VZCZCXRO3576
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #1404/01 1971227
ZNR UUUUU ZZH
R 161227Z JUL 07
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 3013
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 2916

UNCLAS SECTION 01 OF 03 MADRID 001404 
 
SIPDIS 
 
SIPDIS 
 
EUR/WE 
 
E.O. 12958: N/A 
TAGS: EAGR ECON EFIN EIND ELAB ETRD KIPR TBIO SP
EINV, UK, SMIG 
SUBJECT: MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT - 
JULY 9 
 
MADRID 00001404  001.2 OF 003 
 
 
EFIN: High corporate debt levels prompt tougher credit 
conditions 
EFIN: Holding companies are rigorously inspected by tax agency 
EINV/ENRG: CNE approves Enel and Acciona's bid for Endesa 
SENV/BEXP: Chinese toothpaste seized due to contamination 
EAGR/BEXP: Bad year for U.S. wheat exports to Spain 
EFIN: Opposition conservative pary offers tax cuts 
ECIN: Egyptian Minister promotes economic cooperation 
EAIR/ELAB: SpanAir strike over 
ECON: 2008 Budget: More R&D and infrastructure investment 
ENRG: Expert Spanish wind power companies armed and ready to 
tackle U.S. market 
 
 
HIGH SPANISH CORPORATE DEBT LEVELS PROMPT TOUGHER CREDIT 
CONDITIONS 
 
¶1. (U) Standard & Poor's says Spanish corporate debt is at 
106% of GDP, compared with a 70% Eurozone average.  The 
result is that banks are having a harder time syndicating 
loans.  Colonial's (a major Spanish real estate group) chief 
financial  officer says there has been a "radical change in 
the perception of Spanish country risk."  A year ago, banks 
were reportedly willing to lend up to 120% of a real estate 
group's net asset value; now they are only willing to lend up 
to 30% in most cases.  (Comment: There is a sense that higher 
interest rates will at least slow down Spain's 
construction-led boom.  But many analysts remain bullish, 
noting that even with recent interest rate hikes, Spanish 
businesses and consumers can handle the more expensive money 
because it still remains much cheaper than it was prior to 
Spain's entry into the euro.) (Financial Times, July 10). 
 
SPANISH TAX AGENCY INSPECTS SPANISH ENERGY HOLDING COMPANIES' 
DEDUCTIONS MORE RIGOROUSLY 
 
¶2. (U) The Spanish Tax Agency believes that some holding 
companies have taken undue advantage of a 1996 law that 
provided tax benefits for holding companies.  The idea was to 
attract foreign investment, and the law did, in fact, do 
that.  Apparently some Tax Agency inspectors believe that the 
financial cost deductions taken by holding companies may be 
excessive. (Comment: The reason this is interesting to us is 
that American holding companies have complained that the 
Spanish tax authorities have effectively changed the rules 
retroactively for holding companies.  We are encouraging the 
GOS to study the issue with a view to maintaining a good 
investment climate.  The Spanish Tax Authority is, however, 
not necessarily amenable to political direction so this will 
be a challenging issue to manage.) (Expansion, July 9) 
 
CNE APPROVES ENEL AND ACCIONA'S BID FOR ENDESA 
 
¶3. (U) The Spanish National Energy Commission (CNE) approved 
this past week Enel and Acciona's bid to buy major Spanish 
energy utility Endesa.  The approval came with twelve 
conditions attached, including stipulations that Endesa 
preserve its brand identity and headquarters in Spain and 
that the CNE maintain the ability to veto decisions which 
could endanger the Spanish national interest. Enel is 
required to maintain Endesa as a separate company and not 
absorb it.  Furthermore, CNE maintained that a separate 
management team must be set up within Endesa to manage 
nuclear power operations, and thereby keep Enel, in which the 
Italian government holds a significant stake, from gaining 
too much control over Spain's nuclear plants. 
 
CONTAMINATED TOOTHPASTE HITS SPAIN 
 
¶4. (U) Spanish authorities seized approximately 100,000 tubes 
of contaminated toothpaste on July 6 originating from China. 
After further investigation, local authorities determined 
that the toothpaste was contaminated with the same chemical, 
diethylene glycon, as the contaminated Colgate tubes 
discovered in the United States.  The affected products 
seized in Spain were of a non-name brand toothpaste commonly 
distributed in local hospitals and on airplanes. 
 
SPANISH WHEAT MARKET SURPLUS TO LIMIT US EXPORTS 
 
¶5. (U) The prospects for U.S. high-quality Hard Red Spring 
and durum wheat sales to Spain appear to be greatly reduced 
this year, when compared to previous marketing years.  Now, 
approaching the end of the grain harvest, it appears that 
Spanish grain yields and production have reached record 
levels, as a result of the timely and plentiful springtime 
rains and dry harvest-time weather.  Among the various grains 
produced in Spain, the improvements in wheat and barley 
 
MADRID 00001404  002.2 OF 003 
 
 
yields and production, over those of previous years, have 
been especially significant.  In addition, grain quality is 
reported to be extremely good, which will likely result in 
reduced demand for high-quality wheat imports from North 
America because Spanish millers will require less 
high-protein wheat to mix with the normally poorer-quality 
Spanish soft wheat.  Spanish pasta makers will also have 
plenty of local durum wheat, so as not to require high 
quality imports. 
 
