VZCZCXRO1062
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #0793/01 2001433
ZNR UUUUU ZZH
R 181433Z JUL 08
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 5109
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 3502

UNCLAS SECTION 01 OF 02 MADRID 000793 
 
SIPDIS 
 
STATE FOR EUR/WE AND EEB/IFD/OMA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ENRG PGOV SP
SUBJECT: MADRID WEEKLY ECON/COMMERCIAL/AG UPDATE JULY 14 - 
JULY 18 
 
MADRID 00000793  001.2 OF 002 
 
 
 Table of Contents 
 
ECON:      IMF revises growth forecasts for Spain downwards 
ECON/EFIN: GOS decides not to issue a new 15-year bond 
EINV/EFIN: BBVA continues U.S. push 
ECON/EINV: Property company Martinsa Fadesa begins largest 
bankruptcy proceedings in recent years 
ECON/EINV: Large Company layoffs begin appearing in Spain 
ECON/ENRG: EU Courts Rule Against Spain on Energy Takeover 
Policies 
ECON/PGOV: GOS officials continue to espouse positive message 
on future of economy 
ECON/ENRG: ACS sell-off of controlling stake in Union Fenosa 
prompts stock market to rise 
 
IMF REVISES 2009 GROWTH FORECAST FOR SPAIN DOWNWARDS 
 
¶1. (U) The IMF maintained its 2008 growth forecast for Spain 
at 1.8 percent.  Growth for the euro zone is estimated at 1.7 
percent.  However, for 2009 the IMF has revised downwards its 
growth forecast for Spain by half a percentage point - it 
estimates Spanish growth will be 1.2 percent. The Fund 
estimates that euro zone growth in 2009 will be 1.2 percent. 
(Comment: There is a significant risk that these IMF growth 
forecasts for Spain may not be met and that future forecasts 
may be revised downwards additionally.  Second Vice President 
and Finance Minister Pedro Solbes told the Ambassador on 
7/17/08 - see septel - that Spain was facing a "perfect 
storm" of negative circumstances.  BBVA's lead economist told 
DCM that BBVA's 1 percent forecast for Spanish growth in 2008 
may be overly optimistic as the bank's bias tends to be on 
the upside.) (El Pais, 7/18/08) 
 
GOS DECIDES NOT TO ISSUE A NEW 15-YEAR BOND 
 
¶2. (U) Second Vice President and Finance Minister Pedro 
Solbes confirmed on 7/11/08 that Spain would not float a 
15-year bond.  Solbes said that market conditions were not 
"appropriate."  Currently, Spain would have to pay 0.29 
percent more to issue Spanish government bonds than Germany 
does to issue German Bunds, up from only a few hundredths of 
a percentage point in 2007.  The four countries in the EU 
paying the highest premium over German government bonds are 
Greece, Italy, Portugal, and Spain.   Spanish companies are 
also paying more than they did last year to issue bonds. 
(Comment: Clearly, there is less confidence in the Spanish 
economy's prospects as revenues decline, the housing market 
stagnates, inflation is relatively high, unemployment 
increasing, and there is a continued high current account 
deficit.  CharGing more for bonds is also one way markets can 
differentiate among countries belonging to a currency union.) 
(WSJ, 7/14/08) 
 
BBVA CONTINUES U.S. PUSH 
 
¶3. (U)  Since 2004, BBVA has invested more than USD 12.2 
billion in the U.S., principally in Sun Belt states with a 
focus on the Hispanic market.  BBVA is now preparing to 
rebrand its network of about 650 branches using the name of 
BBVA Compass, and the bank is aiming to target non-Hispanic 
customers as well.  BBVA is convinced that its form of retail 
banking with a strong focus on relationship banking can work 
in the U.S. During the first quarter of 2008, BBVA derived 
six percent of its revenues from the U.S., but it wants to 
increase this percentage.  (WSJ, 7/14/08) 
 
