VZCZCXRO1089
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHMD #0497 1421350
ZNR UUUUU ZZH
R 221350Z MAY 09
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 0666
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 3991
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS MADRID 000497 
 
SIPDIS 
 
STATE FOR EUR/WE, EEB/IFD/OMA 
COMMERCE FOR 4212/D.CALVERT 
TREASURY FOR OIA/OEE/T.O'KEEFFE,D.WRIGHT 
 
E.O. 12958: N/A 
TAGS: ECON EFIN SP
SUBJECT: MADRID ECONOMIC WEEKLY, MAY 18-22 
 
REF: A. MADRID 469 
     ¶B. MADRID 446 
 
Contents: 
 
ECON: State of Nation Measures Watered Down 
EFIN: Treasury Issues Debt for Below 1% 
EFIN: La Caixa, Caja Madrid, to Issue up to 5B Euros in 
Preferred Capital 
EFIN: Bank of Spain Studying Relaxing Provisioning 
Requirements 
 
State of Nation Measures Watered Down 
 
1.(U) In order to gain legislative approval of supporting 
resolutions, the GOS watered down several of the measures 
announced by President Zapatero in last week,s state of the 
nation debate (ref A).  The plan to reduce corporate income 
tax rates for small companies from 25% to 20% was dropped. 
The 24,000-euro income threshold Zapatero had announced above 
which no mortgage interest deductions would be permitted 
after 2010 was replaced by a vague reference to continuing to 
permit deductions for those with low incomes.  Madrid 
regional president Esperanza Aguirre announced that her 
government would increase the regional deduction allowed for 
mortgage interest if Zapatero,s measure took effect.  The 
subsidies for purchases of low-emission new cars to replace 
older vehicles took effect May 18, though not without 
confusion.  Only a few regional governments have agreed to 
the GOS proposal that they contribute 500 euros to the 
subsidy, so in most communities the subsidy is 1,500 euros 
rather than 2,000.  The auto manufacturers, association 
Anfac said that the confusion was causing purchases to be 
postponed, further harming the industry.  Opposition Partido 
Popular leader Mariano Rajoy criticized Zapatero for 
governing via "announcements that last for 3 days" and are 
not followed through.  (El Mundo, 5/20; El Pais, 5/20; El 
Confidencial, 5/21; El Pais, 5/22) 
 
Treasury Issues Debt for Below 1% 
 
2.(U) The Treasury issued 3.9 billion euros in one-year debt 
on May 18 at a record low rate of 0.93%, down from 1.27% in 
the April auction.  This is good news for the GOS in a year 
in which it is expected to need to issue 86 billion euros in 
debt.   Perceptions of GOS risk appear to have declined; the 
spread between rates on ten-year Spanish and German debt has 
fallen from 1.3% in January to below 0.7%.  (El Pais, 5/19) 
 
La Caixa, Caja Madrid, to Issue up to 5B Euros in Preferred 
Capital 
 
3.(U) Private financial institutions, while having to pay 
much higher rates, also expect to be able to raise needed 
funds.  Spain,s two largest savings banks ("cajas"), La 
Caixa and Caja Madrid, have obtained authorization to issue a 
total of 5 billion euros in preference shares 
("participaciones preferentes").  These instruments are 
attractive to the issuers because they have characteristics 
of bonds but count towards capital requirements; the 
securities regulator has warned individual investors that 
they are more complex and riskier than traditional bonds and 
are not backed by a deposit guarantee fund.  Because of its 
weaker condition (ref B), Caja Madrid expects to pay an 
interest rate about 1% higher -- La Caixa will pay 6% for the 
first two years and then 3.5% over the three-month Euribor 
rate for up to 2 billion euros, while Caja Madrid will pay 7% 
for the first five years and then 4.75% over the three-month 
Euribor rate for up to 3 billion euros.  (El Pais, 5/22) 
 
Bank of Spain Studying Relaxing Provisioning Requirements 
 
4.(U) The Bank of Spain is studying relaxing existing 
requirements that banks and cajas make provisions for 100% of 
the value of all loans more than 90 days delinquent and for 
100% of the value of all mortgages delinquent for more than 
two years.  Banking sector representatives say the Bank of 
Spain,s provisioning requirements are stricter than those of 
neighboring countries.  The mortgage provisioning change 
would reduce the incentives for banks to take possession of 
properties, which many now do in order to avoid having their 
delinquency rates rise; cajas alone now own over 15 billion 
euros in real estate assets.  However, the change also might 
prolong the lives of unviable institutions and delay 
restructuring of the sector.  (EFE, 5/18; El Pais, 5/22) 
DUNCAN