VZCZCXRO8617
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #0616/01 1541000
ZNR UUUUU ZZH
R 021000Z JUN 08
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 4878
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 3451

UNCLAS SECTION 01 OF 02 MADRID 000616 
 
SIPDIS 
 
STATE FOR EUR/WE AND EEB/IFD/OMA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EIND EINV ENRG KIPR SENV SP
SUBJECT: MADRID WEEKLY ECON/COMMERCIAL UPDATE MAY 26 - MAY 
30 
 
MADRID 00000616  001.2 OF 002 
 
 
Table of Contents: 
 
ECON: Inflation climbs to 4.7% 
EIND/ECON: More bad news on sales, housing 
EFIN: Government says no 2008 budget surplus 
EFIN: Capital markets continue opening to major firms 
EFIN/EINV: La Caixa alliance with Carlos Slim to enter U.S., 
Americas 
ENRG/EINV: ACS CEO says Iberdrola-Gas Natural merger would 
create "national champion" 
SENV: Rains diminish drought concerns 
KIPR: World Wide Web Consortium (W3C) to meet in Madrid in 
2009 
 
 
INFLATION CLIMBS TO 4.7 PERCENT 
 
¶1. (U) The official estimate for May consumer price inflation 
reached 4.7%, the highest rate since the index began in 1997. 
 Separately, April's industrial price index was 7.2% above 
its April 2006 level, the highest inflation rate since 
mid-1995.  Increases in the prices of oil and to a lesser 
extent food were responsible. (El Confidencial, 5/28; El 
Pais, 5/27) 
 
MORE BAD NEWS ON SALES, HOUSING 
 
¶2. (U) Retail sales in April were 3.4 percent below their 
April 2007 level, the fifth consecutive negative month. 
Housing continues to be hard-hit, with the number of housing 
sales and the number of mortgages issued down almost 40 
percent from their 2007 levels.  In the year's first quarter, 
almost 60% fewer construction permits for new housing were 
issued than a year ago. (El Pais, 5/30) 
 
GOVERNMENT SAYS NO 2008 BUDGET SURPLUS 
 
¶3. (U) The Ministry of Economy and Finance conceded for the 
first time on May 27 that Spain will not have a budget 
surplus in 2008, largely because tax receipts are down for 
the first time in 15 years.  During the first four months of 
2008, tax receipts were down by 5.2 percent compared with the 
first four months of 2007.  Value Added Tax collection 
reductions are down most.  Additionally, high oil prices are 
deterring consumers and companies from using petroleum 
products, thus lowering tax receipts on oil consumption. 
Social Security contributions are still strong, and they may, 
in fact, be responsible for the government's consolidated 
budget (central government, local government and social 
security) not incurring a deficit.  The budget had a slight 
surplus for the first four months of the year, but the 
Ministry now expects no surplus or deficit for the year as a 
whole.  (Comment: Clearly, the Spanish economy is slowing 
down much faster than many observers thought it would, 
although it is still not clear that Spain will technically 
enter a recession.  The tighter budget environment is likely 
to lead to political tension over autonomous community 
funding issues.) (El Pais, 5/28) 
 
CAPITAL MARKETS CONTINUE OPENING TO MAJOR FIRMS 
 
¶4. (U) Spain's second largest bank, BBVA, issued 5 billion 
euros in mortgage-backed bonds.  The country's largest 
company, Telefonica, issued 1.25 billion euros in five-year 
bonds at 5.58%, a spread of 94 basis points.  (El 
Confidencial, 5/27) 
 
LA CAIXA ALLIANCE WITH CARLOS SLIM TO ENTER U.S., AMERICAS 
 
¶5. (U) Criteria CaixaCorp (La Caixa savings bank's investment 
holding company) is buying 20 percent of Carlos Slim's Grupo 
Financiero Inbursa for euros 1.5 billion.  Slim will still 
control the Group after this purchase, but La Caixa appears 
to have decided to conclude a strategic alliance with the 
Slim family, and it seems that they are doing so as equals. 
The idea is for La Caixa to use the participation in Inbursa 
to make investments in the U.S. and elsewhere in the 
Americas.  Inbursa manages USD 170 billion and is specialized 
in corporate banking, asset custody, and pension fund 
management.  La Caixa has expertise in retail banking, of 
which Inbursa might avail itself to make inroads in the 
American market.  Reportedly, La Caixa has also left the door 
open for Slim to buy a stake in Criteria CaixaCorp if he 
decides he wants to enter the Spanish market.  (Comment: BBVA 
and Santander have used their strong Mexican bases from which 
to invest in the U.S., and La Caixa appears to be emulating 
this strategy.) (El Pais, 5/27) 
 
ACS CEO SAYS IBERDROLA-GAS NATURAL MERGER WOULD CREATE 
 
MADRID 00000616  002.2 OF 002 
 
 
"NATIONAL CHAMPION" 
 
¶6. (U) Gas Natural already tried to take over Iberdrola in 
2000 and 2003, but its efforts were thwarted.  ACS owns 7.3% 
of Iberdrola, but Iberdrola's CEO, Ignacio Sanchez-Galan, has 
succeeded in limiting ACS, influence in Iberdrola decision 
making  Sanchez-Galan is not enthusiastic about merging with 
Gas Natural or about being bought by France's EDF, which is 
another widely commented upon possibility.  However, he has 
indicated that his posture depends on what price is offered. 
(Comment: Speculation about energy mergers in Spain is 
something of a business-political parlor game.  There does, 
however, appear to be a consensus that consolidation will 
happen sooner or later in the Spanish energy sector.) (El 
Pais, 5/27) 
 
RAINS DIMINISH DROUGHT CONCERNS 
 
¶7. (U) A wetter-than-usual May, with rains in many areas of 
the country nearly every day of the last two weeks, has 
reduced drought concerns.  A national meteorological agency 
spokesman said that the country's rain deficit had gone from 
40 percent on April 1 to 14 percent on May 28.  The deficit 
likely has been reduced below that level by continuing rains 
in the next few days.  The GOS is reported to be considering 
abandoning its plan to pipe water from other regions to 
Barcelona.  (20 Minutos, 5/29; TVE, 5/30) 
 
WORLD WIDE WEB CONSORTIUM (W3C) TO MEET IN MADRID IN 2009 
 
¶8. (U) The April 20-24 meeting will bring together over 2,000 
developers, researchers and programmers to discuss ways to 
make the internet more efficient for business, learning and 
entertainment. (Comment: Embassy will explore how this event 
can be leveraged to demonstrate that a flourishing internet 
business is consistent with respect for intellectual property 
rights.) (El Pais, 5/28; W3C website.) 
Aguirre