VZCZCXRO5222
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #1262/01 1761623
ZNR UUUUU ZZH
R 251623Z JUN 07
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 2873
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 2853

UNCLAS SECTION 01 OF 02 MADRID 001262 
 
SIPDIS 
 
SIPDIS 
 
EUR/WE 
 
E.O. 12958: N/A 
TAGS: EAGR ECON EFIN EIND ELAB ETRD TBIO SP EINV
UK, SMIG 
SUBJECT: MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT - 
JUNE 18 
 
 
MADRID 00001262  001.2 OF 002 
 
 
ECON:  Weakening Spanish Economy 
ECON: GoS to have Budget surplus for the 4th year 
EINV/EFIN: Spain's big banks selling off real estate and debt 
EAIR: Spanair for sale 
ENRG: Miscalculation causes debate over electricity prices 
EAGR: Olive production hits record highs 
SOCI: Madrid makes top 30 most expensive city list 
ECON: Taxes in Spain 
 
 
THE STAGE IS SET FOR THE BEGINNING OF THE END OF THE ECONOMIC 
BOOM 
 
¶1. (U) Andrew Garthwaite, Chief Global Equity Strategist, 
summarized local opinion in an editorial about the weakening 
Spanish Economy.  Garthwaite believes that Spain's economic 
boom was caused by the ECB interest rate being too low for 
Spain's unique economic circumstances.  Garthwaite believes 
that as interest rates trend upward this will have a negative 
effect on consumers who have 75% of their debt at floating 
rates. 
 
¶2. (U) Garthwaite further points out a number of potential 
weaknesses in the Spanish economy.  First, both businesses 
and Spanish consumers have too much debt.  Second, the ratio 
of housing prices to wages is too high implying that housing 
is overvalued.  Third, too much of the Spanish economy (20% 
of total, and 33% of growth) is dependent upon in the real 
estate sector.  Spain is also losing its competitiveness in 
labor due to growing unit labor costs relative to other EU 
countries.  Finally, Spain's stock market appears over 
valued, including the blue-chip IBEX index. 
 
¶3. (U) Despite these warning signs, Garthwaite believes that 
with government debt being relatively low at 21% of GDP, and 
continuing immigration, Spain should have the flexibility to 
adjust smoothly to the end of its boom and avoid recession. 
(Note: Most Embassy contacts in the private sector continue 
bullish on the economy has been overwhelmingly optimistic. 
Despite the obvious existence of "weaknesses" and the 
weakening housing market, our contacts tell us that the 
Spanish economy will avoid serious negative repercussions. 
(June 14, Financial Times) 
 
BUDGET SURPLUS DESPITE TAX INCREASE 
 
¶4. (U) The GoS reports that tax revenues in Spain are 
expected to rise by 7% next year and will lead to a budget 
surplus for the fourth consecutive year.  Despite this 
optimistic news, the government reports that it wishes to 
continue to be prudent on fiscal matters and maintain a 
balanced budget.  GoS officials are concerned that increases 
in social security costs and other social spending will 
stress the spending side of the ledger.  The European 
Commission indicates that Spain will see a budget surplus of 
1.4% of GDP in 2007, a much more optimistic prediction than 
GoS' 7% estimate. 
 
SPAIN'S BIG BANKS SELLING OFF REAL ESTATE AND DEBT 
 
¶5. (U) Following a trend among large banks, Bank of Santander 
has decided to sell off nearly all of its real estate, mostly 
company offices.  In what will be the largest real estate 
sale ever in Spain, Bank of Santander expects to make a 
profit of about 1.4 billion euros on properties worth an 
estimated 4 billion euros.  (Comment. Presumably to help pay 
for proposed acquisition of Banco Real of Brazil and Banca 
Antonveneta of Italy.) In a similar move, BBVA announced that 
they decided to sell most of its offices in Bilbao and Madrid 
in an effort to relocate its various offices to a centrally 
located headquarters in Madrid. 
 
¶6. (U) In other news, BBVA has decided to auction off 720 
million euros of delinquent debt in order to increase 
liquidity as well as escape an anticipated rise in delinquent 
debt in Spain.  This follows a 2005 Banco Santander move to 
sell off a Spanish record 1.4 billion worth of delinquent 
accounts.  Banks are also considering selling some of their 
current mortgage loans, also in anticipation of an increased 
risk of delinquency of payment in that sector. 
 
SPANAIR FOR SALE 
 
¶7. (U) The Scandinavian airline SAS has announced that it 
will sell Spanair.  Spanair Spain's second biggest airline, 
has not been profitable under SAS and has generally been 
problematic for the company.  Gonzalo Pascual, the current 
Spanair Chairman, and also president of Marsans said that he 
 
MADRID 00001262  002.2 OF 002 
 
 
wants to launch a full takeover and will use the funds 
generated from the recent sale of Marsans' cruise business to 
Royal Caribbean.  Pascual was one of the original founders of 
the twenty five year old Spanair. 
 
DEBATE ON FUTURE ELECTRICITY PRICES 
 
¶8. (U) Last week, the Ministry of Industry in conjunction 
with the National Commission on Energy announced a 1.8 
percent hike for August.  GoS recently discovered that 
Spanish energy firms had erroneously overcharged clients in 
2006 to the tune of 1.1 billion euros (a result of an 
accounting issue involving emission credits).  Energy 
companies will feel the affect of this miscalculation 
presumably as the debate on energy prices continues to gain 
momentum. 
 
OLIVE PRODUCTION HITS RECORD HIGH 
 
¶9. (U) Olive production has reached record levels, according 
to the Olive Oil Agency in a record harvest.  The large 
supply has pushed down prices domestically and of Spanish 
exports of olive products. 
 
MADRID MAKES THE TOP 30 MOST EXPENSIVE CITIES LIST 
 
¶10. (U) Madrid and Barcelona are two of the 30 most expensive 
cities in the world for foreigners employed in a foreign 
company according to a study from Mercer Human Resource 
Consulting.  Madrid occupied position 53 last year and jumped 
to 26th place.  Barcelona moved up 25 places from last years 
standings up to 31.  The average monthly rent for an 
unfurnished two bedroom apartment in Madrid is 1,400 and 
1,500 euros in Barcelona.  Whereas in Moscow, the city that 
holds the number 1 ranking, average monthly rent is 3,036 
euros.  The reason for this showing is attributed to the 
strength of the euro and other European currencies that have 
caused European cities, not only in Spain, to have scaled 
positions. 
 
TAXES IN SPAIN 
 
¶11. (U) In 2006 Spain's tax percentage climbed to 36.52% of 
GDP, although it still remains below the EU average of 41.2%. 
 This figure has been rising at about 1% per year throughout 
Zapatero's term and is a product of Spain's economic boom and 
reduction in unemployment.  Although this economic indicator 
gives no evidence of an economic slowdown, it is considered 
too early for the effects of a slowdown to have shown up in 
Spain's tax revenues. 
AGUIRRE