VZCZCXRO4754
RR RUEHLA
DE RUEHMD #1061/01 3031409
ZNR UUUUU ZZH
R 301409Z OCT 09
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC 1395
INFO RUEHLA/AMCONSUL BARCELONA 4182
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 MADRID 001061 
 
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 EINV ENRG KGHG SP
SUBJECT: MADRID ECONOMIC WEEKLY, OCTOBER 26-30 
 
REF: MADRID 1040 
 
Contents: 
 
ECON/EIND: GOS Extends Municipal Stimulus, Auto Incentives 
EFIN: BoS to Require More Provisions Against Banks' Housing 
Assets 
ECON: GDP Decline Slows in Q3: 0.4% from Q2, 4.1% from Year 
Ago 
ECON: Prices Rise in October, Still Below Last Year's Level 
EINV: EC Tells GOS to End Tax Break for EU Acquisitions 
EINV/ENRG: Acciona To Develop 500 MW Solar Project for U.S. 
Army 
ENRG/KGHG: IEA Economist Criticizes Planned Coal Sector Aid 
 
 
GOS Extends Municipal Stimulus, Auto Incentives 
 
1.(U) The Council of Ministers approved on October 23 a new 
5-billion-euro municipal spending plan that will start in 
¶2010.  While the 8-billion-euro 2009 municipal spending plan 
that is coming to an end concentrated on public 
infrastructure, the new Social Fund for Sustainability and 
Employment will finance projects in areas such as social 
spending (one billion euros), technological initiatives, 
renewable energy, the environment, and energy savings.  Some 
of the spending may help compensate municipalities for the 
impact of lower tax receipts on the amount they could 
otherwise expect to receive from the central government.  The 
GOS plans to approve projects in December so work may begin 
in January of 2010.  Separately, Industry, Tourism, and 
Commerce Minister Sebastian announced that the GOS would 
extend until the end of 2009 temporary auto purchase 
incentives and that it proposed to include similar, though 
not-yet-finalized, incentives in the 2010 budget.  (Comment: 
While the domestic market is important to Spanish auto 
producers (including Ford and GM/Opel), most of Spain,s auto 
production is exported to other European countries. 
Incentives in the second half of the year in other European 
countries and Spain have helped reduce the drop in sales of 
Spanish-made vehicles.  End Comment.)  (Presidency Statement, 
10/23; ABC, 10/23; Europa Press, 10/24) 
 
BoS to Require More Provisions Against Banks' Housing Assets 
 
2.(U) In a step that will force banks to acknowledge sooner 
their losses from construction and real estate loans, the 
Bank of Spain will require banks to set aside provisions for 
20% of the value of housing, commercial property, and land 
they have held on their books for more than a year.  At 
present, banks are only required to set aside provisions for 
10% of the value at the time of acquisition.  Spain,s 
housing collapse has led many banks to take property rather 
than having to declare in default loans to construction and 
real estate companies.  Between December 2007 and June 2009, 
savings banks ("cajas") had acquired some 26 billion euros 
worth of housing and land, and banks had acquired another 10 
billion euros worth.  Many of these properties are believed 
to be worth significantly less than the values the banks are 
claiming on their books. 
 
3.(U) The measure, which is expected to enter into force in 
several weeks, could encourage banks to sell assets they have 
been holding.  If the volume of sales is significant, it 
could drive down housing prices, which have still not fallen 
as much as many analysts expect, and speed up the housing 
sector's adjustment.  The increased provisioning should make 
2010 an even more difficult year for cajas and banks than was 
already expected; Moody's predicts that several could report 
losses in the coming quarters.  These losses could increase 
pressure on troubled cajas to merge; so far, mergers have not 
taken place as quickly as the central bank had hoped.  (El 
Confidencial, 10/26; El Pais, 10/27) 
 
GDP Decline Slows in Q3: 0.4% from Q2, 4.1% from Year Ago 
 
4.(U) The economy shrunk by 0.4% in the year's third quarter, 
according to a Bank of Spain estimate.  While this 
contraction was smaller than those of any of the previous 
four quarters (which saw GDP fall by 0.6%, 1.1%, 1.6%, and 
1.1%, respectively) it still meant that third quarter 
production was 4.1% below its third quarter-2008 level.  The 
central bank noted that temporary measures such as the 
government's municipal infrastructure spending package and 
incentives for auto purchases had prevented the contraction 
 
