MADRID ECONOMIC WEEKLY, OCT. 27-31

UNCLAS SECTION 01 OF 02 MADRID 001141 SIPDIS STATE FOR EUR/WE, EEB/IFD/OMA, EEB/ESC/IEC TREASURY FOR OIA/OEE/W.LINDQUIST E.O. 12958: N/A TAGS: ECON EFIN ELAB KIPR SP SUBJECT: MADRID ECONOMIC WEEKLY, OCT. 27-31 MADRID 00001141 001.2 OF 002 Contents: ECON: GDP Contracts in Q3 and GOS Budget Deficit Continues Rise ELAB/EFIN: GOS Considers Labor, Mortgage Measures ECON: Inflation Drops to 3.6% EFIN: Stocks Drop but Big Bank Profits Remain Healthy EFIN: GOS to Start Buying Bank Assets in November EFIN: Savings Bank Mergers Begin KIPR: GOS to Host IPR Conference GDP Contracts in Q3 and GOS Budget Deficit Continues Rise 1.(U) Spain's GDP was 0.2% lower in the July-September quarter than in the previous quarter, according to a Bank of Spain estimate. This is the first quarter-on-quarter contraction since 1993. Private consumption and residential investment are the two sectors that have slowed the most. This figure does not include much of the impact of the drop in confidence resulting from the mid-September financial crisis. The slowdown is affecting the GOS' fiscal position; for the year to September, the government's deficit was 1.24% of GDP. (El Pais, 11/1 and 10/29) GOS Considers Labor, Mortgage Measures 2.(U) The Labor Ministry met with labor and business groups to discuss subsidies for firms that hire workers and for the self-employed. The GOS also is reported to be considering measures to help the unemployed meet mortgage payments. (El Pais, 11/1; Expansion, 11/1) Inflation Drops to 3.6% 3.(U) Inflation fell in October to 3.6% on a year-on-year basis, according to the official estimate of the harmonized consumer price index. GOS officials credited declining oil prices; the rate peaked at 5.3% in July when oil was over $147/barrel. Secretary of State for Economy David Vergara told reporters October 28 that inflation would finish the year close to 3% and could fall below 3% in the first half of ¶2009. GOS officials expressed hope that declining inflation in Spain and other countries could lead the European Central Bank to cut interest rates, as ECB President Trichet suggested in an October 27 Madrid speech. It is not clear how much of an effect on inflation the economic slump is having separate from that of the oil price decline. (Expansion, 10/30; All press, 10/28) Stocks Drop but Big Bank Profits Remain Healthy 4.(U) The IBEX-35 blue chip stock index ended its worst month in the last ten years, falling 17% in October. Many stocks now have dividend yields greater than low-risk bond or deposit yields. Spain's two largest banks, Banco Santander and BBVA, each reported third-quarter profits slighly higher than their third-quarter 2007 levels. (Expansion, 11/1 and 10/29) GOS to Start Buying Bank Assets in November 5.(U) The GOS' Financial Asset Acquisition Fund (FAAF) governing council, chaired by Vice President and Economy/Finance Minister Solbes, held its first meeting October 27 and established procedures to purchase bank assets via auction. In November, the FAAF will buy for up to two years up to 5 billion euros of mortgage-based assets and other assets that have been issued since August 1, 2007 and have credit ratings of AA or better. In December, the FAAF will buy up to 5 billion euros of new mortgage-based assets with credit ratings of AAA. One article suggested that bankers viewed the volumes involved as insufficient to generate new lending and that banks would use the proceeds to meet upcoming obligations. (Expansion, 10/27; El Confidencial, 10/28) Savings Bank Mergers Begin 6.(U) Savings banks (cajas) in two provinces of the Basque region approved a merger that will create Spain's fifth largest caja. BBK and Kutxa will become the Caja de Ahorros de Euskadi, the Basque Savings Bank. The new entity has holdings that could be worth up to six billion euros in companies such as Iberdrola and Enagas. Separately, Catalan regional president Jose Montilla met with the heads of the region's ten cajas amid seculation that some of them might merge. Fitch Ratings lowered its rating of Caixa Laietana, a MADRID 00001141 002.2 OF 002 small Catalan caja heavily exposed to construction and real estate, from BBB to BBB, only two steps above junk bond status. (El Confidencial, 10/28) GOS to Host IPR Conference 7.(U) The telecommunications secretariat of the Ministry of Industry, Tourism, and Commerce will host its second annual international conference on intellectual property November 25-26 as part of the International Digital Content Forum trade show. The US Patent and Trademark Office will be represented, and Department of Commerce representation is possible as well. (El Pais, 11/27; Embassy AGUIRRE