VZCZCXRO7413
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #0547 1401027
ZNR UUUUU ZZH
R 191027Z MAY 08
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 4776
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 3424

UNCLAS MADRID 000547 
 
SIPDIS 
 
STATE FOR EUR/WE AND EEB/IFD/OMA 
 
E.O. 12958: N/A 
TAGS: EAGR ECON EFIN EINV KGHG SENV SP
SUBJECT: MADRID WEEKLY ECON/COMMERCIAL UPDATE MAY 12 - MAY 
16 
 
REF: MADRID 525 
 
Table of Contents: 
 
ECON/KGHG: Gonzalez, Rato Agree Economy has not Touched Bottom 
EFIN: Continued Strong Profit Growth for Non-Real Estate 
Companies 
EFIN/EINV: Santander to Participate in U.S. Bank Capital 
Increase 
ECON/EINV: Spain 2nd Best Destination for International Retail 
SENV/EAGR: Wine Maker Adapts to Global Warming, Drought 
 
 
GONZALEZ, RATO AGREE ECONOMY HAS NOT TOUCHED BOTTOM 
 
¶1. (U) Felipe Gonzalez and Rodrigo Rato, speaking at a 
conference of Repsol directors, agreed that the current 
economic slump has not yet hit bottom, but both expected that 
it would be relatively short-lived.  Former PP Economy 
Minister and IMF Managing Director Rato said businesses 
should get used to higher interest rates than they had seen 
in the recent past, noting the bad combination of high 
inflation and low growth.  Former President Gonzalez (PSOE) 
also doubted that Europe would make the "revolutionary" 
changes needed to meet its greenhouse gas emissions 
reductions commitments given its dependence on oil.  (El 
Pais, 5/13; El Mundo, 5/13) 
 
CONTINUED STRONG PROFIT GROWTH FOR NON-REAL ESTATE COMPANIES 
 
¶2. (U) First-quarter profits of Spanish companies traded on 
the Madrid Stock Exchange showed a marked split between 
companies affected by the construction/real estate slump and 
others.  Profits for the market as a whole rose just over 5% 
from their first-quarter 2007 level.  However, profits of the 
blue-chips that make up the IBEX-35 index rose 17%, and 
profits for the entire market except for the six largest real 
estate firms (none of which are in the IBEX-35 any more) rose 
16%.  Spain's largest company, Telefonica, reported 1.54 
billion euros in profits, 22% over its first-quarter 2007 
level.  As noted in reftel, the big banks also reported 
strong profit growth.  In contrast to the hard-hit real 
estate firms, the country's six largest construction firms 
reported mixed results, with energy investments and overseas 
concessions cushioning a decline in earnings from Spanish 
residential construction.  (Expansion, 5/14 and 5/16) 
 
SANTANDER TO PARTICIPATE IN U.S. BANK CAPITAL INCREASE 
 
¶3. (U) Spain's largest bank, Banco Santander, will contribute 
a quarter of the planned billion-dollar capital increase for 
Sovereign Bancorp in order to maintain its 24.8% stake in the 
Pennsylvania-based bank.  Sovereign, which has been hit by 
the subprime crisis and nonperformance on auto loans, will 
use the capital increase to reinforce its balance sheet.  It 
also will issue 500 million dollars in bonds to help finance 
its expansion plans.  Santander paid a reported $2.4 billion 
in 2006 for its stake in Sovereign; its holding has lost over 
a billion dollars in value since then.  (Expansion 5/12, El 
Confidencial 5/12, Wikipedia.com) 
 
SPAIN 2ND BEST DESTINATION FOR INTERNATIONAL RETAIL 
 
¶4. (U)  51% of principal retail firms are present in Spain, 
second only to the 55% that are in the United Kingdom, 
according to the consulting firm CB Richard Ellis.  Spain's 
ranking is due to a successful and thriving economy that has 
raised consumption, along with the confidence of investors 
and retailers.  The U.S. is eleventh, which the consulting 
firm says is because the strength of U.S. firms discourages 
others from entering the market.  (Finanzas.com, 5/12) 
 
WINE MAKER ADAPTS TO GLOBAL WARMING, DROUGHT 
 
¶5. (U) Although heat and drought lead to higher alcohol 
levels and make irrigation a necessity, one Murcia wine maker 
has discovered a way to survive Spain's worst drought in 60 
years.  While many vineyards are migrating north to cooler, 
wetter climates, the Casa de la Ermita winery has controlled 
the irrigation process to produce a reduced alcohol wine that 
will soon be available on the market.  The stakes in adapting 
to climate change are high, as Spain's wine industry employed 
400,000 people and posted 5.7 billion euros in revenue in 
¶2006.  (News.Scotsman.com, 5/11) 
Llorens