MADRID ECONOMIC WEEKLY UPDATE, SEPT. 8-12

UNCLAS SECTION 01 OF 02 MADRID 000985 SIPDIS STATE FOR EUR/WE, EEB/IFD/OMA; COMMERCE FOR 4212/DON CALVERT TREASURY FOR IA/OEE:W.LINDQUIST E.O. 12958: N/A TAGS: ECON EFIN EIND ELAB SP SUBJECT: MADRID ECONOMIC WEEKLY UPDATE, SEPT. 8-12 REF: MADRID 972 MADRID 00000985 001.2 OF 002 Contents: ECON: Zapatero on Economic Woes ELAB: Labor Minister Backpedals on Visas for Foreign Workers EFIN: Mortgage Lending Down 41% EFIN: Savings Bank Profits Down, Mergers Expected EIND: Ford and GM to Lay Off 1,900 Zapatero on Economic Woes ¶1. (U) President Zapatero appeared before the Congress on September 10 to discuss the state of the economy and the GOS, plans for leading Spain out of its economic doldrums. Zapatero acknowledged that the economic situation had worsened since his last parliamentary appearance in July, but remained optimistic for the economy,s prospects. He discussed the GOS, plans for addressing the downturn, including increased lines of credit for construction companies building homes for rental and increased funding to support unemployed workers. Opposition PP leader Mariano Rajoy criticized the GOS, saying the measures taken so far by the government have had no effect. Zapatero also highlighted his commitment to supporting workers at a Sept 7 labor event. He stressed that despite the economic problems, he would continue his strong commitment to workers and to social priorities, increasing the minimum level of pensions by more than the inflation rate and maintaining unemployment and other benefits. Zapatero also stated that he would not change his opposition to new nuclear power plants. ¶2. (U) Comment: Zapatero has been criticized for being slow to identify and react to Spain,s economic turmoil. He is attempting to rally confidence in the economy. However, given recent spikes in unemployment and predictions from the EC that Spain will enter into a recession during the last half of 2008, this confidence has been hard to come by. Zapatero,s commitment towards workers' benefits may ultimately restrict the flexibility of the GOS to address unemployment, which was estimated at 11 percent in July. (All Media, 9/8 and 9/10) Labor Minister Backpedals on Visas for Foreign Workers ¶3. (U) Labor Minister Celestino Corbacho, who on September 3 announced that the number of visas that the GOS would offer to foreign workers in 2009 would be "roughly zero," (reftel) is in the middle of a controversy after First Vice President Maria Teresa Fernandez de la Vega quickly and publicly rebutted his plans, which had sparked criticism from unions and migrant associations. De la Vega stated that Spain will support "orderly immigration based on the needs of the labor market." Corbacho has backpedaled to be in line with de la Vega,s comments, while continuing to suggest that Spain will try to find jobs for its 2.5 million unemployed. Minister of Industry, Tourism, and Commerce Miguel Sebastian later announced that Fernandez de la Vega,s and Corbacho,s comments were not incongruent. (Comment: This is at least the second time that de la Vega and Corbacho have contradicted each other publicly, but it is unclear whether this represents a growing internal rift or whether Fernandez de la Vega,s comments were in response to widespread criticisms of Corbacho,s comments) (All Media, 9/8-9) Mortgage Lending Down 41% ¶4. (U) The combined value of new mortgages issued in July was 41% below the level of July 2007. This was the 21st consecutive month in which the value of new mortgages declined on a year-on-year basis. Comment: President Zapatero often indicates that Spain's current economic difficulties are the result of external factors, but the international credit crunch started in mid-2007, well after the start of trouble in the housing sector. (Expansion, 9/5) Savings Bank Profits Down, Mergers Expected ¶5. (U) First-half 2008 profits by savings banks (cajas) were 3.8% below their first-half 2007 level, the first such decline since 2002. The Spanish Savings Bank Confederation expects 2009 results to be worse. Delinquent loans rose in July to 2.5% of the total, of which half a point is due to the bankruptcy of the Martinsa Fadesa real estate company. The Confederation expects delinquencies to reach 3.3% by December and 5% next year; as recently as mid-2007, they were MADRID 00000985 002.2 OF 002 below 0.7%. Savings banks are expected to respond in different ways. Some may sell their stakes in other companies to generate liquidity, while others are considering mergers. Two Basque cajas are expected to merge before the end of the year, and a third may be included in the deal. Four cajas have successfully issued debt since June, but at very high spreads of around 140 basis points over reference rates. (El Confidencial, 9/8 and 9/11; El Pais, 9/11) Ford and GM to Lay Off 1,900 ¶6. (U) Ford and General Motors announced September 9 that they would lay off 1,300 and 600 workers respectively to respond to drastically decreasing demand. Ford plans to lay off its workers for two and a half months, while GM plans to lay off its workers for a year. According to industry data, new car sales decreased by 41 percent year on year in August. Both companies will be negotiating with local auto worker unions to define the terms of these cuts. Ford has over 7,000 workers with several plants located in the area of Valencia. GM has two plants in Spain and also has over 7,000 workers. Separately, Seat announced that it was eliminating its night shift; it will reduce worker hours but avoid layoffs. (All Media, 9/9) Aguirre