MADRID ECONOMIC WEEKLY, OCTOBER 26-30

UNCLAS SECTION 01 OF 02 MADRID 001061 SIPDIS STATE FOR EUR/WE, EEB/IFD/OMA COMMERCE FOR 4212/DON CALVERT TREASURY FOR OAI/OEE R.JOHNSTON ENERGY FOR PIA:K.BALLOU E.O. 12958: N/A TAGS: ECON EFIN EIND EINV ENRG KGHG SP SUBJECT: MADRID ECONOMIC WEEKLY, OCTOBER 26-30 REF: MADRID 1040 Contents: ECON/EIND: GOS Extends Municipal Stimulus, Auto Incentives EFIN: BoS to Require More Provisions Against Banks' Housing Assets ECON: GDP Decline Slows in Q3: 0.4% from Q2, 4.1% from Year Ago ECON: Prices Rise in October, Still Below Last Year's Level EINV: EC Tells GOS to End Tax Break for EU Acquisitions EINV/ENRG: Acciona To Develop 500 MW Solar Project for U.S. Army ENRG/KGHG: IEA Economist Criticizes Planned Coal Sector Aid GOS Extends Municipal Stimulus, Auto Incentives 1.(U) The Council of Ministers approved on October 23 a new 5-billion-euro municipal spending plan that will start in ¶2010. While the 8-billion-euro 2009 municipal spending plan that is coming to an end concentrated on public infrastructure, the new Social Fund for Sustainability and Employment will finance projects in areas such as social spending (one billion euros),technological initiatives, renewable energy, the environment, and energy savings. Some of the spending may help compensate municipalities for the impact of lower tax receipts on the amount they could otherwise expect to receive from the central government. The GOS plans to approve projects in December so work may begin in January of 2010. Separately, Industry, Tourism, and Commerce Minister Sebastian announced that the GOS would extend until the end of 2009 temporary auto purchase incentives and that it proposed to include similar, though not-yet-finalized, incentives in the 2010 budget. (Comment: While the domestic market is important to Spanish auto producers (including Ford and GM/Opel),most of Spain,s auto production is exported to other European countries. Incentives in the second half of the year in other European countries and Spain have helped reduce the drop in sales of Spanish-made vehicles. End Comment.) (Presidency Statement, 10/23; ABC, 10/23; Europa Press, 10/24) BoS to Require More Provisions Against Banks' Housing Assets 2.(U) In a step that will force banks to acknowledge sooner their losses from construction and real estate loans, the Bank of Spain will require banks to set aside provisions for 20% of the value of housing, commercial property, and land they have held on their books for more than a year. At present, banks are only required to set aside provisions for 10% of the value at the time of acquisition. Spain,s housing collapse has led many banks to take property rather than having to declare in default loans to construction and real estate companies. Between December 2007 and June 2009, savings banks ("cajas") had acquired some 26 billion euros worth of housing and land, and banks had acquired another 10 billion euros worth. Many of these properties are believed to be worth significantly less than the values the banks are claiming on their books. 3.(U) The measure, which is expected to enter into force in several weeks, could encourage banks to sell assets they have been holding. If the volume of sales is significant, it could drive down housing prices, which have still not fallen as much as many analysts expect, and speed up the housing sector's adjustment. The increased provisioning should make 2010 an even more difficult year for cajas and banks than was already expected; Moody's predicts that several could report losses in the coming quarters. These losses could increase pressure on troubled cajas to merge; so far, mergers have not taken place as quickly as the central bank had hoped. (El Confidencial, 10/26; El Pais, 10/27) GDP Decline Slows in Q3: 0.4% from Q2, 4.1% from Year Ago 4.(U) The economy shrunk by 0.4% in the year's third quarter, according to a Bank of Spain estimate. While this contraction was smaller than those of any of the previous four quarters (which saw GDP fall by 0.6%, 1.1%, 1.6%, and 1.1%, respectively) it still meant that third quarter production was 4.1% below its third quarter-2008 level. The central bank noted that temporary measures such as the government's municipal infrastructure spending package and incentives for auto purchases had prevented the contraction MADRID 00001061 002 OF 002 from being worse. The official National Statistics Institute GDP figure, which will be announced in late November, is likely to be similar. (Bank of Spain) Prices Rise in October, Still Below Last Year's Level 5.