US embassy cable - 04MADRID4432

UNCLAS MADRID 004432 
 
SIPDIS 
 
TREASURY PASS TRACI PHILLIPS 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, SP 
SUBJECT: AMBASSADOR'S FAREWELL LUNCH WITH ECONOMY MINISTER 
SOLBES 
 
 
1.  Summary.  During a farewell lunch with the Ambassador, 
Second Vice President and Minister of the Economy Pedro 
Solbes gave a tour d'horizon of the status of the 2005 
budget, current and projected growth rates for the economy, 
government plans to ease the overheated housing market, and 
his take on the strengthening of the Euro against the dollar. 
 On the housing market, he floated the idea of a sort of 
"owner's insurance" to bring more of the vacant rental stock 
onto the market.  End Summary. 
 
2.  Minister Solbes noted that he was planning to return to 
Parliament immediately after the lunch in order to see the 
vote on the budget and all proposed amendments by the lower 
house.  He anticipated no difficulties in the lower house 
vote.  (Note:  The budget was approved by the Chamber of 
Deputies November 18. End note.)  The budget then goes to the 
Senate for consideration.  Solbes is anticipating difficulty 
in getting the budget through the Senate, and believes there 
is a real possibility the Popular Party and a Catalan 
nationalist party will group together to ensure the budget 
does not pass.  He noted that even if the budget was rejected 
by the Senate, it would return to the lower house and could 
be (and would be) passed by the Chamber of Deputies over the 
Senate veto.  This would not be ideal, of course, and would 
cost the PSOE government political capital in the Senate. 
 
3.  Minister Solbes noted the "flash" statistics for the 
third quarter of 2004 indicate overall economic growth of 2.6 
percent.  The fourth quarter should show similar figures and 
he expects overall growth for 2004 to come in at 2.6 or 2.7 
percent.  He was much cagier in projecting growth for 2005, 
tied in part to the fortunes of Spain's major trading 
partners in Europe.  He did say that optimists project 2.8 
percent growth and the pessimists around 2.5-2.6 percent for 
2005. 
 
4.  Solbes was fairly sanguine about the valuation of the 
Euro against the dollar.  He noted that 70 percent of Spain's 
trade was with Euro zone partners and so Spain is feeling 
less immediate pressure than some other Euro zone countries 
that export more heavily to the United States.  He noted, 
however, that softening demand from Germany and other Spanish 
trading partners because of their own export woes will 
eventually affect the Spanish bottom line.  He believes the 
Euro will continue to rise against the dollar until one or 
the other of the parties takes action. 
 
5.  The Ambassador queried Minister Solbes about government 
plans to ease the overheated housing market throughout Spain. 
 Low interest rates on mortgages coupled with low returns on 
other investment possibilities have led to heavy demand for 
real estate, steep increases in property values, and in 
increased mortgage indebtedness of Spaniards.  Solbes 
indicated he expects interest rates to rise in 2005, although 
incrementally and not enough to crash the market. 
 
6.  Solbes said one area the government would like to affect 
is improving the rental market.  Owner/tenant laws favor the 
tenant and a great deal of rental stock stays off the market. 
 Solbes said he was looking for a way to provide rent 
insurance for owners and to shift eviction and collection 
responsibility to the insurer.  He seemed to be trying out 
the idea and did not say whether the insurance would be 
provided by the private sector, a  public/private 
partnership, or the government.  The Ambassador noted that it 
might be simpler for owners to take action against defaulting 
tenants and evict or recover debts.  Both agreed that 
bringing the potential rental stock into the market, 
especially in Madrid and Barcelona, would effectively slow 
the house purchase market.  The idea, however, showed the 
government may be willing to take a creative (and potentially 
expensive) approach to a difficult problem. 
 
7.  Comment:  Minister Solbes was relaxed and open in his 
comments.  Given recent events, it was a conversation 
refreshingly empty of references to Iraq, U.S.-Spanish 
relations, and even the recent U.S. elections.  Solbes is 
confident of passing the PSOE government's first budget 
reasonably intact, which would be a political victory for the 
man brought into Zapatero's government to reassure those 
worried that a Socialist victory would mean an end to fiscal 
responsibility.  Although recent local rumors have indicated 
Solbes' health was poor and he might leave the government 
sooner rather than later, he appeared in fine fettle. 
ARGYROS