MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT -

UNCLAS SECTION 01 OF 02 MADRID 000981 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 14 MADRID 00000981 001.2 OF 002 EINV: First quarter shows economy increased by 4% EINV/ETRD: Lower growth forecasted as early as 2008 EINV/ECON: Telefonica sells Endemol for 2.6 billion euros EINV/ECON: Zapatero to visit Panama, possibly seeking cooperating tax haven EINV/ETRD: AMCHAM survey results - US investors leery of investing in Spain ELAB: Galicia workers strike for new contracts SPANISH ECONOMY CONTINUES TO GROW ¶1. (U) Spanish economy grew by 4% on an annualized basis during the first quarter of 2007, according to the National Institute of Statistics (INE). The composition of the growth (exports, domestic demand, construction etc.) will be released in the next couple of weeks. Analysts will be looking to see if Spanish exports are increasing or if the fragile construction sector remains the engine of growth. (Comment: Recent stock market jitters probably came too late in the quarter to have an impact on the figures. It will be interesting to see if growth can be sustained in the subsequent two quarters. Observers remain skeptical that Spain can maintain this pace in growth given productivity problems and low competitiveness in general. MORGAN STANLEY FORECASTS LOWER GROWTH STARTING IN 2009, MAYBE EVEN IN 2008 ¶2. (U) Morgan Stanley analyst Eric Chaney has three scenarios for the Spanish economy. The most pessimistic one says Spanish growth will average 2% a year between 2008 and 2017. Chaney talks about a possible recession in 2009 as well. Why? European Central Bank interest rate hikes responding to French/German salary increases; bankruptcies in the construction sector; and a global recession sparked in part by increased protectionism. The first and third of Chaney's factors are outside of Spanish control. The other two scenarios contemplate softer landings but still significantly slower growth. (Comment: The reality is that everybody knows that Spain's construction-led growth model cannot last indefinitely. The issue is how much longer it will last and more to the point, when does Spain stop performing above the Eurozone average? For President Zapatero, who has to fight parliamentary elections by March 2008 at the latest, hopefully not for a year or so.) (Expansion, May 18, 2007) MEDIASET AND TELE 5 BUY ENDEMOL ¶3. (U) Berlsusconi-controlled Mediaset and Tele 5 buy TV producer Endemol from Telefonica for Euros 2.6 billion: This acquisition means that in addition to Berlusconi owning Spain's most profitable TV channel, Tele 5, Berlusconi now also owns Spain's biggest TV producer, Endemol. Among other programs, Endemol produces the Spanish version of the hugely popular "Big Brother". COOPERATING TAX HAVEN STATUS FOR PANAMA? ¶4. (U) Spanish Construction Companies want GOS to declare Panama a "cooperating tax haven" in order to compete for contracts for canal expansion: President Zapatero's Economic Adviser, David Taguas, is involved in negotiating such status for Panama and reportedly met with Panama's Vice President to discuss the matter. President Zapatero will visit Panama on July 17. There are procedures worked out by the OECD for obtaining "cooperating tax haven" status. (Comment: Given the Euros 4 billion at stake, it is understandable that Spanish construction companies are pressuring the Spanish government on this matter.) (El Pais, May 21, 2007) AMCHAM REPORTS TENTATIVE ATTITUDE FOR NEW US INVESTMENTS IN SPAIN ¶5. (U) AmCham "Barometer" of American companies reports cautious attitude towards new investments in Spain: According to the AmCham survey, which is conducted every year, American firms do not see much scope for increasing their investments in the automotive, chemicals or metallurgy sectors. The survey finds limited opportunities in consulting and less specialized services. Government bureaucracy and the inflexible labor market are the U.S. firms main gripes. (Comment: There is no doubt that U.S. firms will invest less in manufacturing in Spain over the coming years as Spanish wages have mostly caught up with their richer European neighbors and productivity lags in Spain. What this survey does not capture, however, is whether U.S. firms are investing less in general overseas. Moreover, it does not MADRID 00000981 002.2 OF 002 capture the relatively new phenomenon of massive American portfolio investment in Spanish firms, which is likely to continue.) (Expansion, May 21, 2007) PROTEST IN VIGO ¶6. (U) Shipyard workers in Vigo, Galicia, continued their almost two week long strike to protest the high ratio of workers employed via temporary contracts (a breach of an agreement from the previous year). The protest turned aggressive this week with laborers blocking streets and setting fires to tires and trash cans. On Tuesday, the protesters broke into the Council headquarters throwing hundreds of files out of the windows. LLORENS