(U) The National Statistics Institute's preliminary October inflation estimate suggests that prices rose by some 0.7% during the month. The headline year-on-year rate was -0.6%, up from September's -1.0%. Year-on-year rates are expected to remain negative for another month or two while they still include the impact of the late-2008 oil price decline. The final October rate will be announced in two weeks. (Expansion, 10/29; Embassy calculation) EC Tells GOS to End Tax Break for EU Acquisitions 6.(U) EC Competition Commissioner Neelie Kroes declared on October 28 that a tax benefit to Spanish companies making acquisitions in other EU countries violates EU state aid rules and has called for the GOS to reclaim the benefits in some instances. Under the corporate tax provision enacted in 2002, Spanish companies can write off over 20 years the difference between the price they pay for a foreign company and its book value. The total amount of indirect public assistance provided since 2002 for acquisitions in other EU countries has been estimated at 30 billion euros, but Kroes ruled that only companies which had made acquisitions after 2007 would have to refund the tax benefit. This exempts major deals such as Banco Santander's 9.5 billion-pound 2005 purchase of the UK bank Abbey, Telefonica's 27 billion-euro 2006 purchase of O2, and Iberdrola's 17 billion-euro 2007 purchase of Scottish Power. Banco Santander is expected to have to return any tax deducted as a result of its 1.26 billion-pound 2008 purchase of UK bank Alliance and Leicester. The EC continues to investigate and discuss with the GOS the application of the benefit to purchases outside the EU; this may affect Spanish investments in the U.S., though it is not clear whether the EC would have jurisdiction unless the Spanish purchasers were competing with potential purchasers from other EU countries. (El Pais, 10/28; Financial Times, 10/29; El Confidencial, 10/29) Acciona To Develop 500 MW Solar Project for U.S. Army 7.(U) The Army Corps of Engineers signed an agreement on October 15 with Acciona Solar Power and the U.S. firm Clark Energy Group to develop a 500 MW solar power project at Fort Irwin in California. This will be DOD's largest solar energy project yet. The project, to be completed between 2013 and 2022, will use concentrating solar power and photovoltaic technology at five sites. By 2014, the first site is expected to be able to cover Fort Irwin's total energy needs, and excess electricity will be sold to regional public utilities. The $2 billion project will have the capacity to generate 1,000 GWh of electricity annually. A federal mandate requires the Army to cover 25% of its energy needs with renewable energy by 2025. (Business Wire, 10/15; Clark press release, 10/15) IEA Economist Criticizes Planned Coal Sector Aid 8.(U) At an October 27 event in Madrid, International Energy Agency chief economist Faith Birol criticized measures proposed by the Ministry of Industry, Tourism, and Commerce to assist Spain,s slumping coal industry. An existing GOS plan anticipates a gradual decline in production between 2006 and 2012, but consumption of domestic coal has fallen to half of the expected level this year because of reduced electricity demand, the price of CO2 emissions permits, and competition from imported coal. Birol acknowledged Spain,s interest in guaranteeing security of supply but said that aiding coal could distort the market and increase CO2 emissions, going against Kyoto and EU aims. An industry association said that the measures contained in a draft Royal Decree would provide assistance worth (if electricity prices remain at current levels) 480 million euros over three years. It downplayed the CO2 emissions issue, saying much of the increased coal produced would replace imported coal. President Zapatero is from Leon, Spain,s principal coal mining area. (El Pais, 10/28; Expansion, 10/28) CHACON