PROMINANT PROPERTY COMPANY MARTINSA FADESA IN BANKRUPTCY 
PROCEEDINGS 
 
¶4. (U) This past week, news that Spanish property company 
giant Martinsa Fadesa had filed for credit protection 
reverberated in the press and fueled a heavy sell-off on the 
Madrid stock exchange - especially affecting other companies 
linked to the construction sector.  With 5 billion euros 
worth in debt, the Martinsa Fadesa bankruptcy proceedings is 
one of the largest seen in recent years in Spain.  It is a 
result not only of Spain's housing downturn, but also of the 
tight credit and confidence issues facing the country.  The 
company decided to file for credit protection after failing 
to raise the 150 million euros needed for a 4 billion 
refinancing agreement made earlier this year.  Officials from 
the Ministry of Housing have made clear that the government 
does not intend to step in to assist, for example by 
extending credit through the Official Credit Institute (ICO). 
 (All Media, 7/15/08) 
 
SPANAIR TO LAY OFF OVER 1,000 - MASS LAYOFFS BEGIN APPEARING 
 
¶5. (U) On July 17, Spanair announced that it would 
 
MADRID 00000793  002.2 OF 002 
 
 
decommission 15 planes (about a quarter of its fleet) and lay 
off more than 1,000 employees, about a third of its 
workforce.  After Iberia, Spanair provides the second largest 
level of service to the Spanish domestic market which has 
been hit hard by high fuel prices, a slowing economy and the 
introduction of more high-speed trains.  (Comment: Spain's 
jump in unemployment to date had been characterized by 
layoffs of low-skilled workers directly linked to the 
flailing residential construction sector.  The Spanair 
announcement along with two other recent mass layoffs by 
prominent Spanish companies Roca and Martinsa-Fadesa signal a 
shift in the unemployment problems Spain is facing.  Official 
GOS unemployment rates for the second quarter are expected to 
be released July 24, and are expected to be higher the first 
quarter level of 9.6%.)  (All Media 7/17/08) 
EU COURTS RULE AGAINST SPAIN ON ENERGY TAKEOVER POLICIES 
 
¶6. (U) On July 17, the European Court of Justice ruled 
against the authority of Spain's National Energy Commission 
(CNE) to place restrictions on takeovers, particularly in 
relation to the CNE's past involvement in the takeover bid of 
former Spanish national energy champion Endesa.  Endesa, 
which is currently co-owned by Acciona and Enel, was the 
subject of an intense and controversial takeover bid process 
in 2007.  At the time, Spain's energy commission placed 
restrictions on the bid placed by German energy company E.ON, 
which critics characterized as a protectionist move intended 
to conserve Endesa's Spanish identity.  The Court of 
Justice's ruling included a determination that the CNE's role 
in approving takeovers did not conform with EU law and 
constituted a "restriction on the free movement of capital". 
(Note: Part of the CNE's role is to ensure energy security 
for Spain. The court's ruling will result in a modification 
of the CNE's role).  (Paris AFP, 7/17/08) 
 
GOS OFFICIALS CONTINUE TO ESPOUSE POSITIVE MESSAGE ON FUTURE 
OF ECONOMY 
 
¶7. (U) During an event celebrating the 120 year anniversary 
of one of Spain's most prominent labor unions, President 
Zapatero pledged to be on the side of laborers, irrespective 
of the economic situation, and to continue his efforts 
towards social policy advances.  Although recognizing the 
difficult economic situation, Zapatero nonetheless warned 
that "pessimism does not create jobs".  In a radio interview 
the same day, Second Vice President and Minister of Economy 
Pedro Solbes denied that Spain was facing a recession but did 
admit the extent of the difficult situation, which he said 
was complicated by numerous factors.  (El Pais, 7/18/08) 
 
ACS SELL-OFF OF CONTROLLING STAKE IN UNION FENOSA PROMPTS 
STOCK MARKET TO RISE 
 
¶8. (U) The decision by construction company ACS to sell its 
controlling stake in the electricity firm, Union Fenosa, 
prompted the Ibex-35 to rise by 3.14 percent on 7/17/08. 
(Comment: The jump in the stock market is probably temporary. 
 Energy companies might see more permanent gains though. 
There has been a lot of speculation about consolidation in 
the energy sector in Spain, which is the reason for the high 
interest in energy stocks.) (El Pais, 7/18/08) 
 
 
 
 
Aguirre