MADRID WEEKLY ECON/COMMERCIAL/AG UPDATE JULY 7 -

UNCLAS SECTION 01 OF 03 MADRID 000764 SIPDIS STATE FOR EUR/WE AND EEB/IFD/OMA E.O. 12958: N/A TAGS: ECON EINV EFIN ENRG PGOV PTER SP SUBJECT: MADRID WEEKLY ECON/COMMERCIAL/AG UPDATE JULY 7 - JULY 11 MADRID 00000764 001.2 OF 003 Table of Contents ECON: OECD says there is an economic crisis in Spain ECON/PGOV: President Zapatero talks of economic "crisis" for the first time ECON/EINV: Minister of Industry says economy will recover, and he says GOS to develop an energy savings plan ECON/EINV: Spain's central bank governor praises GOS initiatives but won't rule out negative growth ECON/EFIN: Price of housing falls again ECON/PTER: ETA continues to send extortion letters to businesses EINV/ENRG: Colorado Governor leads renewable energy mission to Madrid EFIN: Banesto Q2 profit up by 14 percent, but there are signs of loan weakness OECD SAYS THERE IS AN ECONOMIC CRISIS IN SPAIN ¶1. (U) The Secretary General of the Organization for Economic Cooperation and Development (OECD),Angel Gurria, said there is an economic "crisis" in Spain on July 4. He added that the economy would not be "normalized" until 2010 (Note. This latter points tracks with the Spanish government's view.). Currently, the OECD forecasts 1.6 percent economic growth for Spain in 2008, although this could decline further because this forecast is based on oil prices at USD 120 a barrel. Gurria did say, however, that because Spain had comparatively healthy public finances, it had "a little space" for some fiscal stimulus. (Embassy Comment: Actually we believe that the recent downturn in economic activity has weakened revenues and estimate that Spain's fiscal accounts are now in the red.) (Expansion, 7/5/08) PRESIDENT ZAPATERO TALKS OF ECONOMIC CRISIS FOR THE FIRST TIME ¶2. (U) During a TV interview with Antenna 3, Zapatero said he would describe the economic situation as being in a "crisis" if the interviewer wanted to, but that he preferred to offer solutions. (Comment: This was significant because, so far, the GOS has insisted that the Spanish economy is experiencing a "slowdown", not a "crisis.") (ABC, 7/9/08) MINISTER OF INDUSTRY SAYS ECONOMY WILL RECOVER, AND HE SAYS GOS TO DEVELOP AN ENERGY SAVINGS PLAN ¶3. (U) Speaking at a telecommunications industry breakfast, Minister of Industry, Tourism and Trade Miguel Sebastian said that the Spanish economy was suffering from a credit crunch stemming from the U.S. subprime problem, a housing downturn, and increases in the price of oil. However, he offered three "Cs" that would see Spain return to robust economic growth by 2010: "confidence, courage and competitiveness." He said that the "automatic fiscal stabilizers" would work in Spain because Spain had built up a budget surplus during the good times that could now be spent to even out the business cycle. Foreign investment in Spain during the first four months of 2008 was euros 17 billion, twice what it was during the first three months of 2007, clear evidence of foreign "confidence" in Spain. (Note: This number is true but distorted because two thirds of it arose from the one off purchase of Altadis by British Tobacco.) Additionally, the IMF and the BIS had expressed "confidence" in Spain's financial system. With respect to "courage", Sebastian called the GOS's fiscal stimulus package "courageous". Then he listed a number of programs his ministry was working on to improve Spanish "competitiveness." Sebastian also announced that before the end of the summer, an energy savings plan designed to reduce the consumption of oil by 10 percent over the next two years would be unveiled. (Comment: Prompted by a questioner, Sebastian said that he was "delighted" to be working under the coordination of Second Vice President and Finance Minister Pedro Solbes. It was notable though that he started his talk with a macroeconomic overview. Many observers think that he is aiming to replace Solbes when he decides to retire. As his talk demonstrated, besides Solbes, Sebastian is clearly the cabinet member most comfortable with the big macroeconomic issues.) (Telecommunications breakfast, 7/8/08) SPAIN'S CENTRAL BANK GOVERNOR PRAISES GOS ECONOMIC INITIATIVES; WONT RULE OUT NEGATIVE GROWTH FOR SECOND QUARTER ¶4. (U) Speaking on the international economic situation at a lunch hosted by the American Chamber of Commerce, Bank of Spain Governor Miguel Angel Fernandez Ordonez discussed the factors leading up to the current economic slowdown including financial market turmoil and high primary material prices. MADRID 00000764 002.2 OF 003 He said that Spain's housing market downturn might have helped activate Spain's own economic slowdown, but was not the primary cause. He added that at