US embassy cable - 04MADRID3105

UNCLAS MADRID 003105 
 
SIPDIS 
 
TREASURY FOR TRACI PHILLIPS 
 
E.O. 12958: N/A 
TAGS: ECON, EIND, ELAB, EWWT, SP 
SUBJECT: EU SANCTION FORCES SPAIN'S SHIPBUILDER INTO 
RESTRUCTURING OR BANKRUPTCY 
 
1. SUMMARY. The Spanish press reported late July that the 
European Commission has ruled that Spain,s Izar Naval 
Constructions, a quasi-public company, violated the terms of 
EU aid for the shipbuilding industry and must return EUR 1.1 
billion (USD 1.35 billion).  This payment return threatens 
the solvency of Izar and has prompted the GOS to initiate a 
company restructuring, separating the civil and military 
sectors.  Spanish unions fear this plan will result in a huge 
amount of job losses and are considering action to prevent 
the dissolution. END SUMMARY. 
 
EC POSITION 
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2. The Commission is demanding the payment of EUR 1.1 billion 
(USD 1.35 billion) from Izar for the improper use of EU 
public aid funding in shipyard restructuring.  In 1997, the 
Commission and the European Council approved restructuring 
aid for the then publicly owned Spanish shipyards amounting 
to EUR 1.38 billion (USD 1.69 billion) on the condition that 
no further aid would be provided.  Between 1999 and 2000, the 
State Society of Participating Industries (SEPI), the Spanish 
majority shareholder of Izar, granted EUR 500 million (USD 
614 billion) in further aid to the civil public shipyards 
that are today owned by Izar.  SEPI granted aid in the form 
of a capital injection worth EUR 252.4 million (USD 309.6 
million), a loan worth EUR 192.1 million (USD 235.7 million), 
and paid a purchase price allegedly above market value.  This 
further aid is perceived as giving Izar an uncompetitive 
advantage in the shipbuilding industry, and shipyards in 
other EU Member States and other Spanish competitors have 
filed complaints. 
 
GOS PLAN 
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3. Izar is Spain,s leading civil and military shipbuilding 
company, created in December 2000 following the merger of 
Astilleros Espanoles S.A. and Empresa Nacional Bazan.  To 
prevent Izar from entering bankruptcy after paying the EC, 
the GOS has proposed the creation of a society of naval 
shipbuilders, where military activity will be separated from 
civil activity.  If restructuring does not take place, the 
GOS has predicted that Izar will become bankrupt four months 
after repayment.  This separation would result in the closing 
of most of Izar,s facilities, as the GOS has deemed that 
only two out of the eight facilities ) Ferrol and Cartagena 
) meet a &standard of acceptable activity.8  In addition, 
the GOS expects to draw capital from the private sector 
through the sale of Izar,s motor production arm from Manises 
and its shipyards in Sevilla. 
 
UNION CONCERN 
------------- 
 
4. The Spanish press also reported that the General Trade 
Union of Workers and the Workers, Commission have announced 
that they will attend the next SEPI meeting scheduled for 
September 7 to seek clarification on the specifics of the 
government plan.  Further, they anticipate presenting some 
&alternatives8 and &opinions8 to the presumed measures. 
If SEPI confirms the separation of civil and military 
shipyards, the unions have promised to schedule a series of 
demonstrations.  Workers fear huge job losses if the civil 
and military sectors are separated. 
 
5. COMMENT. Considering that the GOS is a majority 
shareholder of Izar through SEPI, it has the power to make 
the changes it deems necessary.  Izar has a coveted position 
in the shipbuilding industry in Europe and the GOS wants to 
protect that role even at the expense of some job losses. 
Whether the unions have the ability to prevent the government 
plan remains to be tested.  If the unions rally in September, 
this will be a major test of the new Socialist government's 
strength over the labor unions. END COMMENT. 
MANZANARES