Viewing cable 08MADRID1003, MADRID WEEKLY ECONOMIC UPDATE, SEPT. 15-19

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C O N F I D E N T I A L SECTION 01 OF 02 MADRID 001003

SIPDIS

STATE FOR EUR/WE, EEB/IFD/OMA
COMMERCE FOR 4212/DON CALVERT
TREASURY FOR IA/OEE W.LINDQUIST

E.O. 12958: DECL: 09/19/2010
TAGS: ECON ECPS EFIN ELAB ENRG EWWT KNNP SOCI
SUBJECT: MADRID WEEKLY ECONOMIC UPDATE, SEPT. 15-19

REF: MADRID 985

Classified By: Deputy Chief of Mission Arnold A. Chacon for Reason 1.4(
b)

Contents:

EFIN: Reactions to U.S. Financial Turmoil
EFIN: 2009 Budget to be Austere
ELAB/SOCI: Immigrant Return Incentive Approved
ENRG/EFIN: Energy Commission Fears Problems Unless GOS
Increases Electricity Charges
EWWT/KNNP: GOS on Track to Implement Radiation Detection
Maritime Portals by Late 2009
ECPS: Vodafone Launches 670 Million Euro Suit Against
Telefonica
EFIN: Sabadell Sells Half of Insurance Business for 750M Euros


Reactions to U.S. Financial Turmoil

¶1. (SBU) Spanish government officials and press followed the
U.S. financial turmoil closely during the week. President
Zapatero and Second Vice President and Economy and Finance
Minister Solbes reassured Spaniards that Spain's financial
sector was safe and its financial firms solvent. Zapatero
claimed that the turmoil proved that the U.S. subprime
mortgage crisis was the origin of Spain's difficulties.
Solbes later acknowledged that Spain's housing and inflation
problems predated the international credit crisis but said
they would have been manageable without the credit crisis.
Some of Zapatero's political allies described USG actions as
proving the inadequacy of unregulated markets and the value
of economic intervention.

¶2. (U) Solbes' ministry announced that Spanish financial
firms had only limited direct exposure to Lehman Brothers.
62 insurance companies had 281 million euros in exposure,
0.2% of the sector's total exposure. 45 pension funds had
exposure totaling 0.07% of assets, and investment funds had
300 million euros in Lehman bonds or shares, 0.13% of the
sector's assets. Solbes and visiting European Commissioner
for Economic and Monetary Affairs Joaquin Almunia called for
more centralized EU financial supervision. (All Media)

2009 Budget to be Austere

¶3. (U) Secretary of State for Treasury and Budget Carlos
Ocana announced September 18 that because of
lower-than-expected growth, the 2009 budget will be more
restrictive than the GOS had anticipated in June. Press
reports suggest that the 2009 budget proposal the GOS is
negotiating with parliamentary groups will include a deficit
of 2% of GDP. (Europa Press, 9/18; El Pais 9/17)

Immigrant Return Incentive Approved

¶4. (U) The Council of Ministers approved Labor Minister
Corbacho's proposal to allow unemployed immigrants to obtain
all of their unemployment benefit if they agree to leave the
country and not return for three years. Immigrants from the
19 non-EU countries that have Social Security agreements with
Spain will be able to participate, receiving 40% of the
benefit in Spain and the remaining 60% a month later in their
country of origin. Of the 165,000 immigrants registered as
unemployed in July, over half were from either Ecuador or
Morocco. The incentive must be reviewed by the Council of
State before it can take effect. (El Pais, 9/19; Council of
Ministers, 9/19)

Energy Commission Fears Problems Unless GOS Increases
Electricity Charges

¶5. (U) According to the National Energy Commission (CNE), if
the GOS does not drastically increase electricity tariffs,
then it runs the risk of accruing an additional debt of up to
5 billion euros in 2009 to add to the 9 billion it already
has with electricity companies. Under Spain's partially
liberalized electricity price system, tariffs for the captive
markets are set by the government. Companies that serve this
portion of the market often must sell electricity to
consumers below cost, producing a deficit that runs into
billions of euros which the GOS is obliged to reimburse.
With a deficit of 9 billion (partially financed by private
banks), the CNE fears that additional debt may incur serious
financial difficulties. Energy Secretary-General Pedro Marin

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told reporters that the next tariff increase would not take
place until January. Comment: Given Spain,s economic woes
and rising unemployment, the GOS will find it politically
difficult to raise electricity prices by too much. The GOS,
which has been under pressure from the European Commission to
abolish regulated tariffs and from the CNE to raise tariffs,
has said in the past that it needs several years to raise
regulated prices enough to bring them fully in line with
costs. Recent GOS tariff increases have been above the rate
of inflation but below CNE requests. (Expansion, 9/18; ABC,
9/17, Embassy)

GOS on Track to Implement Radiation Detection Maritime
Portals by Late 2009

¶6. (C) Spanish Customs officials told a DOE Megaports
visiting team and Emboff September 15 that the GOS was on
schedule to install radiation detection portals at the
maritime ports of Valencia and Barcelona by late 2009. The
GOS will shortly solicit bids from companies interested in
undertaking this Megaports project at each port. The bidding
and award process is expected to take 6 months, followed by
the construction and installation, which is expected to take
up to 9 months. The visiting DOE Megaports team was in
Madrid September 15 to add final technical suggestions to the
RFP document prepared by Spanish Customs. Comment: The only
obstacle the GOS may face in implementing Megaports may be
the upcoming year,s budget, which is expected to be strained
given the current economic woes. (Embassy)

Vodafone Launches 670 Million Euro Suit Against Telefonica
Subsidiary

¶7. (U) Vodafone has filed suit against Telefonica Moviles de
Espana in Spanish court (1st instance court in Madrid)
demanding reparation in the amount of 670 million euros.
Vodafone asserts that Telefonica abused its dominant position
in the mobile phone market between 1995-1999, blocking
Vodafone,s Airtel from gaining access to its network and
ultimately blocking Airtel from hundreds of millions of euros
in profits. According to the Spanish press, Vodafone,s suit
builds on the 2006 Supreme Tribunal,s decision that
determined that between 1996-1999, Telefonica engaged in
conduct that blocked or hindered Airtel,s access to the
network, conduct which did not comply with Spain,s law
against anti-competitive practices (Ley de Defensa de
Competencia).This is the largest judicial suit presented in
Spain against a Spanish multinational company. (El Pais, 9/15)

Sabadell Sells Half of Insurance Business for 750M Euros

¶8. (U) Banco Sabadell, Spain's sixth largest banking
institution, will sell half of its insurance business to
Zurich Vida for 750 million euros plus the possibility of up
to another 150 million euros over ten years, depending on the
evolution of future business. Sabadell is following other
Spanish banks that have sold or are studying selling part of
their insurance business to raise funds. Comment: Spain's
financial press gave this action very little coverage, which
suggests that it was not a panic sale. Sabadell's stock
price is down 40% from its peak of last year, but that is
actually less of a drop than most Spanish banks have
suffered. (Expansion, 9/19)

Aguirre