This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 BRASILIA 001750 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: PGOV ECON SOCI BR
SUBJECT: REVIEW OF A TOUGH SEMESTER AS THE BRAZILIAN 
CONGRESS FADES INTO RECESS 
 
REF: A. BRASILIA 812 
     ¶B. BRASILIA 1155 
     ¶C. BRASILIA 1144 
     ¶D. BRASILIA 313 
     ¶E. BRASILIA 1076 
 
1.(SBU) SUMMARY. After a tough and dramatic semester, the 
first congressional session of 2004 ended on July 13. 
Despite beginning three weeks early and ending two weeks 
late, this session's results were modest at best.  The 
Waldomiro Diniz scandal, poor economic results from 2003, and 
divisive debates over the minimum wage and the term lengths 
of Congressional leaders created a lack of focus, and Lula 
and his coalition contributed with several tactical blunders. 
 No major bills were passed this session, though several 
--including the Bankruptcy bill, Public-Private Partnerships, 
and the Biosecurity bill-- made significant progress through 
the legislative wickets.  With Brazil's economy apparently on 
the rebound and political attention now turning towards the 
October municipal elections, Lula's slipping approval numbers 
may stabilize or improve in the coming months, but there is 
no sign that the administration has moved to improve its 
strategic approach to passing its agenda.  END SUMMARY. 
 
CONGRESS IN NEAR-CONTINUOUS SESSION SINCE EARLY 2003 
--------------------------------------------- ------- 
¶2. (SBU) The 2004 first semester session of the Brazilian 
Congress, marked by controversy and high drama, ground to a 
halt on July 13, two weeks after its scheduled end --this is 
the third of three recesses that have been truncated during 
the 52nd Congress.  The legislature is now in recess until 
August 2, but the upcoming session will operate in low gear 
until the nationwide municipal elections conclude on October 
¶31.  In 2003, Lula's new government worked hard to pass its 
keystone pension and tax reform bills.  So hard, in fact, 
that Lula canceled Congress's July recess last year and held 
the Members in extraordinary session.  Thus, by late 2003, 
Congress was understandably ready for its two-month holiday 
recess, with many Members planning international travel. 
Then Lula cut short that recess also, calling Congress into 
extraordinary session on January 19 in a futile attempt to do 
some heavy lifting before the scheduled opening on February 
¶15.  On January 23, Lula reshuffled his cabinet, bringing 
five Congressmen into the administration, including several 
from the PMDB party.  Lula hoped, vainly as it turned out, 
that cementing the PMDB's place in his coalition would smooth 
passage of his priority projects through Congress. 
 
SCANDAL SET STAGE FOR ADMINISTRATION DEFEATS 
-------------------------------------------- 
¶3. (SBU) On February 13, the "Waldomiro Diniz Scandal" broke, 
in which an advisor to Lula's powerful Chief-of-Staff, Jose 
Dirceu, was videotaped soliciting bribes from a numbers 
racketeer.  The scandal dominated the headlines for seven 
weeks.  A March 30 disclosure that a prosecutor seemed to be 
pursuing the case largely for political reasons (ref A) took 
the wind out of the case, and the government coalition 
managed to head off calls for a congressional inquiry.  By 
then, however, Dirceu was damaged and the administration's 
authority in Congress was weakened.  The scandal, as well as 
poor 2003 economic results that were trickling in, 
reinvigorated the opposition and set the stage for a series 
of administration defeats.  Lula's coalition was also cursed 
with particularly maladroit Congressional leadership, and the 
President tarnished his own image by fumbling his response to 
a critical May 9 New York Times article (ref B). 
 
¶4. (SBU) On May 5, the opposition in the Senate managed to 
kill Lula's proposal to close bingo parlors, which had been 
his clearest response to the Waldomiro scandal (ref C).  The 
same day, the opposition initiated a series of maneuvers 
attacking Lula's small increase in the minimum wage (from 
R$240 to R$260 per month).  By the time the dust settled on 
June 23, Lula's increase remained intact but the opposition 
had enjoyed seven weeks of press coverage accusing him of 
being more interested in IMF fiscal targets than Brazil's 
working class.  Opposition candidates will carry this message 
into October's municipal elections. 
 
