MADRID ECONOMIC WEEKLY, FEBRUARY 1-5

UNCLAS SECTION 01 OF 02 MADRID 000148 SENSITIVE SIPDIS STATE FOR EUR/WE, EEB/IFD/OMA, EEB/TPP/IPE STATE PASS USTR FOR D.WEINER AND J.GROVES COMMERCE FOR 4212/DON CALVERT TREASURY FOR OIA/OEE R.JOHNSTON E.O. 12958: N/A TAGS: ECON EFIN ELAB KIPR SP SUBJECT: MADRID ECONOMIC WEEKLY, FEBRUARY 1-5 REF: A. MADRID 114 ¶B. 09 MADRID 410 MADRID 00000148 001.3 OF 002 Sensitive but Unclassified -- Not for Internet Distribution ECON/EFIN: Markets Shaken by Concern over Deficits, Perceived GOS Indecisiveness ECON: Recession Likely Continued in 2009 Q4, According to Central Bank ELAB: Unemployment Continues to Rise KIPR: First Criminal Conviction for Hosting Unauthorized Streaming Video ECON: 13 Towns Seek to Host Nuclear Waste Storage Facility Markets Shaken by Concern over Deficits, Perceived GOS Indecisiveness 1.(SBU) Interest rates on Spanish government debt rose during the week and the Madrid stock market's blue-chip exchange fell 6% on January 4, reflecting international concern over Spain's economic situation, particularly the GOS budget deficit and unemployment. While announcing on January 29 that the 2009 combined government budget deficit was a higher-than-expected 11.4% of GDP, the Council of Ministers approved measures to reduce spending in 2010 and to reduce planned spending in 2011-13. However, the reduction of government stimulus is expected to prolong high rates of unemployment. 2.(SBU) Press reports and opposition politicians also criticized the GOS for appearing indecisive in the face of economic turmoil. A January 29 proposal to raise the retirement age from 65 to 67, which the GOS portrayed as a responsible effort to begin addressing the long-term demographic challenge faced by the social security system, prompted union opposition and was revised soon afterwards when the GOS said part of the proposal had been submitted in error. As EC and IMF officials were quoted comparing Spain's deficit and other economic problems to Greece's, the spreads between Spanish and German debt, which had dipped briefly after the January 29 announcements, rose past 100 basis points, reaching their highest level since March 2009. The high spreads will increase the interest the GOS must pay to finance its deficit and roll over its existing debt, putting further strain on the deficit. 3.(SBU) Political factors contributed to the sense of uncertainty. The media described the USG decision not to have President Obama come to Madrid for a U.S.-EU Summit during Spain's EU presidency as a setback that shook President Zapatero, and a February 4 poll showed the opposition PP with its greatest lead over the ruling PSOE since Zapatero took office in 2004. The GOS invited union and business leaders to a February 5 meeting to present labor reforms, and the press reported the GOS had specific proposals ready, but the document presented was very general. Economy/Finance Minister Salgado planned to travel to London February 8 to make Spain's case to financial market participants and journalists. GOS officials insist that, while the budget deficit is a problem, Spain's total debt-to-GDP ratio remains relatively low -- it is projected to reach 70% this year, below the Eurozone average. (All Media) Recession Likely Continued in 2009 Q4, According to Central Bank 4.(U) The Bank of Spain's January economic bulletin estimates that the economy continued to contract in the fourth quarter of 2009, though the decline was only 0.1% from the third-quarter figure. Some analysts had speculated in recent weeks that GDP might have been flat or even grown slightly in the quarter, though GOS officials had sought to avoid raising expectations. It is not clear how markets will react; the slight decline should not be a surprise, but the news that Spain has been in recession for seven consecutive quarters could generate headlines. The official National Statistics Institute figure will be released in about 10 days. (Europa Press, 2/5) Unemployment Continues to Rise 5.(U) The Ministry of Labor and Immigration announced that the number of registered unemployed rose by 125,000 in MADRID 00000148 002.3 OF 002 January. This pushes the total number of registered unemployed Spaniards past 4 million, the highest recorded since the current series was started in 1996. Labor Minister Corbacho said that unemployment is expected to continue rising until the second half of this year. Separately, Spain's December unemployment as measured by Eurostat was 19.5%, the second highest in the EU. (El Pais, 2/2; USEU Brussels 122) First Criminal Conviction for Hosting Unauthorized Streaming Video 6.(U) A Galician judge sentenced the owner of a website selling streaming pirated videos to one year in prison and a fine of 2,000 Euros. This is the second criminal conviction in Spain for websites hosting pirated works, and the first for a website offering streaming video. The first conviction came a year ago when a La Rioja judge convicted an individual who facilitated Peer-to-Peer (P2P) downloading of pirated material for a one-time fee (Ref A). The current conviction is significant because the website does not allow customers to download pirated works (which facilitates P2P sharing as in the previous case),only view the 'streaming video' in real time. Currently, the Penal Code identifies profit motive as a required element of IPR crime, allowing prosecutors to pursue such IPR cases as criminal and not civil offenses. Comment: Even though this is a significant ruling, judges in Spain are independent of each other. While this may influence future cases, there will not be a binding decision on IPR unless the Supreme Court acts. (El Pais, 2/5) 13 Towns Seek to Host Nuclear Waste Storage Facility 7.(U) The Ministry of Industry, Tourism, and Commerce has received requests from 13 towns from 5 regions to host a proposed temporary nuclear waste storage facility (ATC). The Ministry will make its decision based on each town's location, citizen sentiment, and general ability to host the facility. Spain's nuclear plants are expected to run out of space to store waste within a few years. Also, the contract under which France stores waste from the Vandellos I reactor closed in 1989 imposes penalties if that waste is not returned by 2011. The ATC is intended to store waste for 60 years, and the contract is valued at one billion Euros; the candidates are small towns hurt by the recession, and some are near nuclear power plants. Many of the applications have been controversial, and each town faces opposition from the president of its region, all whom are from the ruling PSOE. Industry, Tourism, and Commerce Minister Sebastian recently emphasized that the matter was not one over which regional governments had any authority. (El Economista, 2/4; El Pais, 2/5) SOLOMONT