VZCZCXRO8514
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #1101/01 2911950
ZNR UUUUU ZZH
P 171950Z OCT 08
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC PRIORITY 5457
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHAS/AMEMBASSY ALGIERS 4020
RUEHRB/AMEMBASSY RABAT 6118
RUEHLA/AMCONSUL BARCELONA 3605
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 02 MADRID 001101 
 
SENSITIVE 
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 PGOV
SUBJECT: MADRID WEEKLY ECONOMIC UPDATE - OCT 13-17 
 
REF: 08 MADRID 1080 
 
MADRID 00001101  001.2 OF 002 
 
 
CONTENTS 
 
ECON/EFIN: GOS, Following Eurozone Lead, to Guarantee Bank 
Borrowing 
ECON/PGOV: President Zapatero and Opposition Leader Rajoy 
Discuss Economic Measures in Historic Meeting 
ECON: Economic Status Update - Inflation down, but Housing 
Market Downturn Still a Problem 
EINV: Santander Buys Remaining 75% of U.S. Bank 
EFIN: Chairman of Spain's Largest Bank Speaks Out on 
Financial Market Turmoil 
EFIN: Spaniards Affected By Lehman Brothers Bankruptcy 
Protest Spanish Banks 
 
 
GOS, Following Eurozone Lead, to Guarantee Bank Borrowing 
 
¶1. (SBU) President Zapatero announced October 13 that the GOS 
will guarantee up to 100 billion euros in bank borrowing this 
year.  This initiative is part of a decree approved that day 
by the Council of Ministers that incorporates measures agreed 
over the weekend by heads of state of the euro nations.  The 
decree also includes a "preventative" clause allowing the GOS 
to buy equity in banks if necessary.  Zapatero echoed Second 
Vice President and Economy/Finance Minister Solbes' October 
12 statement that he did not think any Spanish banks would 
need the GOS to purchase equity.  Perhaps heeding criticism 
that he has been overly optimistic during Spain's growing 
economic difficulties, Zapatero said that the recovery of 
economic activity would take time and effort, because the 
situation was "very grave."  In a Congressional hearing the 
following day, Zapatero warned of likely mergers or 
restructurings of smaller Spanish banks and savings banks 
(cajas). (Embassy, All Media, 10/14/08, 10/15/08) 
 
President Zapatero and Opposition Leader Rajoy Discuss 
Economic Measures in Historic Meeting 
 
¶2. (U) During a historic meeting October 14, President 
Zapatero and opposition Partido Popular leader Mariano Rajoy 
discussed measures to address Spain's flailing economy. 
Zapatero and Rajoy's relationship to date has been 
characterized by partisan and bitter exchanges, especially 
regarding the state of the economy.  During this rare 
coming-together, Rajoy conditioned his support for Spain's 
financial markets measures on greater oversight on the 100 
billion euro inter-bank loan guarantee fund and the 30-50 
billion euro asset/equity fund (ref).  Zapatero agreed to 
Rajoy's demand, committing to greater transparency, rigor, 
and oversight.  The two leaders also agreed to work together 
over the next two months to develop a bi-partisan plan on 
economic structural reforms, an area in which the two parties 
have traditionally been at odds.  Despite these significant 
agreements, Rajoy and Zapatero continued to be in opposition 
on the 2009 proposed budget.  Zapatero's public statement 
after the meeting was one of optimism, Rajoy's was one of 
cautious expectations.  (El Pais, 10/15/08) 
 
Economic Status Update - Inflation down, but Housing Market 
Still a Problem 
 
¶3. (U) Economic information from the past week (October 
13-17) indicates that Spain's economy continues to face 
significant challenges.  According to Spanish real estate 
appraisal company TINSA, the glut of unsold new properties 
from Spain's housing bubble will likely reach 930,000 by the 
end of 2008, a level much higher than earlier anticipated. 
Related to the residential construction market, cement 
consumption is down from the year before by 25% in the first 
9 months of 2008.  In a radio interview October 16, Minister 
of Labor Celestino Corbacho stated that negative job growth 
will continue to occur in the upcoming months (latest 
estimate for Spain's unemployment rate is over 11 percent). 
In more upbeat news, the National Institute of Statistics 
reports that Spain's September inflation rate (CPI) decreased 
by -0.4 from the year before to 4.5%.  GOS expectations are 
that this rate will continue to decrease over the upcoming 
months, ending the year at 3.5%.  (El Pais, Confidencial, 
Cinco Dias, 10/14/08-10/17/08) 
 
MADRID 00001101  002.2 OF 002 
 
 
 
Chairman of Spain's Largest Bank Speaks Out on Financial 
Market Turmoil 
 
¶4. (U) According to Emilio Botin, Chairman of Banco 
Santander, the financial market crisis is a manifestation of 
various excesses and cannot be blamed on any one market (such 
as the U.S.) or on any one cause.  This assertion, publicized 
widely in the Spanish press, is being portrayed as a 
contradiction of President Zapatero's statement blaming the 
U.S. for the current economic malaise. Botin praises the 
actions of the Spanish government and eurozone leaders, but 
repeats the message of Second Vice President and Minister of 
Economy Pedro Solbes in saying that Spanish banks are faring 
well and do not need the GOS to take ownership stakes as 
other governments have done.  Botin also emphasizes the 
importance of liquidity, avoiding moral hazard, and 
reinforcing transparency and supervision.  Comment: Botin has 
a strong standing in Spain, and any comments made by him 
carry significant weight in the local arena. His comments 
were taken from a recent speech and an opinion piece he wrote 
in the Financial Times. (All Media, 10/16/08, 10/17/08) 
 
Santander to Buy Remaining 75% of U.S. Bank 
 
¶5. (U) On October 13, Banco Santander announced that it would 
purchase the 75% it did not already control of the 
Pennsylvania-based Sovereign Bank.  The purchase will be 
carried out by a stock swap of several billion euros. 
Santander had paid about $2.4 billion for its previous stake 
in Sovereign, plus a $1 billion capital increase earlier this 
year.  Sovereign has suffered from poorly performing 
mortgages and auto loans and the government takeover of 
Fannie Mae and Freddie Mac, in which it held stock.  It has 
750 branches and 12,000 employees in the northeastern U.S. 
(El Pais, 10/14/08, 10/14 Santander press release) 
 
Spaniards Affected By Lehman Brothers Bankruptcy Protest 
Spanish Banks 
 
¶6. (U) On October 13, between 50-100 protestors gathered in 
front of Spain's central bank (Bank of Spain) to demand an 
investigation into Spanish banks for selling Lehman Brother's 
bonds to low risk profile investors and not mentioning these 
investments.  Earlier in September, the Bank of Spain had 
asserted that Spanish banks had minimal exposure to Lehman 
Brothers and remained healthy.  However, recent news about 
Banif's exposure, which some speculate is as high as 800 
million euros, has caused concern about the health of that 
particular bank.  (El Pais, 10/14/08; Confidencial, 10/17/08) 
 
 
 
 
AGUIRRE