MADRID WEEKLY ECON/COMMERCIAL/AG UPDATE JULY 14 -

UNCLAS SECTION 01 OF 02 MADRID 000793 SIPDIS STATE FOR EUR/WE AND EEB/IFD/OMA E.O. 12958: N/A TAGS: ECON EFIN EINV ENRG PGOV SP SUBJECT: MADRID WEEKLY ECON/COMMERCIAL/AG UPDATE JULY 14 - JULY 18 MADRID 00000793 001.2 OF 002 Table of Contents ECON: IMF revises growth forecasts for Spain downwards ECON/EFIN: GOS decides not to issue a new 15-year bond EINV/EFIN: BBVA continues U.S. push ECON/EINV: Property company Martinsa Fadesa begins largest bankruptcy proceedings in recent years ECON/EINV: Large Company layoffs begin appearing in Spain ECON/ENRG: EU Courts Rule Against Spain on Energy Takeover Policies ECON/PGOV: GOS officials continue to espouse positive message on future of economy ECON/ENRG: ACS sell-off of controlling stake in Union Fenosa prompts stock market to rise IMF REVISES 2009 GROWTH FORECAST FOR SPAIN DOWNWARDS ¶1. (U) The IMF maintained its 2008 growth forecast for Spain at 1.8 percent. Growth for the euro zone is estimated at 1.7 percent. However, for 2009 the IMF has revised downwards its growth forecast for Spain by half a percentage point - it estimates Spanish growth will be 1.2 percent. The Fund estimates that euro zone growth in 2009 will be 1.2 percent. (Comment: There is a significant risk that these IMF growth forecasts for Spain may not be met and that future forecasts may be revised downwards additionally. Second Vice President and Finance Minister Pedro Solbes told the Ambassador on 7/17/08 - see septel - that Spain was facing a "perfect storm" of negative circumstances. BBVA's lead economist told DCM that BBVA's 1 percent forecast for Spanish growth in 2008 may be overly optimistic as the bank's bias tends to be on the upside.) (El Pais, 7/18/08) GOS DECIDES NOT TO ISSUE A NEW 15-YEAR BOND ¶2. (U) Second Vice President and Finance Minister Pedro Solbes confirmed on 7/11/08 that Spain would not float a 15-year bond. Solbes said that market conditions were not "appropriate." Currently, Spain would have to pay 0.29 percent more to issue Spanish government bonds than Germany does to issue German Bunds, up from only a few hundredths of a percentage point in 2007. The four countries in the EU paying the highest premium over German government bonds are Greece, Italy, Portugal, and Spain. Spanish companies are also paying more than they did last year to issue bonds. (Comment: Clearly, there is less confidence in the Spanish economy's prospects as revenues decline, the housing market stagnates, inflation is relatively high, unemployment increasing, and there is a continued high current account deficit. CharGing more for bonds is also one way markets can differentiate among countries belonging to a currency union.) (WSJ, 7/14/08) BBVA CONTINUES U.S. PUSH ¶3. (U) Since 2004, BBVA has invested more than USD 12.2 billion in the U.S., principally in Sun Belt states with a focus on the Hispanic market. BBVA is now preparing to rebrand its network of about 650 branches using the name of BBVA Compass, and the bank is aiming to target non-Hispanic customers as well. BBVA is convinced that its form of retail banking with a strong focus on relationship banking can work in the U.S. During the first quarter of 2008, BBVA derived six percent of its revenues from the U.S., but it wants to increase this percentage. (WSJ, 7/14/08) PROMINANT PROPERTY COMPANY MARTINSA FADESA IN BANKRUPTCY PROCEEDINGS ¶4. (U) This past week, news that Spanish property company giant Martinsa Fadesa had filed for credit protection reverberated in the press and fueled a heavy sell-off on the Madrid stock exchange - especially affecting other companies linked to the construction sector. With 5 billion euros worth in debt, the Martinsa Fadesa bankruptcy proceedings is one of the largest seen in recent years in Spain. It is a result not only of Spain's housing downturn, but also of the tight credit and confidence issues facing the country. The company decided to file for credit protection after failing to raise the 150 million euros needed for a 4 billion refinancing agreement made earlier this year. Officials from the Ministry of Housing have made clear that the government does not intend to step in to assist, for example by extending credit through the Official Credit Institute (ICO). (All Media, 7/15/08) SPANAIR TO LAY OFF OVER 1,000 - MASS LAYOFFS BEGIN APPEARING ¶5. (U) On July 17, Spanair announced that it would MADRID 00000793 002.2 OF 002 decommission 15 planes (about a quarter of its fleet) and lay off more than 1,000 employees, about a third of its workforce. After Iberia, Spanair provides the second largest level of service to the Spanish domestic market which has been hit hard by high fuel prices, a slowing economy and the introduction of more high-speed trains. (Comment: Spain's jump in unemployment to date had been characterized by layoffs of low-skilled workers directly linked to the flailing residential construction sector. The Spanair announcement along with two other recent mass layoffs by prominent Spanish companies Roca and Martinsa-Fadesa signal a shift in the unemployment problems Spain is facing. Official GOS unemployment rates for the second quarter are expected to be released July 24, and are expected to be higher the first quarter level of 9.6%.) (All Media 7/17/08) EU COURTS RULE AGAINST SPAIN ON ENERGY TAKEOVER POLICIES ¶6. (U) On July 17, the European Court of Justice ruled against the authority of Spain's National Energy Commission (CNE) to place restrictions on takeovers, particularly in relation to the CNE's past involvement in the takeover bid of former Spanish national energy champion Endesa. Endesa, which is currently co-owned by Acciona and Enel, was the subject of an intense and controversial takeover bid process in 2007. At the time, Spain's energy commission placed restrictions on the bid placed by German energy company E.ON, which critics characterized as a protectionist move intended to conserve Endesa's Spanish identity. The Court of Justice's ruling included a determination that the CNE's role in approving takeovers did not conform with EU law and constituted a "restriction on the free movement of capital". (Note: Part of the CNE's role is to ensure energy security for Spain. The court's ruling will result in a modification of the CNE's role). (Paris AFP, 7/17/08) GOS OFFICIALS CONTINUE TO ESPOUSE POSITIVE MESSAGE ON FUTURE OF ECONOMY ¶7. (U) During an event celebrating the 120 year anniversary of one of Spain's most prominent labor unions, President Zapatero pledged to be on the side of laborers, irrespective of the economic situation, and to continue his efforts towards social policy advances. Although recognizing the difficult economic situation, Zapatero nonetheless warned that "pessimism does not create jobs". In a radio interview the same day, Second Vice President and Minister of Economy Pedro Solbes denied that Spain was facing a recession but did admit the extent of the difficult situation, which he said was complicated by numerous factors. (El Pais, 7/18/08) ACS SELL-OFF OF CONTROLLING STAKE IN UNION FENOSA PROMPTS STOCK MARKET TO RISE ¶8. (U) The decision by construction company ACS to sell its controlling stake in the electricity firm, Union Fenosa, prompted the Ibex-35 to rise by 3.14 percent on 7/17/08. (Comment: The jump in the stock market is probably temporary. Energy companies might see more permanent gains though. There has been a lot of speculation about consolidation in the energy sector in Spain, which is the reason for the high interest in energy stocks.) (El Pais, 7/18/08) Aguirre