the onset of the economic turbulence, Spain was in a strong economic position and even now is in a better standing than many of its EU counterparts. He praised the government's initiatives to combat the slowdown, but cautioned that it might take longer than anticipated to recover from this "low growth phase". When asked about second quarter growth for Spain, Fernandez Ordonez said that he would not rule out "negative growth". (Comment: Private sector growth estimates for 2008 average at 1.7 percent, which is actually somewhat surprisingly high. A recent BBVA report indicated that growth for Spain during Q2 2008 would be 0 percent. Fears are increasing that Spain may already be in recession. (Embassy, 7/9/09; El Pais 7/10/08) PRICE OF HOUSING FALLS BY 2.5 PERCENT ACROSS SPAIN ¶5. (U) According to recently released statistics from Spain's largest real estate appraisal company (TINSA),home prices have fallen by on average 2.5 percent across Spain (from May 2007 to May 2008). Cities and the areas on the Mediterranean coast were hit hardest with average home price drops of 3.7 percent and 3.0 percent, respectively. Furthermore, TINSA president Ildefonso Ortega has asserted that the number of unsold homes in 2008 is higher than anticipated and may very well reach up to 1 million by the end of 2008. (Note: If this estimate is correct, home prices will fall much further and will not level out until the housing stock is on par with demand. This could also mean that the economic difficulties that Spain is facing will take longer to iron out than GOS officials are hoping. Currently the GOS believes that the Spanish economy will begin to turn around starting the second half of 2009.) (el Pais, 7/10/08) ETA TERRORIST GROUP CONTINUES SENDING EXTORTION LETTERS ¶6. (U) According to a local daily "El Correo", the ETA terrorist group has continued to send extortion letters to Basque region businesses to demand a payment of between 70,000 and 120,000 euros. According to the media, antiterrorist experts believe that the number of letters received is slightly larger than in recent months. Also in the news is the recent detention of two prominent Basque business leaders who are suspected of contributing financially to ETA. As the judicial process for these cases continues, it appears that more and more Basque region businesses are coming forth to alert the police of having received these extortion letters. (EL Pais, 7/8/08 - 7/10/08) COLORADO GOVERNOR LEADS RENEWABLE ENERGY MISSION TO MADRID ¶7. (U) Colorado Governor Bill Ritter visited Madrid July 7-10 on an investment mission focused on renewable energy. The visit came five months after Ambassador Aguirre led a Spanish renewable energy mission to Washington, DC and Colorado, where Governor Ritter hosted the delegation for a breakfast discussion. While in Madrid, Governor Ritter met with leaders of Spain's energy industry including the CEOs of Iberdrola, Iberdrola Renovables, Acciona, Abengoa Solar and Elecnor, and with executives from Union Fenosa and Sener. Although no announcements have been made, the governor believes that at least two Spanish energy companies are seriously considering new renewable energy investments in the state. Today, Iberdrola owns two wind farms in Colorado and Abengoa Solar's U.S. business unit is based near Denver. The governor also discussed renewable energy and climate change with GOS officials Silvia Iranzo, Secretary of State at the Ministry of Industry, Tourism and trade, and Teresa Ribera, Secretary of State at the Ministry of Environment, Rural Development and Marine Affairs. During a meeting with researchers at the Ministry of Science and Innovation's Center for Energy, Environment and Technology Research, Ritter discussed opportunities for further collaboration on research and development with the National Renewable Energy Laboratory in Golden and research universities in the metro Denver area. The governor and his delegation also met with leaders from several industries at a dinner hosted by the Charge d'Affaires, a luncheon sponsored by the American Chamber of Commerce in Spain and a breakfast sponsored by the U.S.-Spain Council. BANESTO Q2 PROFIT UP BY 14 PERCENT, BUT THERE ARE SIGNS OF LOAN WEAKNESS ¶8. (U) Profits were up, but the percentage of non-performing MADRID 00000764 003.2 OF 003 loans rose 0.79 percent from 0.42 percent. While such a ratio is still comparatively low, it does demonstrate that Spanish banks are experiencing an uptick in non-performing loans. At a minimum, the current environment suggests that banks will be conservative in their lending. As Banesto Chairwoman, Ana Patricia Botin, put it, "the current environment does not favor growing market share." (WSJ, 7/11/08) LLORENS