VZCZCXRO4898
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #1080/01 2841441
ZNR UUUUU ZZH
R 101441Z OCT 08
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 5429
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 3599
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 MADRID 001080 
 
C O R R E C T E D  C O P Y (ADDED SENSITIVE CAPTION) 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR EUR/WE, EEB/IFD/OMA 
COMMERCE FOR 4212/DON CALVERT 
TREASURY FOR IA/OEE: W.LINDQUIST 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ELAB SP
SUBJECT: MADRID ECON WEEKLY, OCT 6-10 - FINANCIAL CRISIS 
 
REF: MADRID 1050 
 
MADRID 00001080  001.6 OF 002 
 
 
1.(SBU) Summary:  The international financial crisis and the 
GOS, reaction to it have dominated economic news in Spain 
this week.  In the context of bank failures and dramatic 
policy shifts elsewhere in Europe, as well as worldwide stock 
market plunges, two extraordinary GOS measures have generated 
relatively little controversy.  The GOS announced it would 
buy up to 50 billion euros of mortgage-based assets from 
Spanish banks; relative to the size of Spain's economy, this 
effort is comparable to the U.S. rescue fund.  Reacting to 
Irish and German actions, the GOS also increased from 20,000 
euros to 100,000 euros the guarantee on bank deposits.  The 
stock market has followed world markets into a steep decline. 
 The IMF again lowered its growth forecasts and now predicts 
the economy will contract in 2009 and unemployment will 
approach 15%.  Despite concern about the broader economy and 
the worldwide financial crisis, authorities and banks insist 
that Spain,s banks are better able than some of their 
European counterparts to weather the financial crisis.  The 
crisis will complicate GOS efforts to pass the 2009 budget, 
but the first serious tests of whether it has weakened 
support for Zapatero will not come until the Basque and 
Galician regional elections, which are expected to be held 
next April and June, respectively.  End Summary. 
 
Lots of (Re)Action ) Deposit Guarantees and Bank Fund 
2.(U) After President Zapatero met on October 6 with the 
heads of Spain,s three largest banks and three largest 
savings banks (cajas), the GOS announced that it would raise 
the deposit guarantee from the existing 20,000 euros, whether 
or not EU economy/finance ministers were able to agree to 
such an increase the following day.  The ministers did agree 
on an increase to a minimum of 50,000 euros, but Zapatero 
then announced that Spain would guarantee deposits up to 
100,000 euros.  It is not clear who will pay for the 
increased guarantees; banks and cajas have financed the three 
existing funds that cover the 20,000 euro guarantee. 
3.(U) Zapatero also announced a temporary 30-billion euro GOS 
fund to buy mortgages and mortgage-based assets from banks. 
Relative to the size of Spain,s economy, the fund, which can 
be increased to 50 billion euros if needed, is comparable to 
the 700-billion-dollar U.S. fund.  However, the fund is 
different from the U.S. fund in that it will only buy 
top-rated assets from the banks, as it is aimed at injecting 
liquidity, not cleaning up bank balance sheets.  It is more 
attractive to banks than using existing European Central Bank 
mechanisms because the ECB will only lend for 6 months, while 
the GOS plans to keep its holdings for up to 3 years. 
4.(U) Second Vice President and Economy/Finance Minister 
Solbes has emphasized that the GOS does not expect to lose 
much, if any, money on the fund and that the only impact will 
be a manageable increase in the debt/GDP ratio from 39% to 
42% for 3 years.  (This is well below the average EU-15 ratio 
of around 60%.)  Representatives of banking associations and 
leading cajas have said that the fund will allow them to meet 
their funding needs until at least the second half of 2009, 
even in the unlikely event that all other sources of credit 
were to be closed. 
5.(U) On October 10, the Council of Ministers approved the 
deposit guarantee increase and creation of the fund and 
announced that the fund could make its first asset purchases 
before the end of the year.  Press reports suggested that the 
GOS would purchase up to 10 billion euros this year and up to 
20 billion in 2009.  Also on October 10, Zapatero met with 
French president Sarkozy and urged Sarkozy to call a meeting 
of eurozone heads of state to address the crisis. 
Preferring EU Action 
¶6. (SBU) The week,s events show how the GOS, actions have 
been influenced by external developments.  Solbes has said 
frequently that he did not believe the deposit guarantee 
increase was initially necessary, and he has described it as 
a preventative measure.  However, after Ireland and later 
Germany guaranteed all deposits, the GOS felt it had no 
choice in order to maintain public calm.  The bank support 
fund may also have been in part a response to actions 
elsewhere.  Zapatero and Solbes have called for coordinated 
EU-wide action in order to avoid situations like this. 
Without such coordinated EU action, the GOS faces competing 
concerns in its effort to maintain confidence ) inaction 
risks being seen as an inability or unwillingness to do 
anything to stop the crisis, while dramatic GOS measures that 
are not taken by all EU countries risk being seen as evidence 
that Spain,s situation is precarious. 
Banks/Cajas Believed to be Relatively Healthy 
 