MADRID 00001061  002 OF 002 
 
 
from being worse.  The official National Statistics Institute 
GDP figure, which will be announced in late November, is 
likely to be similar.  (Bank of Spain) 
 
Prices Rise in October, Still Below Last Year's Level 
 
5.(U) The National Statistics Institute's preliminary October 
inflation estimate suggests that prices rose by some 0.7% 
during the month.  The headline year-on-year rate was -0.6%, 
up from September's -1.0%.  Year-on-year rates are expected 
to remain negative for another month or two while they still 
include the impact of the late-2008 oil price decline.  The 
final October rate will be announced in two weeks. 
(Expansion, 10/29; Embassy calculation) 
 
EC Tells GOS to End Tax Break for EU Acquisitions 
 
6.(U) EC Competition Commissioner Neelie Kroes declared on 
October 28 that a tax benefit to Spanish companies making 
acquisitions in other EU countries violates EU state aid 
rules and has called for the GOS to reclaim the benefits in 
some instances.  Under the corporate tax provision enacted in 
2002, Spanish companies can write off over 20 years the 
difference between the price they pay for a foreign company 
and its book value.  The total amount of indirect public 
assistance provided since 2002 for acquisitions in other EU 
countries has been estimated at 30 billion euros, but Kroes 
ruled that only companies which had made acquisitions after 
2007 would have to refund the tax benefit. This exempts major 
deals such as Banco Santander's 9.5 billion-pound 2005 
purchase of the UK bank Abbey, Telefonica's 27 billion-euro 
2006 purchase of O2, and Iberdrola's 17 billion-euro 2007 
purchase of Scottish Power.  Banco Santander is expected to 
have to return any tax deducted as a result of its 1.26 
billion-pound 2008 purchase of UK bank Alliance and 
Leicester.  The EC continues to investigate and discuss with 
the GOS the application of the benefit to purchases outside 
the EU; this may affect Spanish investments in the U.S., 
though it is not clear whether the EC would have jurisdiction 
unless the Spanish purchasers were competing with potential 
purchasers from other EU countries.  (El Pais, 10/28; 
Financial Times, 10/29; El Confidencial, 10/29) 
Acciona To Develop 500 MW Solar Project for U.S. Army 
 
7.(U) The Army Corps of Engineers signed an agreement on 
October 15 with Acciona Solar Power and the U.S. firm Clark 
Energy Group to develop a 500 MW solar power project at Fort 
Irwin in California.  This will be DOD's largest solar energy 
project yet.  The project, to be completed between 2013 and 
2022, will use concentrating solar power and photovoltaic 
technology at five sites.  By 2014, the first site is 
expected to be able to cover Fort Irwin's total energy needs, 
and excess electricity will be sold to regional public 
utilities.  The $2 billion project will have the capacity to 
generate 1,000 GWh of electricity annually.  A federal 
mandate requires the Army to cover 25% of its energy needs 
with renewable energy by 2025.  (Business Wire, 10/15; Clark 
press release, 10/15) 
 
IEA Economist Criticizes Planned Coal Sector Aid 
 
8.(U) At an October 27 event in Madrid, International Energy 
Agency chief economist Faith Birol criticized measures 
proposed by the Ministry of Industry, Tourism, and Commerce 
to assist Spain,s slumping coal industry.  An existing GOS 
plan anticipates a gradual decline in production between 2006 
and 2012, but consumption of domestic coal has fallen to half 
of the expected level this year because of reduced 
electricity demand, the price of CO2 emissions permits, and 
competition from imported coal.  Birol acknowledged Spain,s 
interest in guaranteeing security of supply but said that 
aiding coal could distort the market and increase CO2 
emissions, going against Kyoto and EU aims.  An industry 
association said that the measures contained in a draft Royal 
Decree would provide assistance worth (if electricity prices 
remain at current levels) 480 million euros over three years. 
 It downplayed the CO2 emissions issue, saying much of the 
increased coal produced would replace imported coal. 
President Zapatero is from Leon, Spain,s principal coal 
mining area.  (El Pais, 10/28; Expansion, 10/28) 
CHACON