MADRID ECONOMIC WEEKLY, FEB. 16-20

UNCLAS SECTION 01 OF 02 MADRID 000184 SENSITIVE SIPDIS STATE FOR EUR/WE, EEB/IFD/OMA TREASURY FOR OIA/OEE/D.WRIGHT COMMERCE FOR 4212/DON CALVERT E.O. 12958: N/A TAGS: ECON EFIN EIND ELAB PREL SP SUBJECT: MADRID ECONOMIC WEEKLY, FEB. 16-20 REF: MADRID 125 MADRID 00000184 001.2 OF 002 Contents: EFIN/PREL: President Zapatero Invited to London Economic Summit ECON: Sharp Inflation Decreases Prompt Deflation Worries EIND: GOS Unveils "New" Car Support Measures ELAB: Transfer of EADS Military Aircraft Line Sparks Fears of Job Losses EFIN: Troubled CCM Savings Bank Planning Merger With Unicaja President Zapatero Invited to London Economic Summit 1.(SBU) On February 13, UK Prime Minister Brown sent a letter to President Zapatero officially inviting him to participate in the April 2 London Economic Summit. Comment: The Zapatero Administration has lobbied strongly to be able to participate in G-20-type financial reform discussions, partially as a way to be seen as a world player at home. Spanish media has not yet reported that Second Vice President and Minister of Economy/Finance Pedro Solbes was not invited to accompany Zapatero although his counterparts from G-20 countries were invited. (El Pais, 2/19). Sharp Inflation Decreases Prompt Deflation Worries 2.(U) Amidst falling consumption and petroleum prices, the consumer price index fell by 0.8 percent in January according to the National Statistics Institute (INE),the third consecutive monthly decline. The drop brought the year-on-year inflation rate to 0.8 percent, the lowest in 40 years, spurring concern over the possibility of deflation in the near future. (ABC, 2/13; INE website) GOS Unveils "New" Car Support Measures 3.(U) The GOS announced on February 13 a 4 billion euro package to help Spain's ailing auto sector, although the majority of the measures under the "new" auto package had been previously announced as part of other support packages. Included in the 4 billion euro plan is 1.2 billion euros in state credit for those wishing to replace older cars with new environmentally friendly cars, 800 million euros for carmakers to implement production upgrades (reftel),and 950 million euros in rail, road, and sea infrastructure improvements. The package also includes state credit lines for small and medium-sized firms. Among the newer items, the plan will allow auto manufacturers to defer their social security contributions in 2009. ANFAC, Spain's auto industry association, expressed disappointment in the plan and expressed desire for more measures that would increase demand for new cars in Spain. Spain's auto manufacturing sector employs 70,000 directly and contributes between 2-5 percent of Spain's GDP. In 2007, Spain was the 8th largest auto producer worldwide. (All Media, 2/14) Transfer of EADS Military Aircraft Line Sparks Fears of Job Losses 4.(U) Local media was dominated this week by the news that EADS-CASA's Military Transport Aircraft Division (MTAD), which is based in Madrid and employs over 9000, would soon be subsumed under EADS subsidiary Airbus. Although the decision to transfer MTAD to Airbus is not new, recent concerns over job losses and the loss of the Spanish "brand" have sparked controversy. The move comes after cost overruns and delays on the part of MTAD on its 20 billion euros A400M military plane project. Minister of Industry Miguel Sebastian met with EADS representatives February 18 to discuss GOS concerns, and on February 19 EADS CEO Louis Gallois made assurances that Spanish jobs would not be affected. EADS-CASA, a Spanish aircraft manufacturer, is the Spanish branch of EADS, which is the parent company of Airbus. SEPI, the GOS's public industrial holding company, has a 5.5 percent stake in EADS. (All Media, 2/16-2/20) Troubled CCM Savings Bank Planning Merger With Unicaja 5.(U) Although Spanish financial institutions have fared better during the global financial turmoil than some of their European counterparts, smaller savings banks ("cajas") that were most exposed to Spain's housing sector are showing signs of financial stress. Castilla La Mancha Savings Bank (CCM) is reportedly facing financial difficulties, leading the MADRID 00000184 002.2 OF 002 institution to move forward on a merger with prominent Andalucian savings bank Unicaja. If successful, the merger would result in the 6th largest financial institution in Spain and the first merger between cajas from different Autonomous Communities. Many of Spain's 45 savings banks are run or influenced by regional governments, and they reportedly occasionally engage in transactions reflecting the political agenda of those local governments. Spain's cajas hold over half of the nation's loans. (Expansion, 2/19; El Pais, 2/18-19-20) CHACON