MADRID WEEKLY ECON/COMMERCIAL UPDATE MAY 12 - MAY

UNCLAS MADRID 000547 SIPDIS STATE FOR EUR/WE AND EEB/IFD/OMA E.O. 12958: N/A TAGS: EAGR ECON EFIN EINV KGHG SENV SP SUBJECT: MADRID WEEKLY ECON/COMMERCIAL UPDATE MAY 12 - MAY 16 REF: MADRID 525 Table of Contents: ECON/KGHG: Gonzalez, Rato Agree Economy has not Touched Bottom EFIN: Continued Strong Profit Growth for Non-Real Estate Companies EFIN/EINV: Santander to Participate in U.S. Bank Capital Increase ECON/EINV: Spain 2nd Best Destination for International Retail SENV/EAGR: Wine Maker Adapts to Global Warming, Drought GONZALEZ, RATO AGREE ECONOMY HAS NOT TOUCHED BOTTOM ¶1. (U) Felipe Gonzalez and Rodrigo Rato, speaking at a conference of Repsol directors, agreed that the current economic slump has not yet hit bottom, but both expected that it would be relatively short-lived. Former PP Economy Minister and IMF Managing Director Rato said businesses should get used to higher interest rates than they had seen in the recent past, noting the bad combination of high inflation and low growth. Former President Gonzalez (PSOE) also doubted that Europe would make the "revolutionary" changes needed to meet its greenhouse gas emissions reductions commitments given its dependence on oil. (El Pais, 5/13; El Mundo, 5/13) CONTINUED STRONG PROFIT GROWTH FOR NON-REAL ESTATE COMPANIES ¶2. (U) First-quarter profits of Spanish companies traded on the Madrid Stock Exchange showed a marked split between companies affected by the construction/real estate slump and others. Profits for the market as a whole rose just over 5% from their first-quarter 2007 level. However, profits of the blue-chips that make up the IBEX-35 index rose 17%, and profits for the entire market except for the six largest real estate firms (none of which are in the IBEX-35 any more) rose 16%. Spain's largest company, Telefonica, reported 1.54 billion euros in profits, 22% over its first-quarter 2007 level. As noted in reftel, the big banks also reported strong profit growth. In contrast to the hard-hit real estate firms, the country's six largest construction firms reported mixed results, with energy investments and overseas concessions cushioning a decline in earnings from Spanish residential construction. (Expansion, 5/14 and 5/16) SANTANDER TO PARTICIPATE IN U.S. BANK CAPITAL INCREASE ¶3. (U) Spain's largest bank, Banco Santander, will contribute a quarter of the planned billion-dollar capital increase for Sovereign Bancorp in order to maintain its 24.8% stake in the Pennsylvania-based bank. Sovereign, which has been hit by the subprime crisis and nonperformance on auto loans, will use the capital increase to reinforce its balance sheet. It also will issue 500 million dollars in bonds to help finance its expansion plans. Santander paid a reported $2.4 billion in 2006 for its stake in Sovereign; its holding has lost over a billion dollars in value since then. (Expansion 5/12, El Confidencial 5/12, Wikipedia.com) SPAIN 2ND BEST DESTINATION FOR INTERNATIONAL RETAIL ¶4. (U) 51% of principal retail firms are present in Spain, second only to the 55% that are in the United Kingdom, according to the consulting firm CB Richard Ellis. Spain's ranking is due to a successful and thriving economy that has raised consumption, along with the confidence of investors and retailers. The U.S. is eleventh, which the consulting firm says is because the strength of U.S. firms discourages others from entering the market. (Finanzas.com, 5/12) WINE MAKER ADAPTS TO GLOBAL WARMING, DROUGHT ¶5. (U) Although heat and drought lead to higher alcohol levels and make irrigation a necessity, one Murcia wine maker has discovered a way to survive Spain's worst drought in 60 years. While many vineyards are migrating north to cooler, wetter climates, the Casa de la Ermita winery has controlled the irrigation process to produce a reduced alcohol wine that will soon be available on the market. The stakes in adapting to climate change are high, as Spain's wine industry employed 400,000 people and posted 5.7 billion euros in revenue in ¶2006. (News.Scotsman.com, 5/11) Llorens