OPPOSITION CONSERVATIVE PP PARTY OFFERS TAX CUTS 
 
¶6. (U) PP leader Mariano Rajoy used a July 10 PriceWaterhouse 
lunch attended by Spain's business elite to offer to 
eliminate the wealth tax; reduce personal income taxes 
between 12% and something below 40%; reduce corporate income 
taxes to 25% for most companies and 20% for small businesses; 
eliminate the tax levied on corporate financial 
restructuring; reduce or eliminate taxes on certain legal 
transactions; and reform the estate tax.  (Comment: This is 
clearly an electoral offer - elections must be held by March 
2008 at the latest.  The tax cut ideas were not followed by 
specific plans for savings, something of a disappointment for 
fiscal hawks - the PP normally argues for more fiscal 
restraint.  Interestingly, the proposal to eliminate taxes on 
legal transactions would benefit the real estate sector the 
most, an area the PP clearly sees might need shoring up given 
widespread fears of a real estate bubble.  Rajoy's ideas 
followed President Zapatero's pledge to pay families 2500 
euros for each new baby.  Clearly, both political parties are 
trying to reach voters through economic proposals, although 
terrorism and constitutional issues will still likely 
dominate the elections.)  On July 11, Finance Minister Solbes 
rejected Rajoy's tax cuts because he said they would lead to 
a budget deficit on the order of 0.4% of GDP. (Expansion, 
July 10;July 11) 
 
EGYPTIAN MINISTER OF FOREIGN TRADE AND INDUSTRY PROMOTES 
ECONOMIC COOPERATION IN SPAIN 
 
¶7. (U) Egyptian Minister of Foreign Trade and Industry, 
Rachid Mohamed Rachid, visited Spain in hopes of promoting 
investment and economic cooperation between the two nations. 
Accompanied by a delegation of representatives from 50 
leading Egyptian businesses, the group met with notable 
Spanish businesses such as Union Fenosa, Iberdrola, Cepsa, 
Corte Ingles, and Banco Santander.  Rachid was quoted as 
saying that the meetings were very positive, particularly 
those meetings with representatives from the energy and 
tourism sectors. (Note:  Egypt is currently a minor supplier 
of petroleum to Spain).  During his visit, the Egyptian 
Minister also met with Minister of Industry, Commerce and 
Tourism Joan Clos, who promised a reciprocal visit to Egypt 
in October. 
 
SPANAIR AIRLINE STRIKE OVER 
 
¶8. (U) SpanAir, one of Spain's most well known airlines, 
reached an agreement July 6 with the Independent Union of 
Cabin Airline Crew (SITC-PLA) to grant its employees 
concessions on work hours and scheduling issues. This 
agreement brought to a close employee strikes which affected 
over 100 SpanAir flights since the strike's commencement June 
¶25.  SpanAir, a member of the Scandinavian travel group Star 
Alliance, operates a fleet of over 60 aircraft and employs 
more than 3,600 people. 
 
2008 BUDGET: MORE R&D AND INFRASTRUCTURE INVESTMENT 
 
¶9. (U) The Secretary General of Budgeting at the Ministry of 
Economy and Treasury, Luis Espadas, announced that research 
and development, infrastructure investment, and social 
spending would be the leading priorities in the 2008 budget, 
the last budget for this administration.  He noted that the 
budget ceiling had already been approved by the Council of 
Ministers and signed off on by Congress at 152.6 billion 
euros, a 6.7 percent increase over 2007.  Congressional 
discussion on the details of the 2008 budget is expected to 
occur late September. 
 
 
SPANISH COMPANIES EXPERT IN WIND POWER ARMED AND READY TO 
TACKLE GROWING U.S. MARKET 
 
¶10. (U) The United State's recent appetite for renewable wind 
energy has created a shortage in the wind turbines needed to 
generate the power.  Due to the nature of the production of 
wind turbines, like airplanes requiring many high-tech 
 
MADRID 00001404  003.2 OF 003 
 
 
specially made components from many different producers, the 
recent jump in demand has left turbine manufacturers with 
long order backlogs.  Being relatively new to the game, 
American renewable energy companies have found themselves at 
the back of the line and without the equipment to increase 
their wind power generation.  This has created a unique 
opportunity for European players such as Spain's Iberdrola, a 
world leader in renewable energy which holds many of the new 
turbine production contracts over the next few years.  The 
result is that Iberdrola is now being welcomed as it seeks to 
acquire U.S. firms in search of turbines.  The company has 
bought small companies in Pennsylvania, Iowa and Virginia, as 
well as Maine utility Energy East for 4.58 billion in June 
¶2007.  Similarly, Spanish turbine manufactures Gamesa and 
Acciona have been opening plants in the United States in 
order to meet new demand.  Part of the reason the United 
States has lagged behind in wind power has been inconsistent 
government support for the technology.  That support appears 
to be solidifying and old hand European companies are looking 
to reap the benefits. 
AGUIRRE