MADRID WEEKLY ECON/COMMERCIAL/AG UPDATE - DECEMBER

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SIPDIS

SIPDIS

DEPARTMENT FOR EUR/WE AND EEB/IFD/OMA

C O R R E C T E D C O P Y (REMOVED SENSITIVE CAPTION, RENUMBERE PARAS

E.O. 12958: N/A
TAGS: ECON EFIN EIND ELAB ELTN KIPR PGOV TBIO SP
SUBJECT: MADRID WEEKLY ECON/COMMERCIAL/AG UPDATE - DECEMBER
31 - JANUARY 4

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Table of Contents:

ECON/PGOV: Economy becoming a bigger election issue
ECON/EFIN: Santander aims to overtake Citigroup
ECON/EFIN: FT's year in 2007 statistics show Spain's housing
and equities markets up
ECON/EFIN: Italian Prime Minister Prodi questions Spanish
economic "sorpasso" of Italy
ECON/EFIN: Housing prices up by 5.1% in 2007
EFIN/ECON: Ibex-35 up by 8% during 2007
SENV: Spain to appeal New York court's Prestige ruling

ECONOMY BECOMING A BIGGER ELECTION ISSUE


1. (U) "The economy hounds the socialists only two months
before the elections" is the January 4th El Pais headline, a
stinging statement coming from the largely pro-government
daily, Spain's newspaper of record. December's 4.3%
inflation rate (annualized) and a 5.5% increase in
unemployment gave rise to this headline. The opposition
conservative PP party is trying to make electoral hay out of
the negative trends. The socialists are emphasizing the
positive overall economic record of the last four years.
According to an El Mundo poll, 40.1% of Spaniards think that
opposition leader Mariano Rajoy is best placed to manage the
economy versus 39.3% who think Zapatero is better placed. In
terms of international coverage of the Spanish economy, the
Financial Times ran a January 4 article entitled "Spain's
house of cards has started tumbling down." The article talks
about the problems of a number of construction/real estate
development companies, including Astroc, Llanera, and
Colonial. (Comment: It may be premature to talk about an
economic "crisis" as El Mundo does. However, in politics
what often counts is the trend. And the economic trend does
not favor the socialists now. There is a palpable difference
in media coverage of the economy (lots of stories about
inflation, housing problems and now growing unemployment).
Given that the race between the socialists and the
conservatives is very tight, the conservatives clearly have
an opportunity if they can establish greater credibility on
economic issues, something they will try to do from now until
the March 9 elections.) (El Pais, 1/4/07; El Mundo, 1/4/07;
FT, 1/4/07)

SANTANDER AIMS TO OVERTAKE CITIGROUP


2. (U) The 73 year old tycoon, Emilio Botin, told 300
executives at a Santander Christmas party that his objective
for 2008 is to overtake Citigroup in terms of market
capitalization. On January 2, Citigroup's market
capitalization was euros 206 billion and Santander's euros
88.5 billion. On December 28, Santander's market
capitalization was euros 92.5 billion and Citigroup's 98.7
billion. Hitherto, Santander has come out relatively
unscathed from the U.S. sub-prime mortgage crisis, which
makes Botin's goal a possibility. Botin also told the
Financial Times that he is looking for additional buying
opportunities in the U.S. and the U.K. (El Pais, 12/31/07);
FT, 12/31/07)

FT'S YEAR IN 2007 STATISTICS SHOW SPAIN'S HOUSING AND
EQUITIES MARKETS UP


3. (U) Housing prices were up by 5% (lower than previous
years, double digit increases) and the stock market up by
7%. Among large economies, only Germany's stock market
performed better. In the U.S., stocks were up by about 3%.
(Comment: Most observers think housing prices will decline in
Spain in 2008, at least in real terms. With respect to
Spain's Ibex-35, the future is less clear. Given that
Spanish companies, including construction companies, have
diversified so aggressively overseas, the Spanish stock
market could still perform relatively well in 2008.) (FT,
12/31/07)

ITALIAN PRIME MINISTER PRODI QUESTIONS SPANISH ECONOMIC
"SORPASSO" OF ITALY


4. (U) An angry Prodi signed a letter to Italian press agency
Ansa explaining that in 2006, Italy's GDP per capita was
euros 25,100 and Spain's was euros 22,300. However, adjusted
for purchasing power parity, Eurostat found that a Spaniard
had higher purchasing power than an Italian. Prodi referred
to an IMF methodology which found that an Italian could, on
average, buy more than euros 3,000 a year than a Spaniard.
Prodi noted that there is no standard purchasing power parity
calculation methodology. However, the El Pais story on this
topic notes that when Prodi was President of the European

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Commission, he never referred to IMF statistics! (El Pais,
1/3/07)

HOUSING PRICES UP BY 5.1% IN 2007


5. (U) But, prices went up by 9.1% during the first half of
2007 and only 1.1% during the second half of 2007. This is
one more indicator that 2008 will be a rough year for house
prices in Spain. (El Pais, 1/3/07)

IBEX-35 UP BY 8% DURING 2007


6. (U) Telefonica, Iberdrola, Acciona and Santander were
responsible for a large part of the uptick. In fact,
Telefonica alone was responsible for 76% of the growth.
Medium-sized banks, construction companies, real estate
development firms and TV channel were a drag on the stock
index. (Cinco Dias, 12/28/07)

SPAIN TO APPEAL NEW YORK COURT'S PRESTIGE RULING


7. (U) U.S. Federal courts dismissed on Wednesday a damage
claim filed by Spain against the American Bureau of Shipping
ruling that Spain must pursue its claims in its own courts in
accordance with the International Convention on Civil
Liability for Oil Pollution Damage (CLC). In other words,
the court ruled that it does not have standing on this
matter. The Prestige disaster was Spain's worst
environmental disaster damaging fishing, tourism and natural
habitats in the region. Spain argues that the bureau was
negligent in it's classification of the 26 year old vessel
clearing the single hulled vessel as fit to carry fuel. The
Justice Ministry issued a statement announcing they will
appeal the decision. (El Pais 1/3/07)
AGUIRRE