was a modest fall of 0.29%. As of midday,
Friday, September 7, the market is down by almost 1%.
(Comment: The European Central Bank's decision Thursday not
to raise interest rates again should provide a boost to the
Spanish economy. However, there is no doubt that something
is beginning to change in people's views about the economy.)
(All media)

NEW MORTGAGES DECLINING; EVIDENCE OF HOUSING MARKET SLOWDOWN


2. (U) Almost 3% fewer mortgages were signed in the first
half of 2007 compared with the first half of 2006, but the
average mortgage amount is up by 6%. This is the first time
in six years that the number of new mortgages declined, which
is being interpreted as evidence of a slowdown in the housing
market. In an effort to calm fears of a "hard landing," the
new Housing Minister, Carme Chacon, has been saying that
European Central Bank (ECB) interest rate hikes have probably
neared their peak. In another housing related story,
Autonomous Community of Andalucia President Manuel Chaves
promises to provide housing to all who earn less than 3,100
euros a month as a "right". Economy and Housing Minister
Chacon supported the idea, but Finance Minister Solbes
expressed doubts about the initiative. (Comment: Chacon's
statements on interest rates are speculative, of course, as
the ECB sets interest rates independently. Solbes' statement
on the Chaves housing initiative is not the first time he has
expressed public disagreement with another minister. As the
elections approach, he will find increasing demands for
spending. (El Pais, 9/4/07, all media)

EMPLOYMENT NUMBERS WORSENING, DEFINITIVE DATA NOT AVAILABLE


3. (U) Unemployment was 7.95% as of June 30, 2007, the lowest
unemployment figure during the last 30 years. However, since
then there have been reports of layoffs in the construction
sector. Also, in August, 2007 the number of new registered
unemployed people was almost 58,000. In August, 2006, there
were about 27,000 new registered unemployed individuals.
(Comment: The doubling of this year's August unemployment
figure has been interpreted as a sign of possible future bad
news on the employment front. The data are not definitive,
but it may turn out that a 7.95% unemployment rate remains
the best record on unemployment for a while. In July 2007,
EU unemployment was 6.8% and the eurozone unemployment rate
was 6.9%. These numbers are better than Spain's, but what
often matters politically is trends and Spanish unemployment
has been trending downwards for some time, contributing to
the country's optimism. Should the trend reverse, economic

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psychology could change.) (El Pais, 9/5/07)

MEETING WITH MINISTRY OF INDUSTRY SUBDIRECTOR GENERAL FOR EU
TRADE POLICY


4. (U) EconCouns and EconOff meet with Ministry of Industry
Subdirector General for EU Trade Policy. We delivered the
IPR Special 301 demarche, expressed interest in working on an
import safety dialogue, inquired about EU China textile
safeguards, and urged settlement of the Rosalini case
(separate reporting on these issues to come). Our Industry
contact said Spain would be interested in sharing ideas on
import safety and noted that his ministry was now more active
in this regard, as well as the Ministry of Health's Consumer
and Safety Commission. He expressed concern about future
container scanning requirements and the possible
extraterritorial dimension of U.S. Iran financial sanctions.
He listened to what we had to say about Rosalini, but noted
that the Spanish legal system allowed for criminal charges to
be filed by Autonimous Community governments. (9/5/07
meeting).

UN CONVENTION TO COMBAT DESERTIFICATION


5. (U) In conjunction with its sponsorship of the U.N.
Convention to Combat Desertification conference taking place
in Madrid this week and next, the GOS announced that its
contributions to the U.N. to combat desertification since
2001 total more than 155 million euros. Since 2004, the GOS
has increased its level of support, particularly through
projects in African countries including Morocco, Tunisia,
Algeria, Mauritania, Senegal and Guinea-Bissau. In her
speech to open the conference, Environment Minister Cristina
Narbona emphasized the obligation developed nations have in
doing more, particularly given their causal role in global
climate change and its effect on water depletion and
deforestation. (NOTE: The USG is also a party to the
convention, and a USG delegation is participating in the
conference in Madrid. END NOTE). (GOS, 9/5/07).

GOS TO APPEAL EC DECISION TO FINE TELEFONICA?


6. (U) Media reports indicate that GOS is seriously
considering appealing the July European Commission decision
to fine Telefonica 152 million euros for anti-competitive
pricing practices. The appeal would be based on complaints
put forth by Spain's Telecommunications Market Commission
(CMT),which argues that the EC ruling infringes on the
competencies of member states' regulatory bodies. The CMT,
which approved the Telefonica rates that the EC later found
to be "anti-competitive," adds that if the EC ruling holds
firm, it may undermine the CMT's ability to act as a credible
regulatory body in the future. The CMT has further
complained that Brussels failed to include Spain's regulatory
body in its preliminary investigations against Telefonica,
violating principles of cooperation between member states and
the EC. Telefonica, in its role of majority operator of
wide-band service, was reportedly charging prices that were
too high to allow rivals to obtain reasonable profits and
compete fairly in that market.

ALGERIA'S SONATRECH TERMINATES MULTI-BILLION DOLLAR CONTRACT
WITH SPANISH GAS COMPANIES


7. (U) Algerian parastatal gas company Sonatrech recently
terminated a multi-billion euro gas development contract with
Spanish companies Gas Natural and Repsol, saying that the
Spanish companies were responsible for excessive project
delays. The decision, which caused stocks of both companies
to fall significantly, has received prominent local press
coverage over the past week and has raised questions about
the role the GOS should have played in its interactions with
Algeria.


8. (U) Representatives from opposition Partido Popular have
argued that the Zapatero Administration has not been
sufficiently supportive of the Spanish gas companies and add
that GOS' policy towards Algeria on natural gas has been too
conciliatory. For their part, GoS officials have attempted
to express disapproval for Sonatrech's decision while
distancing themselves from the dispute. Algeria is Spain's
largest supplier of natural gas, supplying almost a third of
Spain's consumption.

GERMANY'S EON TO ACQUIRE ENERGI E2 RENEWABLES IBERICAS FOR
722 MILLION EUROS


9. (U) Germany utility company E.ON, which lost its previous

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bid to acquire Spanish power company Endesa, has agreed to
acquire Energi E2 Renewables Ibericas (E2-I) for 722 million
euros. E2-I operates wind farms in Spain and Portugal that
currently generate 260 megawatts of electricity. The move is
seen as an effort by E.ON to achieve a balanced portfolio of
power generating assets by diversifying into renewable
projects. This acquisition, along with the announced
purchase of Spanish power utility Viesgo, positions E.ON as
the fourth largest company in Spain's power market. (Energy
Business Review Online, 9/5/07)

TWO SPANISH WOMEN MAKE THE FORBES 100 LIST


10. (U) Ana Patricia Botin, chairwoman of Banesto bank, and
Rosalia Mera, co-founder of the Inditex textile empire,
ranked 40th and 76th, respectively, in this year's Forbes
magazine's list of The World's 100 Most Powerful Women.
Botin is considered front-runner to succeed her 72-year-old
father Emilio as chairman of Grupo Santander when he retires.
Rosalia Mera is a philanthropist active in the real estate
sector, and her personal wealth is estimated at over 1.2
billion euros. (El Pais)
AGUIRRE