SCENESETTER FOR CODEL DODD VISIT TO SPAIN DEC.

UNCLAS SECTION 01 OF 04 MADRID 001277 SENSITIVE SIPDIS STATE FOR EUR/WE AND H:AMACDERMOTT PASS TO SENATE FOREIGN RELATIONS COMMITTEE FOR FULTON ARMSTRONG E.O. 12958: N/A TAGS: ECON OREP PREL SP SUBJECT: SCENESETTER FOR CODEL DODD VISIT TO SPAIN DEC. 10-12 //INTRODUCTION AND SUMMARY// ¶1. (SBU) Embassy Madrid welcomes your visit. The Spaniards you meet will be eager to share their assessment of financial developments, Latin American issues, and bilateral relations. Our elections were closely followed here, and a strong atmosphere of goodwill and optimism has emerged for increasingly closer bilateral relations and cooperation. Our current relations on counterterrorism, counternarcotics, and military issues are strong. The end of a long housing boom and the international financial crisis have led to a severe economic slowdown that the GOS has been unable to prevent, costing it public support. The GOS believes Spain,s cautious banking regulation and the importance of its banks strengthen its case for continued participation in the G-20 summit process even though it is not a member of the G-20. //BILATERAL RELATIONS// ¶2. (SBU) As you are aware from your many years of leadership of the U.S.-Spain Council, Spain is an important friend and ally of the U.S., and we value its cooperation. The fight against terrorism, narcotics, and human trafficking forms one of the cornerstones of our bilateral relationship, and Spanish troops are carrying out important missions in countries such as Afghanistan and Lebanon. Spain has long fought a domestic terrorist threat from the Basque terrorist group ETA and suffered tragically from Islamic extremist terrorism in the 2004 Madrid train bombings. We need to be innovative in finding new and improved avenues for bilateral cooperation with this trusted multilateral ally against the common threats we face. Spanish officials closely followed our elections and expect relations at the senior levels of government to improve, giving us the opportunity to strengthen cooperation. //POLITICAL BACKGROUND// ¶3. (SBU) President Zapatero's center-left Spanish Socialist Workers' Party (PSOE) was the victor in the March 9 general election, although it remains a minority government (seven seats shy of a working majority in the 350-seat lower house of parliament) that depends upon the support of other parties to pass legislation. The opposition Partido Popular (PP) also gained seats and retained Mariano Rajoy as party leader, though the party has suffered from internal divisions. Zapatero kept most of the key players in his Cabinet in their posts. First Vice President and Minster of the Presidency Maria Teresa Fernandez de la Vega is Zapatero's political deputy, while Second Vice President and Minister of Finance and Economy Pedro Solbes is his economic deputy. Miguel Angel Moratinos remained in place as Minister of Foreign Affairs. The most prominent change was that Carme Chacon became Spain's first-ever female Minister of Defense; she is described in the press as a possible eventual successor to Zapatero. //ECONOMIC CONTEXT// ¶4. (SBU) Spain enjoyed one of the fastest growing economies in Europe for the 15 years through 2007, but the good times have come to an abrupt halt. A housing boom that contributed greatly to growth for several years ended suddenly last year; housing prices have fallen, construction has almost stopped, and unemployment has risen rapidly to almost 13 percent. The international credit crisis has aggravated the situation, as Spain,s high current account deficit leaves it dependent on now-scarce crossborder lending. It is widely assumed that the economy is already in a recession, and GDP is expected to contract further in 2009. Months of worse-than-predicted economic news have led to widespread criticism of Zapatero and his economic policymakers for their upbeat predictions during the campaign and for having downplayed the economic difficulties long after many others were saying Spain was in a crisis. Public skepticism has been aggravated by the failure of a series of GOS measures to noticeably affect the slowdown and by Zapatero's initial efforts to blame the U.S. subprime mortgage crisis for all of Spain's troubles. Now that the budget surplus of the previous four years has become a rapidly growing deficit, tensions have heightened over regional government financing issues and the proposed austerity budget for 2009. ¶5. (SBU) Despite the economic difficulties, Spain has not faced the same financial turmoil that other developed countries have seen. In part this is due to the Bank of Spain,s cautious regulation, including requiring higher MADRID 00001277 002 OF 004 reserve provisioning in good times and not allowing off-balance-sheet SIVs. Spanish financial institutions also do not own many instruments based on U.S. mortgages. Although many banks have problem loans to troubled construction and real estate companies, there have been relatively few mortgage defaults so far, and no Spanish banks have gone under, although there is talk that some of the smaller "cajas" (savings banks) may merge. Spain,s largest bank, Banco Santander, has taken advantage of reduced bank stock prices to buy troubled UK banks and to buy the 75 percent it did not already own of the Pennsylvania-based Sovereign Bank. BBVA, the country,s other large bank, also has a significant presence in the U.S. through its ownership of Compass Bank. (These are but two examples of Spain,s emergence as one of the leading foreign investors in the U.S. in recent years; other sectors that have