US embassy cable - 04MADRID2871

UNCLAS MADRID 002871 
 
SIPDIS 
 
TREASURY FOR TRACI PHILLIPS 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, SP 
SUBJECT: FINANCE MINISTER SOLBES CLEANS UP BOOKS 
 
REF: MADRID 00162 
 
1.  SUMMARY: Finance Minister Pedro Solbes announced July 16 
his intention to add EUR 6.14 billion (USD 7.4 billion), or 
0.78% of GDP, of non-performing government investments to the 
2004 budget.  This is predicted to give Spain its first 
budget deficit (at 1.2% of GDP), since 1999.  These 
liabilities result from several failed government investments 
such as the liquidation of the Andalusian Government debt, 
investments in Radio-Television Espanola, and loans to 
Argentina. Solbes' report also called for transparency 
reforms that will increase the amount and clarity of budget 
information to the public.  The opposing Popular Party (PP) 
has criticized Solbes' move as an attempt to tarnish the 
former PP administration's image.  END SUMMARY. 
 
2.  Pedro Solbes, Second Vice-president and Minister of 
Economy, has revised Spain's 2004 budget accounting by adding 
EUR 6.14 billion (USD 7.4 billion) in non-performing debts to 
government liabilities. In his July 16 report to the Council 
of Ministers, Mr. Solbes revealed that this change will 
increase Spain's projected 2004 deficit from 0.4% to 1.2% of 
GDP, and for the first time in three years Spain will report 
a budget deficit.  (The Social Security payments account will 
add 0.5% of GDP surplus, which originally would have left the 
government with a budget surplus of 0.1%).  Despite this new 
revised 2004 budget, Solbes projected a GOS budget surplus of 
0.1% of GDP in 2005, if the autonomous regional governments 
maintain balanced budgets. 
 
3.  For further background on Solbes' position, we spoke with 
Jose Luis Kaiser Moreiras, former PP finance advisor and 
currently in the Ministry of Economy, and Alvaro Sanmartin 
Antelo, a current Solbes advisor.  They explained that EU 
rules allow certain government investments, known as 
contingent liabilities, to be kept off the books as long as 
there is credible evidence of return on those investments. 
Solbes has decided that some of these investments now show no 
future feasibility, and has to report them as government 
expenditures in 2004.  Examples of these ventures include the 
liquidation of debt with the Andalusian government, failed 
investments in Radio-Television Espanola, and loans to 
Argentina during its 2001 financial crisis. 
 
4.  Solbes also accounted for budget losses of ailing 
government-owned companies in 2004.  If the results of 
state-owned enterprises do not permit future profitability, 
then Eurostat requires those losses to appear in the 
government budget, as Solbes has done.  Losses by companies 
like RENFE (state-owned railroad), AENA (state-owned aviation 
administration), and the state-owned water company appeared 
in this new deficit figure. 
 
5.  Solbes' report called for greater transparency in the GOS 
budget.  He called for an amendment to the already existing 
Balanced Budget Law, which would require increased 
transparency and public information.  The transparency 
amendment would require the GOS to make more information 
public, require the National Statistics Institute and the 
Bank of Spain to open their books, and standardize the 
budgetary schedule and information provided to the public. 
 
6.  Mariano Rajoy, Secretary General of the opposition PP, 
dedicated almost an entire press conference on July 21 to 
criticizing Solbes' move to include these new deficit figures 
in the 2004 budget.  Rajoy claimed that Solbes is trying to 
blame the PP administration for "hidden deficits," in spite 
of the fact that Solbes refuses to use the term to describe 
PP budgeting.  Rajoy added that some of these enterprises 
might still become profitable in the future, or had already 
appeared in previous years' budgets.  Solbes was head of 
Eurostat, the EU body that validates all EU state budgets and 
finances, before taking the Spanish Finance Minister 
position.  He approved the 2004 GOS budget while in that post 
and Rajoy criticized Solbes for not taking action previously 
if a deficit problem existed. 
 
7.  COMMENT: The PSOE government may not be trying to portray 
the former PP government as having "hidden" budget deficits, 
despite sensationalist press reports to the contrary.  The 
timing of these adjustments, post-EU parliamentary elections, 
may indicate that this is not strictly a campaign tactic. 
Solbes may be loading up the 2004 budget with deficit 
liabilities so that the PSOE can claim 2005 and other future 
budget surpluses on its record.  Adjusting the government 
accounts at this time is also a positive move for Solbes' 
image.  He can portray himself as a fair and respectable 
Finance Minister who displays prudent budgeting practices. 
MANZANARES