MADRID ECONOMIC WEEKLY, MARCH 30-APRIL 3

UNCLAS SECTION 01 OF 02 MADRID 000360 SENSITIVE SIPDIS STATE FOR EUR/WE, EEB/IFD/OMA, EEB/CIP/BA TREASURY FOR OIA/OEE/T.O'KEEFFE,D.WRIGHT COMMERCE FOR 4212/D.CALVERT E.O. 12958: N/A TAGS: ECON EFIN ELAB EPET KIPR SP SUBJECT: MADRID ECONOMIC WEEKLY, MARCH 30-APRIL 3 REF: A. MADRID 336 ¶B. MADRID 323 MADRID 00000360 001.2 OF 002 Contents: ECON: Zapatero Praises G-20 Summit Outcome, Expresses Optimism About Economy EFIN: CCM Savings Bank Takeover Sparks Concern About Banking System ELAB: Unemployment Continues to Rise ECON/ELAB: Central Bank Predicts 3% GDP Drop in 2009, 19% Unemployment in 2010 ECON: Annual Inflation Rate Falls Below Zero EPET: Abu Dhabi-Owned Company to Increase Stake in Spanish Oil Company to 47 Percent KIPR: GOS Launches Second Legal Software Campaign Zapatero Praises G-20 Summit Outcome, Expresses Optimism About Economy 1.(U) President Zapatero left the G-20 summit in London yesterday with a message of confidence and optimism, highlighting to the press that the participants were in concordance on a way forward and downplaying differences between U.S. and Europe over stimulus efforts and financial regulation. He noted that there was still much work to be done but suggested that the right conditions existed for the recession to touch bottom and recovery to begin in the second half of 2009. As part of the outcome of the summit, Spain will contribute 4 billion euros out of the EU's 75 billion towards the IMF. (All Media 4/3) CCM Savings Bank Takeover Sparks Concern About Banking System 2.(U) The Bank of Spain,s March 29 takeover of the Caja Castilla La Mancha (CCM) savings bank (Ref A) has sparked concern about the cost to the GOS, especially if other cajas need help. The GOS provided on April 1 a guarantee for 3 billion euros to support the central bank,s intervention. While the Council of Ministers had authorized up to 9 billion euros in guarantees if necessary, Second Vice President and Economy/Finance Minister Solbes said he expected that the cost of cleaning up CCM would not surpass 3 billion euros. Solbes continued to insist that CCM, which had been run by a former ruling party legislator, was solvent and merely faced a liquidity problem, which Castilla-La Mancha's regional governor claimed was the result of a smear campaign by the opposition PP party. However, press reports citing internal Central Bank documents indicated that CCM had resisted BOS instructions to revise its books to reflect the true value of its troubled loans to property developers and was in fact insolvent. 3.(SBU) Solbes announced on March 30 that the GOS would seek legislation to reduce politicization of the management of cajas, most of which are controlled by provincial or regional governments or their allies. The sums involved in the intervention of CCM -- which has only 1% of the financial system,s assets -- have made it clear that the three deposit guarantee funds, which have a total of 7 billion euros in resources, will not be sufficient to handle trouble at more than a few institutions. The GOS is reported to be planning a fund that would provide capital to financial institutions. Comment: In addition to its economic cost, the takeover has been a political black eye for the GOS because of the apparent influence of political considerations on GOS and Bank of Spain efforts to broker a merger with the also-PSOE-linked Unicaja. (El Pais, 3/30-4/3; El Confidencial, 3/30-4/3) Unemployment Continues to Rise 4.(U) According to the Ministry of Labor and Immigration, the number of unemployed jumped by 120,000 in March to a total of 3.6 million - the 12th consecutive monthly increase and the first increase in March in 16 years. Although the official GOS unemployment rate for the year's first quarter is not yet available, February's rate was 15.5 percent, according to the EU's data agency Eurostat. Spain has the highest level of unemployment in the EU. (All Media, 4/2) Central Bank Predicts 3% GDP Drop in 2009, 19% Unemployment in 2010 MADRID 00000360 002.2 OF 002 5.(U) The Bank of Spain was considerably less optimistic than Zapatero, predicting on April 3 that Spain will suffer a "deep recession" this year in which GDP will fall by 3%. It expects GDP to fall by another 1% in 2010 but for growth to resume in the year's second half. It predicts that unemployment will hit 17% this year and 19% in 2010 if no new measures are taken. The shrinking economy and rising unemployment will lead to budget deficits of over 8% of GDP in both 2009 and 2010. All of these predictions are worse than the most recent GOS predictions. (Expansion, 4/3; AFP, 4/3) Annual Inflation Rate Falls Below Zero 6.(U) Consumer prices in March are estimated to have been 0.1% below their March 2008 level, according to the National Statistics Institute's EU-harmonized index. This makes Spain the first eurozone member with a negative annual inflation rate since the monetary union,s founding. Second Vice President and Economy/Finance Minister Solbes dismissed concerns of deflation, noting that the lower price level was in part a result of petroleum prices being much lower than they were a year ago. Comment: The concern over deflation is not so much because prices are lower than they were a year ago, but because prices have fallen in four of the last five months, even after the oil price has leveled off. GOS officials expect the annual inflation rate to remain negative through the summer, as current prices will be compared to prices when oil was at its most expensive. (All Media) Abu Dhabi-Owned Company to Increase Stake in Spanish Oil Company to 47 Percent 7.(U) Banco Santander and Union Fenosa have agreed to sell their 32.5% and 5% stakes in Spanish oil company CEPSA to Abu Dhabi's International Petroleum Investment Company (IPIC). The sale will raise IPIC's share in the company to 47%. Once the agreement receives approval from the appropriate regulatory bodies, IPIC will become the second largest shareholder of CEPSA after the French company TOTAL. CEPSA is a petrochemical and refinery company with a large service station network in Spain and Portugal. (All Media, 3/31; IPIC Press Release, 3/31) GOS Launches Second Legal Software Campaign 8.(U) The Secretariat of State for Telecommunications launched March 31 the second phase of its campaign to promote use of legal software, which is part of the GOS,s "Plan Avanza" for development of the information society. The campaign will be implemented in coordination with the Spanish Electronic, Information Technology and Telecommunications Industry Association (AETIC) and the Business Software Alliance (BSA). The 2007 campaign is credited with a reduction in software piracy levels, and BSA is the only major copyright-dependent organization to express satisfaction with GOS anti-piracy efforts. Comment: Spain has achieved some success combating software piracy but continues to face significant challenges with illicit Internet downloads of music, films, and video games. End Comment. (Ministry of Industry, Tourism, and Commerce, 4/1) CHACON