MADRID ECONOMIC WEEKLY, APRIL 20-24

UNCLAS SECTION 01 OF 02 MADRID 000414

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 SP
SUBJECT: MADRID ECONOMIC WEEKLY, APRIL 20-24

REF: A. MADRID 397

B. MADRID 336

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Contents:

ELAB: Unemployment Above 17%
ECON: IMF Predicts 3% GDP Decline in 2009
ECON: IMF Questions GOS Room for More Spending
EFIN: Cajas Continue to be a Concern
EFIN: Fitch Lowers Caja Madrid, Other Ratings
EFIN: Valuation Complicates Cajas' Real Estate Assets Plan


Unemployment Above 17%

1.(U) The unemployment rate rose to 17.3% in the first
quarter of the year, up more than 3% from the fourth-quarter
2008 rate. This is the highest rate since 1998. More than 4
million Spaniards are now unemployed, 84% more than were
unemployed a year ago. (National Statistics Institute, 4/24)

IMF Predicts 3% GDP Decline in 2009

2.(U) The IMF predicted that Spain,s GDP will contract by 3%
this year and 0.7% next year. The 2009 prediction is a 1.3%
deterioration from the IMF,s previous prediction for the
same year, released in January. The Bank of Spain recently
predicted similar contractions of 3% this year and 1% next
year. These forecasts are significantly more pessimistic
than the most recent GOS predictions, made somewhat earlier,
of a 1.6% contraction this year and 1.2% growth in 2010.
Equally troubling is that the IMF expects a slow recovery,
with growth only reaching 2% in 2014. (El Pais, 4/23-24)

IMF Questions GOS Room for More Spending

3.(U) In presenting the IMF's report on Spain, the IMF's
country economist warned that the GOS had little room for
additional spending. New Second Vice President and
Economy/Finance Minister Elena Salgado emphasized that the
GOS continues to have room for additional spending. She did,
however, warn that the GOS would have to be "more selective"
in choosing projects. Press reports speculate that Salgado
was named because she would be more aggressive about
increasing spending than was her predecessor, Pedro Solbes.
(Comment: Most analysts now expect this year's GOS budget
deficit will be over 6% of GDP, and this does not include
deficits of regional and municipal governments.) (El Pais,
4/23-4/24)

Cajas Continue to be a Concern

4.(U) Although the GOS has only had to intervene in one
financial institution so far (Ref B),there is a widespread
expectation that others, primarily savings banks ("cajas"),
will face difficulties as the newly unemployed have trouble
making their mortgage payments. According to one report,
central bank Governor Fernandez Ordonez told legislators the
names of seven cajas that are in such bad shape that the
central bank is requiring daily deposit reports. The GOS is
reported to be finishing plans for a financial sector rescue
fund aimed at cajas. The fund would contain about 40 billion
euros, some 30 billion of which would come from remaining
funds in the GOS' financial asset acquisition fund (FAAF)
created last year. (The GOS has reportedly decided to stop
FAAF purchases after buying almost 20 billion euros of
assets, as institutions are said to have covered their most
urgent liquidity needs and no longer find the terms
attractive.) The rest of the financing for the financial
sector rescue fund would come from the existing deposit
guarantee funds for cajas, banks, and cooperatives, and from
banks and cajas themselves. The cajas welcome reports of
creation of the fund, while the banking association appears
to object to the use of public funds to support individual
cajas. Separately, there are conflicting reports as to
whether a revision to the regulatory framework for cajas will
be ready in a month or so or has been shelved because of
political party opposition to reducing political control over
the cajas. (El Confidencial, 4/21-22-23; ABC, 4/23; El Pais
4/21-23-24)

Fitch Lowers Caja Madrid, Other Ratings

5.(U) The Fitch credit rating agency lowered its long-term
rating on Caja Madrid from AA-minus to A-plus, citing its
exposure to construction companies. Caja Madrid, Spain's

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fourth largest financial institution, reported earnings of
357 million euros in the first quarter of 2009, up 1 percent
from its first-quarter 2008 figure. However, its loan
delinquency rate reached 5.6%, four times its level of a year
earlier and higher than the 4.6% figure for cajas as a whole.
Fitch also lowered its rating for CajaSur to BB-plus, giving
it junk bond status, and its rating for Caja Granada from
A-minus to BBB-plus. CajaSur's delinquency rate is 6.4%.
Unlike most cajas, the Cordoba-based CajaSur is not
controlled by a regional or local government, but by the
Catholic Church. (El Pais, 4/22-23)

Valuation Complicates Cajas' Real Estate Assets Plan

6.(U) According to one report, plans to collect troubled real
estate assets of 23 or more cajas in a separate vehicle,
Ahorro Corporation (ACSI),are foundering over disagreements
over asset valuation. ACSI would issue stock to
participating cajas in return for their real estate assets,
providing tax and regulatory advantages. Initially
interested cajas are now said to be reluctant after ACSI's
assessor indicated that it would require valuations that
would force the cajas to recognize significant losses. (El
Confidencial, 4/21)



CHACON