VZCZCXRO0028
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSL RUEHSR
DE RUEHMD #0613 1771452
ZNR UUUUU ZZH
R 261452Z JUN 09
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 0837
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHLA/AMCONSUL BARCELONA 4037
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS MADRID 000613 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EUR/WE, EEB/IFD/OMA 
COMMERCE FOR 4212/D.CALVERT 
ENERGY FOR PIA/K.BALLOU 
TREASURY FOR OIA/OEE/T.O'KEEFFE,D.WRIGHT 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EIND SP
SUBJECT: MADRID ECONOMIC WEEKLY, JUNE 22-26 
 
REF: MADRID 591 
 
Contents: 
 
EFIN: Bank Restructuring Fund Approved 
ECON: OECD predicts GDP to Shrink 4.25% This Year 
EFIN: Record GOS Debt Issuances Expected 
EIND: Tourism Slumps, Expected to Begin Rebound by End-2009 
 
Bank Restructuring Fund Approved 
 
1.(U) The Council of Ministers approved on June 26 a Royal 
Decree-Law creating a nine-billion euro Orderly Bank 
Restructuring Fund (FROB) aimed primarily at addressing 
expected solvency problems in savings banks (cajas).  The 
GOS, first preference will be for troubled institutions to 
find private solutions such as raising capital or merging. 
The second option will be for institutions to use deposit 
guarantee funds.  The last option will be restructuring with 
use of the FROB.  The decree-law sets out a process through 
which troubled banks must submit business plans to the Bank 
of Spain.  The fund will be able to issue debt for up to 27 
billion euros during 2009.  Of the initial nine billion 
euros, 6.75 billion will be funded by the GOS, using leftover 
funds from the Financial Asset Acquisition Fund created last 
fall to purchase bank debt, and 2.25 billion will come by the 
three existing deposit guarantee funds, which are funded by 
the banks and cajas themselves. 
 
2.(SBU) Comment:  Second Vice President and Economy/Finance 
Minister Elena Salgado told reporters after the announcement 
of the Decree-Law that the GOS would not seek to change the 
Cajas Law this year.  Critics say the politicization of many 
cajas has contributed to their difficulties.  Earlier this 
year, changes to reduce regional governments, control over 
cajas had been considered likely, but President Zapatero was 
reportedly lobbied on the issue by the Socialist presidents 
of Andalucia and Catalonia.  This means that regional 
governments will continue to be able to block mergers of 
cajas across regional borders.  Although the GOS had sought 
consensus and negotiated with the opposition Partido Popular 
for several weeks during the process of drafting the 
Decree-Law, initial PP reaction was to criticize the measure 
as insufficient.  (Presidency announcement, 6/26; El 
Confidencial, 6/26; Expansion, 6/26) 
 
OECD predicts GDP to Shrink 4.25% This Year 
 
3.(U) The OECD issued on June 24 predictions for the Spanish 
economy that are somewhat more pessimistic than GOS 
predictions from earlier this month.  It expects a 4.25% GDP 
contraction this year and an 0.9% contraction in 2010, when 
it expects unemployment to reach almost 20%.  The OECD also 
expects the budget deficit to approach 10% of GDP in 2010. 
The most recent GOS prediction had the economy shrinking 3.6% 
this year and 0.3% in 2010. (Europa Press, 6/24) 
 
Record GOS Debt Issuances Expected 
 
4.(U) The GOS will be forced to issue 100B Euros in debt this 
year to cover its budget deficit.  Some analysts predict that 
public debt will account for 66% of GDP by 2010, compared to 
under 40% just a few years ago.  There was high demand for 
Spain's first 50B Euros of bond issuances this year, but the 
GOS may find less demand -- and so have to pay higher 
interest rates -- for the remainder, as the worldwide bond 
market has become saturated. (El Confidencial, 6/22) 
 
Tourism Slumps, Expected to Begin Rebound by End-2009 
 
5.(U) The tourism industry, which accounts for 11% of Spanish 
GDP, is taking a hit in the economic crisis, with the number 
of foreign tourists in January-May 11.8% below the 
January-May 2008 level.  This brings the number of foreign 
tourists to a 5-year low.  Hotel nights booked fell 10.2% in 
the same period, and rates fell 5.3%.  The decline was less 
than the 30% that some had anticipated, and the tourism 
industry is expected to begin rebounding by the end of 2009. 
(El Pais, 6/23; El Confidencial, 6/23) 
CHACON