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PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #0972/01 2520557
ZNR UUUUU ZZH
P 080557Z SEP 08
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC PRIORITY 5308
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 3568
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 02 MADRID 000972 
 
SIPDIS 
 
STATE FOR EUR/WE, EEB/IFD/OMA, EEB/ESC/IEC 
TREASURY FOR OIA/OEE/W.LINDQUIST 
DOE FOR EERE 
 
E.O. 12958: N/A 
TAGS: ECON ECPS EFIN EINV ELAB ENRG SP
SUBJECT: MADRID WEEKLY ECONOMIC UPDATE -- SEPT 2-5 
 
REF: MADRID 943 
 
MADRID 00000972  001.2 OF 002 
 
 
Contents: 
 
ELAB: Unemployment Continues to Rise 
ELAB: Labor/Immigration Minister Proposes to Reduce Immigrant 
Labor 
EFIN: ECB Collateral Tightening Not Expected to Affect 
Spanish Banks 
EFIN: Corporate Profits Fall for First Time in Four Years 
ENRG/EINV: Planned Cut in Solar Electricity Price Guarantee 
Sparks Criticism 
ENRG/EINV: Iberdrola Receives Final Approval to Buy U.S. 
Utility Energy East 
ECPS/EINV: Telefonica Raises China Netcom Stake to 12 Percent 
in 800M Euro Deal 
 
Unemployment Continues to Rise 
 
¶1. (U) The number of unemployed increased by 103,085 in 
August, bringing the total number of unemployed to 2.53 
million, the highest total since 1998.  President Zapatero 
will appear September 10 in parliament to discuss these and 
other poor economic indicators and the GOS response.  Spain 
has one of the highest unemployment rates in the EU.  The 
second quarter unemployment rate was 10.4 percent, and EU 
figures put the rate at 11% in July.  The respected Savings 
Bank Foundation (Funcas) predicted that the rate would peak 
at 16% in 2010.  Comment: Since undergoing a severe housing 
downturn beginning in 2007, Spain has experienced rapid 
increases in unemployment.  The government,s response is 
seen as lackluster at best by many Spaniards.  (Ministry of 
Labor, All Media, 9/2; El Pais, 9/5) 
 
Labor/Immigration Minister Proposes to Reduce Immigrant Labor 
 
¶2. (U) Minister of Labor and Immigration Celestino Corbacho 
said September 3 that because of the high unemployment rate, 
the GOS would limit to almost zero the hiring in 2009 of 
foreign workers in their countries of origin, allowing only 
contracting related to specialized workers and to Spain,s 
international commitments.  Minister Corbacho,s comments 
were heavily criticized by prominent labor unions and 
business associations, which noted among other things that 
immigration was not the underlying reason behind Spain,s 
unemployment problem.  In 2007, over 200,000 foreign workers 
were hired abroad, and 88,000 were hired between January and 
July of 2008.  (El Pais, Expansion, La Vanguardia 9/4, 9/5) 
 
ECB Collateral Tightening Not Expected to Affect Spanish Banks 
 
¶3. (U) Although the international press has suggested that 
Spain could be affected by the European Central Bank's 
decision announced September 4 to tighten collateral 
requirements for its lending, Spanish press, bankers, and 
others with whom post has met seem confident that there will 
be little impact.  A Bank of Spain (central bank) official 
noted that although Spanish banks had made increased use of 
the ECB window since the start of the financial crisis, what 
had happened was that German banks that had been going to the 
ECB to finance their purchases of Spanish mortgage-backed 
securities had stopped those purchases, so the Spanish banks 
had gone directly to the ECB and used the same type of 
securities as collateral.  Even after the increase, Spanish 
banks are only making use of the ECB in proportion to the 
size of Spain's economy within the Euro zone, and they have 
available collateral that could support three times the 
amount of funding they need.  (El Pais, 9/5; Bank of Spain 
meeting 9/3) 
 