seen significant Spanish investment include wind and solar power, ethanol, road construction, foods, and insurance.) ¶6. (SBU) President Zapatero argued that the size of Spain,s economy, the significant international presence of Santander and BBVA, and the Bank of Spain,s successful regulation meant that Spain deserved a place at the November 15 G-20 financial summit even though it was not a G-20 member. He made it a matter of national pride to attend (risking political damage if he had failed to be invited) and succeeded in participating as a result of the intervention of French President Sarkozy. While domestic press articles have suggested that UK Prime Minister Brown is likely to invite Zapatero to the followup summit next April, Spain is not a member of the Financial Action Task Force that is working on many of the regulatory recommendations from the November summit. Zapatero has spoken often of the importance of coordinated European and U.S. action in facing the financial crisis. ¶7. (SBU) The GOS has taken a series of measures over the last several months to address the economic slowdown. Soon after Zapatero,s reelection, it implemented his campaign promise of a 400-euro tax rebate. Since September, the GOS has increased deposit insurance (reluctantly, as a result of other countries, increases) and announced plans to buy Spanish banks, high-quality mortgage-backed assets, guarantee new debt, and inject capital if necessary. Banks, reactions have been mixed. Neither the GOS nor the banks say that new capital is needed, and banks only sold 2.1 billion euros out of a possible 5 billion in assets that the GOS had been willing to buy in its first round of purchases last month. However, it appears that banks are actively seeking GOS guarantees for their new lending in a first round that ends December 3. Zapatero also announced on November 27 an 11-billion-euro spending package that features 8 billion euros for municipal governments for quick-starting new infrastructure projects aimed at employing many of those who have lost construction jobs. The remainder will go to the struggling auto sector, environmental initiatives, research and development spending, the handicapped, and other sectors. The aid package will amount to just over 1 percent of Spain's GDP and is aimed at creating 300,000 jobs in 2009. These and previous anti-crisis measures will put the public sector deficit close to 3 percent of GDP in 2008 and 2009. Press reports have speculated that Second Vice President and Finance/Economy Minister Pedro Solbes has lost influence with Zapatero as a result of frustration over the economic slowdown. //LATIN AMERICA// ¶8. (SBU) Spain wields significant influence in Latin America, where its businesses have invested heavily. Like the U.S., Spain wants strong democratic and free market institutions in the region. We have sharply differing views on Cuba, as Spain believes it can encourage change via engagement with the Castro regime, but we seek the same end result. On Venezuela, Spain appears to be going ahead with the sale of four ocean-going patrol ships and four Coast Guard-type high seas patrol ships; plans to sell aircraft to Venezuela were scuttled when the U.S. objected to the transfer of U.S. technology in the aircraft. Spanish companies have had major problems with Argentina,s government, including the ongoing nationalizations of Areolineas Argentinas from the Spanish Marsans group and of the private pension funds, one of which is owned by BBVA. Spanish officials have expressed hope that the USG will increase engagement with Latin America in the coming years, sometimes alleging that it was abandoned after 9/11. MADRID 00001277 003 OF 004 //MILITARY AND SECURITY COOPERATION// ¶9. (SBU) Spanish military cooperation is important to the U.S. The southern Spanish bases of Rota and Moron are strategic hubs, midway between the U.S. and theaters of operation in Afghanistan and Iraq. Spain has troops in Lebanon (roughly 1,100),Afghanistan (780),Kosovo (500), Bosnia (260),and a smattering of others in various UN & EU observer missions. Although the Afghan NATO mission is not popular with the Spanish public, the GOS clearly expects the incoming U.S. Administration to request an increased Spanish effort there. Defense Minister Chacon has talked publicly of the need to remove the GOS, self-imposed cap of 3,000 total overseas military troops deployed, but at the same time GOS officials have stressed that the solution in Afghanistan cannot be purely military and that a new strategy is needed. Elsewhere on the diplomatic front, Spain in recent years has more often been a follower than a leader, looking to stay within EU consensus on issues such as Iran and missile defense. Spain will not recognize Kosovo and is so far refusing to train or fund Kosovar security forces. Nonetheless, its commitment to KFOR remains firm. Spain is supportive of U.S. efforts towards Middle East peace. Driven by the twin threats of terrorism and illegal immigration, Spain is also increasing its engagement with the countries of North and Western Africa. The seizure by Somali pirates of a Spanish fishing ship earlier this year led to a ransom payment and sparked GOS interest in addressing piracy. Spain is planning to send two warships to join an EU mission off Somalia and already has a patrol plane operating there. //COUNTERTERRORISM COOPERATION// ¶10. (SBU) Spain is an al-Qaeda target and a critical player in U.S.