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09MADRID1095 2009-11-13 16:07:00 UNCLASSIFIED Embassy Madrid
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1.(U) European Commissioner for Economic and Monetary Affairs
Joaquin Almunia agreed November 9 to give Spain (along with
some other countries) until 2013 to reduce its budget deficit
to 3% of GDP, an extension from the original deadline of

2012. Almunia cited Spain,s commitment to reducing spending
and managing its deficit amidst the economic crisis. The
European Commission confirmed that beginning in 2010 Spain
should reduce its deficit by 1.75% of GDP each year to ensure
that the deficit is below 3% by 2013. Second Vice President
and Minister of Economy and Finance Elena Salgado expressed
confidence that Spain would be able to gradually reduce the
deficit by the extended deadline. The EC also urged Spain to
advance with structural reforms on health insurance and
pension spending, called for greater support and financial
discipline from autonomous communities and local governments,
and cautioned against Spain,s rising public debt. Comment:
Meeting the 3% requirement will be a challenge for Spain.
Its deficit for 2009 is likely to be well over 10% of GDP,
meaning that the annual reduction will have to be even
greater than the 1.75% called for by the EC. (All Media,

Congress Approves Autonomous Community Financing Law

2.(U) Bringing an end to an issue that had been controversial
for two years, the Congress barely approved on November 11
changes to central government financing of autonomous
community (regional) governments. The new system will give
the communities more funds and make several adjustments based
on the size, population, etc. of each community. It was
originally motivated by Catalans' assertions that the old
system did not give their region an appropriate share of
total GOS revenues. The law garnered exactly the requisite
176 votes, including the ruling PSOE and five small parties.
The support of both small Navarra parties was crucial;
ironically, Navarra has its own financing regime and so is
not affected by the reform. (El Pais, 11/12; ABC, 11/13)

Official Q3 GDP and October Inflation Figures

3.(U) National Statistics Institute (INE) figures showed the
economy contracted by 0.3% in the year's third quarter,
bringing production 4.0% below its third-quarter 2008 level.
The INE also reported that consumer prices rose by 0.7% in
October, bringing prices to 0.7% below their October 2008
level. These figures are nearly identical to preliminary
figures announced by the Bank of Spain (GDP) and INE
(inflation) two weeks ago. (Europa Press, 11/12-13)

Spain to Purchase 25 million Euros of Greenhouse Gas Emission
Permits from Poland

4.(U) At President Zapatero's November 9 meeting with Polish
PM Tusk, the GOS agreed to purchase 25 million Euros of
excess greenhouse gas emissions permits from Poland in order
to meet its Kyoto Protocol obligations. Tusk said the funds
would be invested in the lowering of CO2 emissions and in the
development of Polish energy efficiency. While this is the
first time Poland has sold its emission rights, Spain has
purchased from countries including Hungary, Lithuania, and
the Czech Republic. Comment: Although Spain's emissions are
down because of the recession, they are expected to be well
over its Kyoto limit, forcing such purchases of other
countries' excess emissions credits. (El Confidencial, 11/9)

Iberia and British Airways Agree on Merger Terms

5.(U) After 16 months of negotiations, Iberia and British
Airways (BA) agreed to a merger that would create one of the
world's largest airlines. The merger will create the holding

MADRID 00001095 002 OF 002

company "TopCo," which will be incorporated in Spain, though
its operating and financial headquarters will be in London.
For the first five years of the merger the companies will
maintain separate brands, codes, licenses and hubs. BA
stockholders will get 55% of the stock in TopCo, and Iberia
stockholders will get 45%. The new company's largest single
stockholder, with an 11% stake, will be Caja Madrid, which
currently owns 23% of Iberia. The pound's devaluation during
the economic crisis helped move the negotiations along. In
July 2008, when the airlines first announced their intent to
merge, BA had a market capitalization nearly twice that of
Iberia. As of closing on Thursday, BA was valued at 2.761
billion euros to Iberia's 2.115 billion euros. Still at
issue is BA,s pension deficit of nearly 3 billion euros.
The agreement stipulates that neither Iberia nor TopCo will
be liable for the pension plan and gives Iberia the option of
backing out if BA does not resolve the situation. The news
of the merger comes at a challenging time for Iberia. The
Spanish airline reported a net loss of over 16 million euros
during the third quarter this year and is facing difficult
labor relations, with several strike days planned before the
Christmas holidays. The companies expect to close the merger
by late 2010. (Iberia/BA Press Release, 11/12; El Pais/WSJ
Europe/Financial Times, 11/13)

Insurance Firms Fined 121 Million Euros for Price-Fixing

6.(U) The National Competition Commission (CNC) announced the
largest fine in its history: nearly 121 million euros against
six insurance companies -- Asefa, Swiss RE, Mapfre, Scor,
Muchener, and Caser. The CNC found that, from 2002 to 2007
-- during the height of the construction boom -- the
companies colluded to fix prices for the 10-year
construction-insurance policies required by Spanish law. The
penalty is over twice that of the CNC's second largest fine,
57 million levied against Astel and Telefonica in 2004.
(Europa Press, 11/13)