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

UNCLAS SECTION 01 OF 02 BRASILIA 001695 
 
SIPDIS 
 
SENSITIVE 
 
NSC FOR BREIER, RENIGAR 
TREASURY FOR OASIA - DAS LEE, FPARODI AND KBERG 
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE 
STATE FOR WHA/BSC, WHA/EPSC, EB/IFD/OMA AND OES 
USAID FOR USAID/LAC/SAM - BETH HOGAN 
 
E.O. 12958: N/A 
TAGS: EFIN SENV AID
SUBJECT: BRAZIL DEBATING MERITS OF A DEBT-FOR-NATURE SWAP 
PACT WITH THE USG 
 
¶1. (SBU) Summary and action request:  The GoB is studying 
the idea of participating in a debt-for-nature swap of USG 
debt to support environmental projects.  The GoB likely will 
have at least one significant hurdle to clear before it can 
engage in a swap, since it would need new legislative 
authorities to enshrine the creation of the Board that would 
administer projects to be supported by the proceeds of the 
swap.  Finance Ministry contacts also argued, given Brazil's 
size and the scope for conservation projects, for a much 
larger swap (on the order of USD 50 million) than the USG 
previously has executed.  Another key point for the GoB is 
the discount factor built into the swap.  In an aside, our 
Finance Ministry interlocutors noted the Environment 
Ministry has some questions about how to ensure that 
conservation projects supported by the swap are consistent 
with Brazil's overall environmental policies.  The Finance 
Ministry hopes to conclude its analysis by end-June so that 
it can devote the month of July to obtaining the necessary 
interagency concurrence within the GoB.  The great unknown, 
our contacts noted, was whether the Foreign Ministry would 
support the proposal.  Post recommends that the USG engage 
the GoB actively as it considers the costs and benefits of a 
swap, and requests guidance for responses to our 
interlocutors questions on the contemplated discount factor 
and swap size.  End Summary. 
 
¶2. (SBU) Finance Ministry General Coordinator for debt 
operations, Paulo Valle and debt manager Cesar Almeida told 
Econoffs in a June 15 meeting that the GoB is studying very 
closely the idea of engaging in a debt-for-nature swap with 
the USG under the Tropical Forest Conservation Act (TFCA). 
There is considerable interest in the idea from within 
several parts of the GoB, including from the governor of the 
Amazon state of Acre, Jorge Viana, a member of President 
Lula's Workers' Party (PT).  Valle's debt team is 
elaborating a detailed financial proposal to put into 
numbers the impact on GoB accounts and the amounts that 
would be available to support conservation efforts. 
Notwithstanding ongoing technical level contacts with the 
U.S. Treasury, Valle said, the GoB still had many questions 
about aspects of the swap -- particularly the size of the 
discount that would be built into the operation. 
 
¶3. (SBU) Our Finance Ministry interlocutors also sought 
clarification on how large a swap the USG would undertake. 
Given Brazil's size and the scope for environmental 
protection projects, Valle said, the GoB was interested in a 
much larger swap (USD $50 million) than the U.S. previously 
had executed with other countries.  Econoffs explained that 
there was a budgetary issue for the USG, as the debt written 
off would have to be charged, at a discounted rate, against 
the amount the U.S. Congress appropriated for debt 
forgiveness.  Valle took the point but reiterated the GoB's 
interest in a large swap. 
 
¶4. (SBU) Valle noted that the GoB most likely would have a 
legislative hurdle to clear before it could engage in a 
swap.  He was waiting for Finance Ministry lawyers to issue 
a formal opinion, but fully expected that the GoB would need 
new legislative authority to set up the fund into which the 
proceeds of the swap would be paid.  Whether the mechanism 
for doing this would be via a draft bill or a presidential 
decree (a time-limited executive order which carries the 
force of law) has not yet been determined Valle stated, 
noting that if the GoB went for the later option this would 
speed the process.  Valle added in an aside that, while not 
a Finance Ministry concern, Environment Ministry colleagues 
had questions about the fund's independence and how to 
ensure that it hewed to overarching GoB environmental 
policies.  He declared that the Finance Ministry hoped to 
conclude its analysis by end-June so that it could devote 
the month of July to obtaining the necessary interagency 
concurrence within the GoB.  The great unknown, he stated, 
was whether the Foreign Ministry would support the proposal. 
 
¶5. (SBU) Comment:  It was clear that the Finance Ministry is 
engaging in a cost-benefit analysis on Brazil's 
participation in a TFCA debt swap.  The key points for the 
Finance team appear to be whether the size of the swap, and 
the discount (if any), justify the costs and management 
resources spent in seeking new legislative authorities to 
create the fund.  This is a unique opportunity, given the 
unprecedented level of Brazilian interest in a TFCA swap, to 
advance our environmental protection goals in Brazil.  Post 
strongly recommends forward-leaning USG engagement to 
address the GoB questions. 
 
DANILOVICH