-EU counterterrorism efforts due to its proximity to the Maghreb and a population that includes more than one million Muslims, mostly immigrants. Senior Al-Qaeda leaders often call for attacks to recapture the medieval "Al Andalus," and the Spanish enclaves of Ceuta and Melilla in North Africa are a fixation for Al-Qaeda in the Maghreb and other extremists. The March 11, 2004, train bombings killed 191 persons and injured nearly 2,000 more, making it the second-deadliest terror attack in European history. The Spanish government considers the threat from Islamic terrorism to be one of its top national security priorities and has identified numerous Islamic extremist groups operating within its borders. The Spanish are actively pursuing Islamic extremism terrorism-related investigations and have scores of suspects in jail. Public opinion polling shows nearly three-quarters of Spaniards are worried about the threat of Islamic fundamentalism, more than in the U.S. or Europe as a whole. ¶11. (SBU) Bilateral cooperation is strong. Spain pursues an aggressive agenda in law enforcement, judicial, and information-sharing efforts, at least with us. One example is the HSPD-6 agreement we signed in 2007 to facilitate the sharing of information between our national counterterrorism authorities. Spain also is a founding member of the Proliferation Security Initiative and has participated actively during its five-year existence. Spain has hosted a number of Global Initiative to Combat Nuclear Terrorism (GI) events in 2008 and has been at the forefront of efforts to expand membership. Spanish officials recently have given indications that Madrid wants to deepen bilateral cooperation -- especially emergency preparedness operational exercises -- to combat nuclear terrorism in the coming year. Our Consulate General in Barcelona is increasing its staff size as part of an inter-agency initiative to host a jointly-coordinated counterterrorism, anti-crime, and intelligence center to combat the target-rich environment of terrorist and criminal activities in the region, which has been the site of more than a dozen raids on suspected radical Islamists since 9/11, including the dismantlement in January 2008 of a cell with ties to Al-Qaeda that intended to attack Barcelona's subway system //TOPICS YOU MAY BE ASKED ABOUT BY THE PRESS// ¶12. (SBU) Overflights - The issue of so-called "illegal CIA flights" carrying terrorism suspects to Guantanamo has been prominent in the Spanish media in recent days. The reports are muddled and contain a fair amount of innuendo. They suggest that the Aznar government allowed the transport of terrorism detainees to Guantanamo via Spain. The reports also confuse the so-called CIA flights with routine U.S. military flights via Spain (roughly 4,000 a year). We and MADRID 00001277 004 OF 004 the GOS have tried to make it clear that the U.S. military has done nothing illegal and has fully respected our bilateral agreements regarding military flights, which would include seeking the informed consent of the Spanish government for any flight carrying controversial cargo or passengers. Unfortunately, this controversy often leaves us in the position of trying to prove a negative. If asked about this by the media, we suggest making the point that the U.S. places a high value on relations with Spain and pays scrupulous attention to the notification and flight clearance requirements contained in our bilateral agreements ¶13. (SBU) Possible VP Biden Visit - The Spanish press have reported extensively on President Zapatero,s lack of a meeting with President Bush and the lack of a Zapatero White House visit (until last month,s G-20 financial summit). They followed closely statements during the presidential campaign by Senators Obama and McCain and their spokesmen about the possibility of meeting with Zapatero. The GOS has made clear its pleasure with the result of the election, and it may have unrealistic expectations about how soon Obama will visit Spain or Zapatero Washington. Spanish officials told reporters recently that Vice President-elect Biden told Zapatero in a November 17 phone conversation that he would visit Spain shortly after taking office to discuss the global financial crisis. The Vice President-elect also was said to have mentioned the importance the President-elect places on bilateral relations and highlighted the possibility for cooperation on Latin America. We have not heard any confirmation of this from U.S. sources and have told reporters that we cannot speak for the incoming administration. //PERSONAL SECURITY// ¶14. (U) In general, Spain is safe. However, Madrid and other large cities attract a large number of criminals and pickpockets and frequent incidents of crime of opportunity against the unwary do occur. It is best to carry only essential items, including a photocopy of your passport's photo page. Visitors can protect themselves against crime by being street-smart, alert and aware of their surroundings. Travelers are encouraged to review the most recent Worldwide Caution issued by the Department of State. As the Department of State continues to develop information on any potential security threats to Americans overseas, it shares credible threat information through its Consular Information Program documents, available on the Internet at http://travel/state.gov. Additional information regarding safety and security in Spain is available on the U.S. Department of State's website (www.embusa.es). //CONCLUSION// ¶15. (U) Again, we are looking forward to your visit. Amid the current atmosphere of increased goodwill toward the United States, we want to set the stage for continuing improvements in bilateral cooperation. There is much we can do together. AGUIRRE