MADRID– “Spain’s film industry is dead,” Spanish newspaper El Mundo proclaimed last month.

Well, hardly. But the 36% cut to the Film Protection Fund, Spain’s main subsidy, announced April 3 by Mariano Rajoy’s deficit-battling government marks a milestone in Spanish cinema’s often forced march to a more market-driven economy.

Spain’s industry suffers a perfect storm: Rampant piracy, recession — fueling a 50% youth unemployment rate — and fiscal squeezes on the national, regional and municipal level.

What kind of Spanish film life can survive in such a climate? By mid-April, the industry was already yielding some answers.

Spain’s Film Protection Fund has been slashed to $63.7 million. That’s no total train crash, however. Bedrock aid — so-called “amortization” subsidies triggered by films’ B.O., fest runs, producers’ investment — remains intact.

Around $45.5 million is earmarked to amortize Spanish films that bowed in the second half 2010, says Susana de la Sierra, director general of Spain’s ICAA Film Institute, the fund manager.

State bank ICO still puts up bridging loans for producers awaiting amortization incentive payments.

Also, de la Sierra adds, if approved by Spain’s tax authorities and the European Commission, the government will hike film tax breaks from 18% to around 20%-25%, while making them easier to use.

Ability to use the incentives is equally important as the savings they offer. “The key to Spanish tax breaks isn’t the percentage but the legal guarantees that film investors can access them,” says Arcadia Motion’s Ibon Cormenzana.

Beyond this, however, as de la Sierra recognizes, the ICAA today has “little room for maneuver,” though it is already working on 2013’s legal framework and budget.

Artier and first-time movies, smaller shingles’ bread and butter, receive a total $3.9 million in 2012 project-stage subsidies, well below 2011’s $10.4 million.

Meanwhile, Catalonia’s fund, Spain’s biggest regional war chest, plunged from 2011’s $18.2 million to a provisional $12.35 million.

“ICAA project-stage subsidies have been essential for arthouse first features and smaller, personal movies,” says Wanda’s Jose Maria Morales. Humbler, undiversified outfits may now simply shutter. Low-grade craft jobs will be lost. Pay-scales have already fallen. They will now fall further.

There’s already a new talent drain: Some talked-up helmers now live in L.A. (Alexis Morante, David-Martin Porras) and New York (Martin Rosete, Antonio Mendez).

Despite all this, reports of Spanish cinema’s death remain an exaggeration.

The main bugbear is increased uncertainty. For banks, that already exists. Spain’s singular subsidy system, giving producers up to $1.95 million per pic based on a points system and a film’s admissions, means amortization aid is paid 18-24 months after a movie’s release, says Christophe Vidal, at French bank Natixis Coficine.

The large question for films going into production in 2012, hence 2013 releases, is how Spain’s Protection Fund will stand in 2015, says Mod Producciones’ Simon de Santiago, at Mod Producciones, a producer on one of Spain’s big 2012 releases, “The End,” a thriller now in post.

Nobody’s sure of Spain’s short-term future, let alone 2015.

“Uncertainty about the future subsidies amounts would create an issue with banks,” Vidal says.

Over 2008-10, however, ICAA paid out only 66%-70% of its Protection Fund budget. Set more realistically, 2012’s budget “will completely cover amortization aid,” says Jose Maria Lassalle, Secretary of State for Culture.

As smaller shingles struggle to access bank facilities, the film industry could go through the throes of contraction, Vidal says.

Despite cutbacks, a swarm of substantial Spanish movies — often from a select number of top-echelon production houses still tapping bank coin — are being greenlit, put into production, or brought onto the international market.

Pedro Almodovar’s “Standby Lovers,” a comedy with Javier Camara, Lola Duenas and Cecilia Roth, shoots this summer.

Dreamcatchers — a label formed of 6 Sales, Arcadia Motion and Wanda Films — is unveiling Claudia Llosa’s “Don’t Cry, Fly” at Cannes, Film Factory Oskar Santos’ “Goonies”-ish “Zip & Zap and the Marble Gang,” produced by Zeta Cinema, Mod and Antena 3 Films.

Two Morena films rolled May 7: “The Last Days,” from David and Alex Pastor (“Carriers”), and Santi Zannou’s soph pic “Alacran in Love.”

“We don’t intend to stop. We’ll even ratchet up production levels a little,” says Joaquin Padro at Rodar y Rodar, whose “Carmen Amaya,” from Mar Targarona, shoots later this year, and its first English-language pic, “The Hollow Man,” in 2013.

Traditionally depending on international finance, toon pic production may also prove more crisis-resilient, says El Toro’s Jordi Gasull.

These movies rep isolated productions, however.

“Spain won’t have a film industry if only 25 films are put into production this year,” says Xavi Parache, at Barcelona’s Escac film school.

Subsidy isn’t the be-all of the Spanish industry, moreover.

“The current subsidy system will allow films to get made. However, the kind of films that will get made is already being decided by the market,” says Ghislain Barrois at Telecinco Cinema.

In Spain, there’s little home-entertainment money. The country’s DVD market yields just nominal returns. Receipts from TV are also dwindling. A few years ago, free-to-air was worth 30% of budgets, now only 15% to 20%, says Eddie Saeta’s Luis Minarro.

So production will cut several ways — skewing international or mainstream or downscaling, producers concur.

Movies “will depend on outside Spain, be low cost or have a high percentage of (private-sector) financing: pre-sales, sales, international investors,” predicts Nostromo’s Adrian Guerra.

“The market’s splitting between films (costing) $60,000 to $500,000, shot with no TV or distributor support, and $4 million-to-$6.5 million movies with a clear shot at reaching audiences,” says Morena’s Juan Gordon. He doesn’t anticipate more than 15 films per year in the latter category.

Spain’s industry looks set for creeping full-scale industrial reconversion. For Alvaro Longoria, another Morena producer, that has some upside: “People are more inventive in crisis. Films made will tend to be the good ones. As Sun Tzu wrote in ‘The Art of War,’ in chaos lies opportunity.”

Emilio Mayorga contributed to this report.

Cannes Daily Spotlight 2012: Spanish Cinema
Biz dodges crash landing | VOD paves new path to profitability | Creative finance | Int’l sales agents steer the market | Films in the fest, market | 10 to track
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