MADRID ECONOMIC WEEKLY, MAY 18-22

UNCLAS MADRID 000497 SIPDIS STATE FOR EUR/WE, EEB/IFD/OMA COMMERCE FOR 4212/D.CALVERT TREASURY FOR OIA/OEE/T.O'KEEFFE,D.WRIGHT E.O. 12958: N/A TAGS: ECON EFIN SP SUBJECT: MADRID ECONOMIC WEEKLY, MAY 18-22 REF: A. MADRID 469 ¶B. MADRID 446 Contents: ECON: State of Nation Measures Watered Down EFIN: Treasury Issues Debt for Below 1% EFIN: La Caixa, Caja Madrid, to Issue up to 5B Euros in Preferred Capital EFIN: Bank of Spain Studying Relaxing Provisioning Requirements State of Nation Measures Watered Down 1.(U) In order to gain legislative approval of supporting resolutions, the GOS watered down several of the measures announced by President Zapatero in last week,s state of the nation debate (ref A). The plan to reduce corporate income tax rates for small companies from 25% to 20% was dropped. The 24,000-euro income threshold Zapatero had announced above which no mortgage interest deductions would be permitted after 2010 was replaced by a vague reference to continuing to permit deductions for those with low incomes. Madrid regional president Esperanza Aguirre announced that her government would increase the regional deduction allowed for mortgage interest if Zapatero,s measure took effect. The subsidies for purchases of low-emission new cars to replace older vehicles took effect May 18, though not without confusion. Only a few regional governments have agreed to the GOS proposal that they contribute 500 euros to the subsidy, so in most communities the subsidy is 1,500 euros rather than 2,000. The auto manufacturers, association Anfac said that the confusion was causing purchases to be postponed, further harming the industry. Opposition Partido Popular leader Mariano Rajoy criticized Zapatero for governing via "announcements that last for 3 days" and are not followed through. (El Mundo, 5/20; El Pais, 5/20; El Confidencial, 5/21; El Pais, 5/22) Treasury Issues Debt for Below 1% 2.(U) The Treasury issued 3.9 billion euros in one-year debt on May 18 at a record low rate of 0.93%, down from 1.27% in the April auction. This is good news for the GOS in a year in which it is expected to need to issue 86 billion euros in debt. Perceptions of GOS risk appear to have declined; the spread between rates on ten-year Spanish and German debt has fallen from 1.3% in January to below 0.7%. (El Pais, 5/19) La Caixa, Caja Madrid, to Issue up to 5B Euros in Preferred Capital 3.(U) Private financial institutions, while having to pay much higher rates, also expect to be able to raise needed funds. Spain,s two largest savings banks ("cajas"),La Caixa and Caja Madrid, have obtained authorization to issue a total of 5 billion euros in preference shares ("participaciones preferentes"). These instruments are attractive to the issuers because they have characteristics of bonds but count towards capital requirements; the securities regulator has warned individual investors that they are more complex and riskier than traditional bonds and are not backed by a deposit guarantee fund. Because of its weaker condition (ref B),Caja Madrid expects to pay an interest rate about 1% higher -- La Caixa will pay 6% for the first two years and then 3.5% over the three-month Euribor rate for up to 2 billion euros, while Caja Madrid will pay 7% for the first five years and then 4.75% over the three-month Euribor rate for up to 3 billion euros. (El Pais, 5/22) Bank of Spain Studying Relaxing Provisioning Requirements 4.(U) The Bank of Spain is studying relaxing existing requirements that banks and cajas make provisions for 100% of the value of all loans more than 90 days delinquent and for 100% of the value of all mortgages delinquent for more than two years. Banking sector representatives say the Bank of Spain,s provisioning requirements are stricter than those of neighboring countries. The mortgage provisioning change would reduce the incentives for banks to take possession of properties, which many now do in order to avoid having their delinquency rates rise; cajas alone now own over 15 billion euros in real estate assets. However, the change also might prolong the lives of unviable institutions and delay restructuring of the sector. (EFE, 5/18; El Pais, 5/22) DUNCAN