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