MADRID 00001080  002.6 OF 002 
 
 
¶7. (SBU) The GOS and the financial community believe -) and 
authorities have repeatedly emphasized -- that Spain,s 
financial sector is in better shape than those in other large 
EU countries.  Because of the Bank of Spain,s conservative 
regulation and Spain,s position as a net capital importer, 
Spanish institutions have almost no exposure to U.S. 
mortgage-based assets and have little exposure to Lehman 
Brothers assets.  While the domestic construction collapse 
and the resulting slowdown in the broader economy have caused 
loan delinquencies to increase rapidly, they remain at 
manageable levels, at least for now.  Mortgage delinquencies, 
though rising, are still at relatively low levels.  The two 
largest banks, Santander and BBVA, are widely diversified 
internationally, and Santander has been looking to buy 
foreign banks at bargain prices.  All Spanish banks have seen 
significant drops in their stock prices over the last year, 
but none are thought to be in imminent danger of collapse. 
Savings banks (&cajas8) are considered to be in slightly 
worse shape because of their greater exposure to mortgages, 
construction, and real estate.  There is speculation that 
some of the smaller cajas may need to merge, and the GOS is 
considering legislative proposals that would enable the 
merger of cajas ) many of which are controlled by regional 
governments ) from different regions. 
Broader Economy Outlook Continues to Worsen 
8.(SBU) Despite the relative strength of Spain,s financial 
sector, the financial crisis will certainly aggravate the 
damage the broader economy has already felt from the 
construction slowdown that started last year.  This week the 
IMF again lowered its forecast for overall Spanish economic 
performance, predicting that 2008 growth would be 1.4% and 
2009 would see a contraction of 0.2%.  (Comment: Only 1.4% 
growth for the full year would imply that a recession has 
started in the year,s second half; this is consistent with 
widespread reports of an abrupt decline in economic 
activity.)  The IMF also predicted that unemployment would 
average 14.7% in 2009.  The stock market has responded to 
both Spain,s own deteriorating prospects and turmoil in 
international markets; after falling by over 5% on October 
10, the IBEX-35 blue-chip index was down 18% for the week and 
almost 40% this year. 
Little Immediate Political Impact 
9.(SBU) As post has reported previously, Zapatero has been 
criticized for what has been portrayed as unwillingness to 
admit ) especially during his successful re-election 
campaign earlier this year ) the severity of the economic 
situation.  His insistence that criticism by the opposition 
Partido Popular (PP) is unpatriotic and his efforts to blame 
Spain,s economic difficulties on the U.S. subprime mortgage 
crisis also have generated skepticism.  Unsurprisingly, the 
public is also unhappy that the GOS has not been able to 
prevent the financial crisis, although criticism may be muted 
by the sight of the apparently more serious troubles in the 
U.S., the UK, and Germany. 
10.(SBU) Zapatero may be helped by the apparent inability of 
the PP to do much more than criticize his handling of the 
crisis.  He is expected to meet with PP leader Mariano Rajoy 
in the next week or so to discuss the crisis, now that Solbes 
has held preparatory meetings with Rajoy,s economic team. 
The crisis and the economic slump,s impact on tax revenues 
will complicate the already-difficult prospects for passage 
of the 2009 budget, as the PSOE is slightly short of the 
necessary congressional majority.  However, the issue will be 
resolved one way or the other by the end of the year; if no 
agreement is reached, the 2008 budget will be repeated. 
Otherwise, the first major post-crisis tests of Zapatero,s 
political strength will come with the Basque and Galician 
regional elections, which we expect will be held next April 
and June, respectively. 
AGUIRRE