Corporate Profits Fall for First Time in Four Years 
 
¶4. (U) The economic difficulties are being reflected in 
corporate earnings.  The Spanish companies that are traded on 
Madrid's stock market reported first-half 2008 profits 0.02 
percent below their profits for the first half of 2007. 
Without one-time items from two companies, the result would 
have been a 7 percent decline.  A more telling sign of the 
impact of the slowdown came in second quarter profits, which 
were 6.4 percent below their second-quarter 2007 level, even 
taking into account the one-time items.  This was the first 
quarterly decline in four years.  Large companies that make 
up the Ibex 35 blue-chip index, many of which have profitable 
operations outside Spain, did much better than smaller 
companies; Ibex 35 companies' combined profits rose 17 
 
MADRID 00000972  002.2 OF 002 
 
 
percent in the first half, while other companies' profits 
fell 98 percent.  Analysts expect results to be worse in the 
coming quarters.  (El Pais, 9/2) 
 
Planned Cut in Solar Electricity Price Guarantee Sparks 
Criticism 
 
¶5. (U) A European photovoltaic solar energy conference in 
Valencia this week (that a dozen USG officials attended) 
focused media attention on an impending decline in Spain's 
solar electricity incentives.  In order to encourage 
investment and technological development, the GOS guarantees 
high prices to producers of different types of 
renewably-generated electricity.  To limit costs to consumers 
(and itself, as it covers some of the costs), the GOS 
guarantees prices only to those projects that connect to the 
grid by a certain date.  The existing guarantee of 45 cents 
of a euro per KwH for solar photovoltaic projects has sparked 
a boom in investment, but only projects that come on line 
before the end of September will receive it.  The GOS plans 
to reduce to 29 or 33 cents the guaranteed price for future 
projects and to guarantee that price only for the first 300 
MW that come on line per year.  These prices are still far 
above the market price for electricity generated by coal or 
gas.  Industry representatives have criticized the planned 
reduction, saying it will lead companies to halt investment 
plans.  Environmental NGOs concerned about climate change and 
labor groups have also criticized the reduction.  GOS 
officials are reported to be open to modest increases in the 
300MW/year quota but not to changing prices.  (El Pais, 9/2; 
El Confidencial, 9/4) 
 
Iberdrola Receives Final Approval to Buy U.S. Utility Energy 
East 
 
¶6. (U) New York state,s Public Service Commission (PSC) 
approved Spanish energy giant Iberdrola,s proposal to take 
over utility Energy East Corp.  This acquisition and 
subsequent investments would represent one of the largest 
investments in the United States by a Spanish company.  The 
New York PSC,s decision was the final hurdle for the 
multi-billion dollar deal, which has undergone scrutiny from 
regulators from several states for over a year.  Iberdrola 
had said earlier in the summer that if allowed to purchase 
Energy East, it would invest $2 billion in wind turbines in 
New York, doubling the amount of NY wind power capacity 
within a few years.  The purchase would make it the U.S., 
second largest wind power provider and one of the ten largest 
U.S. electricity companies.  Iberdrola representatives have 
indicated that they will study the conditions imposed by the 
state before deciding whether to proceed with the deal, but 
press reports suggest that the conditions do not appear to 
contain any dealbreakers for the company.  (All Media, 9/4) 
 
Telefonica Raises China Netcom Stake to 12 Percent in 800M 
Euro Deal 
 
¶7. (U) Spanish telecoms giant Telefonica  announced on 
September 4 that it would purchase over 800 million euros 
worth of shares of China Netcom, raising its stake in the 
company to a total of 12 percent.  Telefonica is buying the 
shares from US-based fund manager Alliance Bernstein 
Holdings.  When China Netcom merges with China Unicom, 
Telefonica will be the leading partner in the new company. 
Comment: Telefonica is diversifying from its traditional 
Latin America focus.  Encouraging trade with and investment 
in China has been a focus of the Ministry of Foreign Affairs 
and other GOS players, and we expect additional significant 
actions from Spanish companies in the future.  End Comment. 
(Cinco Dias, 9/5) 
Aguirre