MADRID WEEKLY ECON/COMMERCIAL/AG UPDATE JULY 21-24

UNCLAS SECTION 01 OF 02 MADRID 000825

SIPDIS

STATE FOR EUR/WE AND EEB/IFD/OMA

E.O. 12958: N/A
TAGS: ECON EFIN EINV ELAB ENRG EPET SP
SUBJECT: MADRID WEEKLY ECON/COMMERCIAL/AG UPDATE JULY 21-24

REF: MADRID 793

MADRID 00000825 001.2 OF 002


Table of Contents:

ECON/ELAB: UNEMPLOYMENT JUMPS TO 10.4%, EXPECTED TO BE 12.5%
IN 2009
ECON/EFIN: BUDGET IN RED FOR FIRST TIME SINCE 2005
ECON: GOS LOWERS GROWTH FORECASTS, STILL SEES RECOVERY
STARTING LATE NEXT YEAR
EFIN/EINV: CAJA MADRID TROUBLES CONTINUE
ENRG/EPET: GAS SUPPLIER SIGNS AGREEMENT WITH GAZPROM
ECON/EINV: COMPANIES PLAN TO BID ON CALIFORNIA HIGH-SPEED
RAIL LINE


UNEMPLOYMENT JUMPS TO 10.4%, EXPECTED TO BE 12.5% IN 2009


1. (U) Spain's official statistics agency (INE) released data
showing that Spain's unemployment rate had risen to 10.4% in
the year's second quarter, a significant jump from 9.6% the
prior quarter. Since undergoing a severe housing downturn
beginning 2007, Spain has experienced rapid increases in
unemployment. In fact, in less than a year Spain's rate
increased by over 2 full points (Q3 2007 unemployment was at
8.1%, rising to 8.7% in Q4 2007 and to 9.6% in Q1 2008).
Spain has one of the highest unemployment rates in the EU,
second only to Slovakia. According to the INE, the second
quarter experienced a slight increase in job growth which was
overshadowed by a significantly greater number of entrants to
the labor force. The total number of employed was
20,425,100. The GOS forecast on July 24 that 2009
unemployment would average 12.5%. (National Institute of
Statistics, 7/24/08; El Economista, 7/24/08)


BUDGET IN RED FOR FIRST TIME SINCE 2005,


2. (U) The GOS ended the first half of 2008 with a budget
deficit of 4.68 billion euros, equivalent to 0.42% of GDP.
This represents the first time since June 2005 in which Spain
has accrued a deficit. During the same period last year,
Spain enjoyed a surplus of over 5 billion euros. The deficit
is expected to increase in the second half of the year, in
part as the result of the government's 400-euro tax rebates.
Although it was only in recent years that Spain had enjoyed
budget surpluses, the news of this deficit in conjunction
with other negative economic news (such as bankruptcy news
and unemployment increases),has increased concern that Spain
may already be in a recession or will soon enter one. (All
Media, 7/22/08)


GOS LOWERS GROWTH FORECASTS, STILL SEES RECOVERY STARTING
LATE NEXT YEAR


3. (U) On July 24, the GOS lowered its forecast for 2008
growth from 2.3% to 1.6% and reduced its forecast for 2009
growth from 2.3% to 1%, citing the impacts of the continuing
international financial crisis and high prices for oil, food,
and raw materials. Nonetheless, it maintained that the
economy would begin to recover in the second half of 2009.
(Comment: These changes bring the GOS' forecasts back in line
with private forecasts, which have declined steadily in
recent months. A GOS official told a USG visitor in March
that because of the strong growth during the course of 2007,
the full-year 2008 growth figure would be 1.9% if the economy
remained at its fourth-quarter 2007 level. The 1.6%
projection suggests that quarter-on-quarter GDP will decline
during at least some quarters. End Comment.) (El
Economista, 7/24/08)


CAJA MADRID TROUBLES CONTINUE


4. (U) Fitch has revised downward its perspective on Caja
Madrid, citing the savings bank's exposure to the
construction and real estate sectors. These two battered
sectors account for 23% of the outstanding loans of the
country's fourth largest financial institution. Fitch
calculates that Caja Madrid's nonperforming assets percentage
will rise to 3% after the inclusion of the 900 million euros
owed by the real estate company Martinsa Fadesa, which
suspended payment on its obligations last week (reftel).
Caja Madrid is Martinsa's largest creditor. In a related
matter, a Caja Madrid executive who had recently returned to
the savings bank resigned after it was revealed that he had
approved loans to Martinsa shortly before becoming a senior

MADRID 00000825 002.2 OF 002


Martinsa executive. Despite the difficulties, Caja Madrid's
board approved on July 21 the purchase of the remaining 60%
it does not already control of the Mexican mortgage bank
Hipotecaria Su Casita for 342 million dollars. (El Mundo,
7/21/08; El Pais, 7/22/08)


GAS SUPPLIER SIGNS AGREEMENT WITH GAZPROM


5. (U) Spain's leading gas distributor, Gas Natural,
announced on July 21 that it had signed an agreement with
Russian gas giant Gazprom to expand cooperation on liquefied
natural gas projects. Gas Natural gave no details on the
agreement, but the move is widely perceived as a potential
step to reduce Spain's reliance on Algerian gas supplies.
Algeria is Spain's largest gas supplier (both natural and
LNG) providing over 30 percent of natural gas consumed in
Spain. Last year, there was significant friction between
Algeria and Spain over both the quantity and price, resulting
in significant concessions on the part of the GOS. (Note: In
the past, Algeria supplied more than 60 percent of Spain's
natural gas. However, in the name of energy security,
Spanish law has capped the amount of gas that any one country
can provide Spain.) (El Pais, 7/21/08)


COMPANIES PLAN TO BID ON CALIFORNIA HIGH-SPEED RAIL LINE


6. (U) A consortium of four Spanish companies are preparing
to submit a bid for a future high-speed train line connecting
San Francisco with Los Angeles. Train manufacturer Talgo,
state-sponsored train operator RENFE, construction group
Isolux, and consulting firm Imathia have been in close talks
with state officials about the potential for constructing
this line. The proposals will be submitted this fall, with a
tender likely being awarded in early 2009. (Cinco Dias,
7/22/08)
Aguirre