VZCZCXRO2119
RR RUEHLA
DE RUEHMD #1015/01 2891455
ZNR UUUUU ZZH
R 161455Z OCT 09
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 1342
INFO RUEHLA/AMCONSUL BARCELONA 4154
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 MADRID 001015 
 
SIPDIS 
 
STATE FOR EUR/WE, EEB/IFD/OMA 
COMMERCE FOR 4212/DON CALVERT 
TREASURY FOR OAI/OEE R.JOHNSTON 
ENERGY FOR PIA:K.BALLOU 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EIND ENRG SP
SUBJECT: MADRID ECONOMIC WEEKLY, OCTOBER 5-16 
 
REF: MADRID 969 
 
Contents: 
 
ECON: EC Calls Spain,s Budget Trends Unsustainable 
ECON: Prices Fell 0.2% in September 
EFIN: Moody's Warns Banks are Understating Losses 
EFIN: International Firms Playing Role in Caja Restructuring 
EIND: Job Cuts Key as Opel Talks Continue 
EIND/ENRG: Renault to Invest 500 Million Euros in Valladolid 
Facility 
ENRG: CNC Opens Sanctions Proceedings Against Electric 
Companies 
 
 
EC Calls Spain,s Budget Trends Unsustainable 
 
1.(U) A European Commission study says the GOS needs to make 
serious budgetary adjustments to assure long-term 
sustainability.  Over the past three years, Spain,s 
sustainability indicator (S2), which measures the impact of 
debt and spending, has grown from 3% of GDP to around 12%, 
nearly twice the EU average.  Without significant budgetary 
modifications, the study estimates that Spain,s public debt, 
now not far over 50% of GDP, will grow to 528% of GDP by 
¶2050. The EC recommends increasing revenues, cutting 
spending, and reforming the public pension and health 
systems.  (El Pais, 10/15) 
 
Prices Fell 0.2% in September 
 
2.(U) The National Statistics Institute confirmed that 
consumer prices fell 0.2% in September after rising 0.3% in 
August.  Prices in September were 1.0% below their level of 
September 2008.  Underlying inflation (not including energy 
or food prices, which are more volatile) dropped to a 
year-on-year rate of 0.1%.  (National Statistics Institute, 
10/13) 
 
Moody's Warns Banks are Understating Losses 
 
3.(U) Spanish banks are risking future growth by not 
recognizing the full extent of their losses, according to a 
report issued this week by Moody's.  Restructuring loans and 
accepting property in exchange for unpaid mortgages are 
keeping defaults off the books.  Moody's warns that failure 
to address the situation more directly could hamper recovery 
from the economic crisis.  Rigorous banking regulations, 
requiring significant reserves, have provided a good buffer 
thus far.  However, given the continued economic downturn, 
Moody's says current reserves would cover less than half of 
an estimated 108 billion euros in losses.  Should the economy 
continue to deteriorate, losses could reach up to 225 billion 
euros.  The president of the Spanish Banking Association 
(AEB) denied that banks are hiding losses and countered that 
they are weathering the crisis well, pointing to 8 billion 
euros in earnings during the first quarter of 2009.  Comment: 
The AEB does not represent savings banks ("cajas"), only 
traditional banks.   (WSJ, 10/13; El Pais, 10/14 and 10/16). 
 
International Firms Playing Role in Caja Restructuring 
 
4.(U) Morgan Stanley, KPMG, and UBS are among those playing a 
role in restructuring Spain,s financial sector.  Savings 
banks ("cajas") have been the financial institutions hardest 
hit during the economic crisis, due to their heavy exposure 
to the construction and real estate sectors.  The Bank of 
Spain has called for consolidation of cajas (there are 
currently over 40, many small) to make them stronger and more 
competitive.   Last June, the GOS created the Fund for 
Orderly Bank Restructuring (FROB), which will be able to 
leverage up to 90 billion euros to facilitate mergers and 
other restructuring.  Now several significant mergers are in 
the works.  Morgan Stanley is advising three cajas in the 
Catalan region -- Caixa Manresa, Caixa Catalunya and Caixa 
Tarragona -- whose merger would create the fourth largest 
savings bank in Spain.  They are seeking around 1.5 billion 
euros from the FROB to effect the merger.  KPMG is assisting 
Caja Espana, Caja Duero and Caja Burgos, while UBS has been 
working with Caja Castilla La Mancha, which authorities took 
over in March.  (El Pais, 10/14; El Confidencial, 10/16) 
 
Job Cuts Key as Opel Talks Continue 
 
5.(U) National and regional government officials, including 
 
MADRID 00001015  002 OF 002 
 
 
Industry, Tourism, and Commerce Minister Sebastian, met with 
union leaders and Magna representatives during the week to 
discuss the plans of the Canadian-Austrian firm Magna for 
Opel's Figueruelas plant once Magna completes its proposed 
purchase of a controlling stake in Opel from GM.  Magna's 
current plans reportedly call for cuts of at least 1,350 jobs 
from the Figueruelas plant, which currently employs 7,500. 
These cuts would also lead to the loss of thousands of jobs 
by local suppliers of the plant.  Spanish labor 
representatives have urged the government to impede signing 
if it will mean significant job losses.  One article says 
union representatives are unwilling to accept cuts of more 
than 1,000 jobs.  Magna plans to divert some of the plant's 
production to Germany's Eisenach plant but has committed to 
keep 70% of the plant's production at Figueruelas, to 
increase to 72% in 2013.  Discussions continue, and a deal is 
expected to be signed in the next few days.  (Multiple media, 
10/16; El Pais, 10/15; El Mundo, 10/15) 
 
Renault to invest 500 million euros in Valladolid facility 
 
6.(U) Renault Spain has announced plans to invest 500 million 
Euros in its Valladolid facilities, guaranteeing the plant's 
livelihood for the next ten years. Renault plans to build an 
electric car there starting in 2011 and a new "ecological 
engine" vehicle in 2012; the electric car would be the first 
to be mass-produced in Spain.  President Zapatero says this 
is proof that the Spanish industry remains competitive 
despite the automotive slump resulting from the economic 
crisis.  Renault currently employs 5,000 workers directly at 
the Valladolid facility and is indirectly responsible for 
another 30,000 jobs in the region.  (WSJ, 10/6; El Pais, 10/7) 
 
CNC Opens Sanctions Proceedings Against Electric Companies 
 
7.(U) Spain,s National Competition Commission (CNC) 
announced it will begin sanctioning proceedings against nine 
major electricity companies, including Iberdrola, Endesa, and 
Gas Natural.  The CNC says it found sufficient evidence of 
anti-competitive practices among the companies during a 
preliminary investigation.  Specifically, the CNC contends 
that between 2004 and 2008, these companies withheld 
electricity from the market in order to inflate prices, 
supported by actions by their distribution operations.  The 
decision to open the proceedings demonstrates the CNC's 
resolve to address anti-competitive practices as the 
electricity market continues the liberalization process 
initiated in 1998. (Expansion, 10/5; ABC, 10/6) 
CHACON