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UNCLAS SECTION 01 OF 02 BRASILIA 002278 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
NSC FOR FEARS 
TREASURY FOR OASIA - J.HOEK 
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE 
STATE PASS USAID FOR LAC 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/SHUPKA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV PREL BR
SUBJECT: BRAZIL: LULA REAFFIRMS MACROECONOMIC POLICY CONTINUITY 
 
REF: A) BRASILIA 2277  B) BRASILIA 2246 
 
This cable is Sensitive But Unclassified, please protect 
accordingly. 
 
¶1. (SBU) Summary:  Only a day after winning reelection to a second 
four year term, President Lula was forced by an outburst from his 
Institutional Relations Minister and PT party stalwart, Tarso Genro, 
into reaffirming during a series of October 30 television interviews 
his commitment to his current macroeconomic policies and denying 
that he would immediately be replacing Finance Minister Guido 
Mantega and Central Bank Chairman Henrique Meirelles.  Many analysts 
attributed the 1% fall in the Sao Paulo stock index and the 0.6% 
depreciation of the real on October 30 to Genro's statement that the 
era of "slow growth" monetary and fiscal policies was over.  While 
Lula's reaffirmation of his commitment to these policies is welcome, 
he did not/not state that Mantega would be still be on the job on 
January 1, the date of his second inauguration.  The incident is a 
harbinger of the jockeying to come between political factions within 
and without the PT over the make-up of Lula's second-term cabinet, 
much of which will depend on the outcome of negotiations to bring 
the PMDB into Lula's governing coalition.  End Summary. 
 
¶2. (U) Fresh from his October 29 victory in the polls over PSDB 
presidential candidate Geraldo Alckmin, Lula was forced to use a 
series of television interviews the following day to walk back 
statements by his own institutional relations minister, Tarso Genro, 
who had crowed that Lula's second term meant the "end of the Palocci 
era" with its emphasis on "slow growth" monetary and fiscal 
policies.  Genro also had stated that Mantega and Meirelles would be 
leaving immediately.  Many analysts blamed Genro's comments for the 
1.09 percent drop in the Sao Paulo stock exchange's main index and 
the 0.6 percent depreciation of the real October 30. 
 
¶3. (U) Lula stated in each of several interviews that there would be 
continuity in macroeconomic policy.  He specifically reaffirmed the 
GoB's commitment to its inflation-targeting monetary policy 
framework.  Lula dismissed the idea that Mantega and Meirelles would 
be out immediately.  They serve at the president's pleasure, Lula 
said, and will remain in their jobs until I decide otherwise.  When 
pressed, he clarified that he has not made any decisions about the 
makeup of his second-term cabinet.  Lula's chief of staff, Dilma 
Rousseff (comment: who is widely expected to stay on) also told the 
press that there would be economic policy continuity. 
 
¶4. (U) Genro's comments came in the wake of a statement from Mantega 
himself in the week preceding the election that Lula's second term 
economic policy would be more "developmentalist" than the first. 
Mantega, whose comment was made while out campaigning for Lula, did 
not elaborate on what precisely that would mean in terms of policy 
initiatives.  Within Brazilian economic circles, the term is 
generally understood to mean greater government intervention in the 
economy to promote industrial development. 
 
¶5. (SBU) Comment: The Genro incident is but a small foretaste of the 
jockeying that is to come over the next two months as political 
factions try to position themselves for positions of influence in 
Lula's second-term cabinet, some perhaps with the hopes of a pushing 
for alternate policies.  How the cabinet politics will play out 
depends in largest part on the negotiations to bring the PMDB into 
Lula's governing coalition, as the centrist swing party will be 
seeking some major ministries and policy influence.   While there is 
almost no chance Lula would give the Finance Ministry to the PMDB, 
neither is it a foregone conclusion that Mantega will remain. 
Earlier rumors had been floated that Petrobras President Jose Sergio 
Gabrielli and Belo Horizonte Mayor Jose Pimentel (both prominent PT 
figures) were the leading candidates to replace Mantega.  For his 
part, Mantega does not act like he will soon depart office. 
Recently, he replaced his well-regarded International Relations 
 
BRASILIA 00002278  002 OF 002 
 
 
Secretary (a holdover from his predecessor's team) with one of his 
 
SIPDIS 
own confidantes. 
 
¶6.  (SBU) Within the context of this political jockeying, Lula's 
reaffirmation of his commitment to the current sound macroeconomic 
policy mix is welcome, as it places some boundaries on the process. 
The bigger question, however, has always been whether Lula will be 
able successfully to pursue the mix of microeconomic and structural 
reforms necessary to improve productivity growth and sustain higher 
GDP growth rates.  That, in turn, will depend on multiple 
interlocking factors, including the strength and discipline of his 
congressional coalition and his success in lowering the temperature 
in the domestic political arena, superheated by corruption scandals 
and the electoral tribunal's investigations into PT's electoral 
dirty tricks.  Lula's initial extension of an olive branch to the 
opposition (ref A) is a useful first step. 
 
SOBEL