US embassy cable - 05MADRID2731

UNCLAS SECTION 01 OF 02 MADRID 002731 
 
SIPDIS 
 
EUR FOR WE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, SP 
SUBJECT: AMBASSADOR'S MEETING WITH SECOND VICE PRESIDENT 
AND MINISTER OF FINANCE AND ECONOMY SOLBES 
 
 
1.  Summary and introduction:  The Ambassador met with Second 
Vice President and Minister of Finance and the Economy Pedro 
Solbes July 20.  Solbes was accompanied by Chief of Staff 
Soledad Abad Rico and Secretary of State for the Economy 
David Vegara.  Solbes provided a fairly comprehensive tour 
d'horizon of the Spanish economy that included no surprises - 
Spain is doing well; growth for 2005 is expected to be 
healthy; areas of concern remain the long term 
competitiveness of the economy, the growing current account 
deficit, and inflation.  Solbes stated that each of these 
concerns is manageable, but remains the subject of government 
attention.  He spoke briefly about the economic aspects of 
negotiations between the central government and regional 
autonomous communities, notably Catalunya and the Basque 
Country, over revenue sharing.  In response to questions from 
the Ambassador, Solbes said the Spanish banking sector is an 
area of strength and he does not believe it is overexposed to 
mortgage debt.  He seconded the Ambassador's statement on 
strong U.S.-Spanish coordination on terror finance issues. 
End summary and introduction. 
 
2.  Solbes expects GDP growth for 2005 to be between 3.2 and 
3.4 percent.  (Note:  This is in keeping with recent figures 
from the IMF and EU, and well above the 2.7 percent 
originally forecast by the GOS last year.  End note.)  The 
housing and construction markets remain strong in response to 
historically low interest rates.  Solbes noted that 
non-Spaniards are also active in the Spanish housing market 
with significant investment from elsewhere in the EU, 
particularly Germany.  Tourism also remains a strong 
performer in Spain.  Solbes then moved to some of the 
government's concerns. He restated the Zapatero government's 
goals of increasing investment in research and development 
and education to improve Spain's long term competitiveness in 
the world and European economies.  The growing current 
account deficit is the most serious short term concern, but 
is driven, according to Solbes, by strong internal demand 
that has driven imports up and a strong Euro that depresses 
exports.  Solbes indicated he felt Spain could sustain its 
growth rate, even with a growing deficit, for now.  He feels 
inflation is high, but at between three and four percent not 
out of control, and is sustainable for now. 
 
3.  A particular area of interest and concern for the 
government is immigration - primarily in how to integrate 
immigrants into the formal economy.  This is a relatively new 
issue for Spain, which has become a magnet for large numbers 
of immigrants only within the past 10-15 years.  Vegara noted 
that U.S. success in absorbing and integrating large numbers 
of new immigrants could be a useful model for Spain. 
 
4.  Solbes noted that although negotiations between the 
Spanish central government and the governments of regional 
communities - especially the Basque Country and Catalunya - 
are primarily viewed as political, there is an important 
economic component.  This is particularly important with 
Catalunya, where the Catalans feel that they are paying far 
more into state coffers than receiving in return, and want 
the same sort of financial autonomy granted to the Basques. 
Solbes noted that Catalunya is historically one of the 
wealthiest and industrially developed parts of Spain, and 
that there is a long-standing rivalry between Barcelona and 
Madrid to be the "primary" city in Spain. 
 
5.  Solbes stated that the Spanish banking sector is an area 
of strength.  The banks are healthy, modern, enjoy excellent 
management, and an increasing international profile.  In 
response to a question from the Ambassador, Solbes and Vegara 
stated they felt the banking sector (including the 
Spain-centered savings banks) is not overexposed on mortgage 
debt.  Even if the economy and the housing market slow down 
and interest rates rise, they believe most households will be 
able to manage mortgage payments.  In addition, Vegara noted 
that Spanish consumers have not followed the American 
practice of extracting equity from their real estate by cash 
out refinancing, home equity loans, and multiple mortgages on 
property, so most homeowners are less leveraged than 
Americans.  Solbes added that Spanish banks are subject to 
high reserve requirements and that the reserves provide a 
reasonable cushion. 
 
6.  On terror finance issues, Solbes agreed that the United 
States and Spain have an excellent record of cooperation. 
Solbes added that Spain takes financial crimes seriously, 
whether terror finance, narco-financing, or money laundering, 
and that the government closely monitors the banking sector. 
However, when queried by the Ambassador about the level of 
personal criminal liability for bank officers involved 
(wittingly or unwittingly) in money laundering, Solbes and 
Vegara were unsure. 
 
7.  The Ambassador closed by suggesting that the U.S. and 
Spanish business, with many common interests and 
complementary advantages, could work together to mutual 
advantage in the Latin American market.  Solbes agreed. 
 
8.  Comment:  Solbes is known as a technocrat rather than a 
political animal, and his discourse was heavy on economic 
details and almost devoid of political commentary.  Although 
he referred to it only briefly, the revenue-sharing 
negotiations with Catalunya are almost certainly a sensitive 
issue for his ministry.  There is no question that wealthier 
regions like Catalunya subsidize government spending in 
poorer regions.  President Zapatero, however, is dependent on 
the Catalan Socialist Party (ERC) to maintain a majority in 
the parliament, which limits the PSOE government's ability to 
simply say no to Catalan demands.  Acquiescence to Catalunya, 
however, would only open the way for increased demands for 
financial autonomy from other Spanish regions.  End comment. 
 
AGUIRRE