SESSION HAD FIREWORKS BUT LITTLE ACCOMPLISHMENT 
--------------------------------------------- -- 
¶5. (SBU) Thus there were plenty of fireworks this session, 
and the opposition repeatedly pushed Lula's coalition into a 
corner.  As a result of the time and energy spent on the 
Waldomiro scandal and the minimum wage debates (as well as a 
divisive and futile debate over allowing the leaders of 
Congress to remain in their posts for four years instead of 
two), Congress failed to pass any of the significant bills on 
its plate.  Some items made progress, while others were 
simply pushed onto next year's notional calender.  In the 
meantime, congressional leaders complained that Lula was too 
quick to issue Presidential Decrees (which have the force of 
law, but require Congressional ratification to remain in 
force --and which clog the congressional calendar while 
awaiting ratification).  But given the political challenges 
for Lula to pass his legislation, issuing Decrees offered him 
a mechanism to move forward on some elements of his agenda. 
Among the key bills that did not pass: 
 
- Biosecurity bill to regulate biotechnology, including GMO 
soy, which remains illegal here.  For the past two years, the 
GoB has issued waivers allowing farmers to plant and sell 
their GMO soybeans, but an overdue bill to regulate the 
sector faces an impasse in the Senate, and another waiver is 
likely to be issued in the coming weeks to legalize the 
2004-05 soy crop. (ref D). 
 
- Public-Private Partnership bill to generate funding for 
infrastructure projects is bogged down in a Senate committee, 
where there are questions about the bill's accounting 
mechanisms and impact on city and state budgets.  If a deal 
can be reached, this bill may pass in August. 
 
- Judicial Reform to streamline the judiciary.  This bill had 
been stalled by opposition from the Supreme Court Chief 
Justice who retired in May (ref E).  Parts of the text have 
passed the Senate, but more work remains to be done. 
 
- Bankruptcy bill, closely watched by investors, passed both 
houses but in different forms, so it must now go back to the 
Chamber for a final vote, possibly in August. 
 
- Other legislation, including the final pieces of last 
year's pension reform and a bill to combat the use of slave 
labor also failed to pass into law but made progress and 
could pass by year's end. 
 
RECESS GUARANTEED BY MINIMUM WAGE DEAL 
-------------------------------------- 
¶6. (SBU) Congress's final act on July 13 was to pass a 
mandatory, but preliminary, budget piece called the Law of 
Budgetary Directives (LDO).  This year's LDO sparked interest 
because it includes an amendment that will avert a partisan 
battle next year over the minimum wage increase.  Under the 
law, next year's minimum wage hike will be indexed to the sum 
of inflation and per capita GDP growth.  The administration 
was divided over this amendment but eventually acceded.  On 
the one hand it does not wish to have its fiscal hands tied 
by a pre-fixed minimum wage hike (and indexing was a major 
culprit in the hyperinflation of the early 1990s).  On the 
other hand, Lula is loathe to endure another bruising battle 
over the minimum wage. 
 
COMMENT - NOWHERE TO GO BUT UP 
------------------------------ 
¶7. (SBU) The failure of the Brazilian Congress to pass key 
laws this session was due to a combination of factors that 
weakened the administration's hand:  the Waldomiro scandal, 
poor economic results, lame whip work in Congress, rebellious 
coalition partners, and an opposition not only emboldened by 
these weaknesses, but given incentive to capitalize on them 
in advance of the October municipal elections.  While the 
session was disappointing to some, it was not an utter 
failure.  It seems likely that the coming months will be a 
bit better for Lula.  Some of the key bills left hanging fire 
during this recess should pass, and economic statistics 
suggest improved growth through year's end.  One interlocutor 
noted that Lula's dipping approval numbers could recover as 
the middle class regains some of the confidence it lost 
during the first semester's travails, but that the working 
class --those most affected by stubbornly high unemployment-- 
may remain disillusioned until employment numbers improve. 
An economic rebound would give a bounce to the government and 
strengthen its hand in congress, but there is no sign that 
the administration has fixed the structural problems in the 
coalition.  The nine main parties in the coalition often do 
not share legislative priorities nor do they maintain 
internal discipline on votes --another significant 
contributing factor to this session's disappointing results. 
Better tactics and a clearer strategic vision for its agenda 
would have gone a long way to averting the serial crises of 
the past few months, yet the administration seems 
surprisingly inactive in addressing these shortcomings. 
DUDDY