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

C O N F I D E N T I A L SECTION 01 OF 03 BRASILIA 000572 
 
SIPDIS 
 
DEPT FOR WHA/BSC 
 
E.O. 12958: DECL: 03/10/2014 
TAGS: PGOV ECON SOCI KCRM BR
SUBJECT: WORST OF BRAZILIAN SCANDAL HAS PASSED 
 
REF: A. BRASILIA 402 
 
     ¶B. BRASILIA 458 
     ¶C. BRASILIA 564 
     ¶D. SAO PAULO 378 
 
Classified By: POLOFF RICHARD REITER, FOR REASONS 1.5 B AND D. 
 
¶1. (C) SUMMARY.  On March 4, Brazil's Workers' Party (PT) 
quashed efforts to set up a congressional inquiry (CPI) into 
the gaming sector and the "Waldomiro Diniz" scandal (refs 
A,B).  This, coupled with the fact that no new allegations 
pointing to wrongdoing by PT leaders have emerged in recent 
days, suggests that the worst of the scandal has passed. 
Lula's Chief of Staff, Jose Dirceu, was emboldened to give a 
defiant press interview in VEJA magazine.  The post-mortem 
shows that the winners include PMDB Senator Jose Sarney, who 
gave key support to the administration in quashing the CPI. 
Losers, aside from Dirceu, include PT Senator Aloizio 
Mercadante and PL Senator Magno Malta.  Other big losers are 
the nation's more than 120,000 bingo parlor employees put out 
of work when Lula closed the parlors February 20. 
 
¶2. (C) And of course the Workers' Party has lost political 
capital.  It is too early to say whether the scandal will 
hurt the PT in October's municipal elections, but it is 
likely to slow the legislative agenda in an already 
compressed congressional year.  The PT may also emerge more 
dependant on its coalition partners (who will extract maximum 
benefits in return), particularly the PMDB, which was 
instrumental in saving the PT from worse disgrace.  The PT's 
poor response to the crisis is in part due to its 
inexperience with ethics scandals, but the party is likely to 
discover that learning these lessons is politically 
expensive.  END SUMMARY. 
 
CONGRESSIONAL INQUIRY GETS PUT IN A DRAWER 
------------------------------------------ 
¶3. (SBU) On March 4, three weeks after the "Waldomiro Diniz" 
scandal broke --in which a senior advisor on President Lula's 
staff was caught soliciting bribes from a numbers racketeer-- 
the Workers' Party used a parliamentary tactic to quash 
efforts to establish a congressional inquiry (CPI).  The CPI 
was sponsored by Senator Magno Malta, of the coalition's 
Liberal Party.  On March 4, Malta filed his petition with the 
Senate leadership, but the fix was already in.  Senate 
President Jose Sarney, a leader of the coalition's PMDB 
party, went ahead and authorized the CPI, but then neither 
the PT nor the PMDB nominated their members to the committee. 
 Without a quorum, the committee could not be established 
and, in the lexicon, was "put in a drawer".  Investigations 
by the Federal Police, the Federal Prosecutor, and the Rio 
state assembly still continue.  With the CPI threat gone, and 
the fact that no new allegations against PT leaders have 
emerged in recent days, the worst of the scandal appears to 
have blown over. 
 
JOSE DIRCEU FINALLY GOES PUBLIC 
------------------------------- 
¶4. (U)  In fact, Lula's embattled Chief of Staff Jose Dirceu, 
for whom Waldomiro Diniz worked, felt emboldened enough to 
make his first public statement when he gave a long interview 
for the March 10 issue of VEJA magazine.  Defiant, Dirceu 
wondered why the opposition politicians who now say they have 
known about Diniz's malfeasance for over a year did not raise 
the issue earlier.  Saying that he made a mistake in trusting 
Diniz but committed no crime, Dirceu confirmed that Lula 
refused his offer to resign.  He insisted that the scandal is 
not an "institutional crisis" and that the Workers' Party 
maintains its "standard of ethical behavior and transparency". 
 
LEGISLATIVE AGENDA A TOUGH SELL 
------------------------------- 
¶5. (C)  The Lula administration and the PT have not emerged 
unscathed.  Lula's personal approval remains at a teflon 60%, 
but his government's popularity has slipped to 38% (ref C). 
Even PT politicians tell us that the administration will have 
to work harder to sell its bills in Congress and may have to 
offer more pork to coalition allies.  Congress is now turning 
to its legislative agenda (one PT Federal Deputy told us that 
when the PT caucus in the lower house held its weekly meeting 
on March 9, crisis management was not even on the agenda), 
which in the coming weeks will include the Energy Model, 
Public-Private Partnerships, a Bankruptcy Law, follow-on 
legislation for last year's tax and pension reforms and 
possibly judicial reforms.  (A bill to reform campaign 
financing, which got an early boost from the scandal, has 
once again been put on the back burner.)  The legislative 
plate is full of tough bills, and with municipal elections 
set for October, Congress will essentially stop working when 
it goes into recess on June 30. 
 
WINNERS... 
----------- 
¶6. (SBU) The post-mortem on the scandal is still being 
written, but there are some clear winners and losers.  Among 
the winners are Senate President Jose Sarney (PMDB) who 
provided sound advice and procedural support in helping the 
administration quash the CPI.  Rumors that Sarney will be 
rewarded by getting to name the next head of Electrobras have 
resurfaced, and it is rumored that the PT will support 
Sarney's bid to amend the constitution to allow him to remain 
as Senate President through 2006.  Similarly, leading PMDB 
Senator Renan Calheiros and Chamber Speaker Joao Paulo Cunha 
(PT) worked hard on the administration's behalf and will 
expect recognition.  Meanwhile, former-Rio Governor Anthony 
Garotinho, who came in third in the 2002 presidential 
elections, is positioning himself for another presidential 
run in 2006.  Though Garotinho heads Rio's PMDB branch --and 
the PMDB is part of Lula's coalition-- he did not miss the 
opportunity to slam the administration over the Diniz 
scandal. 
 
...AND LOSERS 
------------- 
¶7. (C) The list of losers from the Diniz scandal must start 
with Chief of Staff Jose Dirceu.  He appears to have dodged 
the bullet, in that there is no evidence that he was 
personally involved in corrupt activities.  But Diniz worked 
for him, and there are still unanswered questions about 
Dirceu's role in both the Diniz and Celso Daniel (ref D) 
cases.  Dirceu is convinced that another member of Lula's 
inner circle, Communications Secretary Luiz Gushiken, tried 
to undermine him with tactical leaks over the past weeks, and 
Lula reportedly had to mediate their dispute.  In a March 2 
poll (ref C), two-thirds of Brazilians said Dirceu should 
step down, either temporarily or permanently, from his post. 
 
¶8. (SBU) Leading PT Senator Aloizio Mercadante also came out 
badly.  It was he who gave disastrous tactical guidance to 
the PT caucus in the Senate that nearly resulted in the CPI 
being established.  (There is some speculation that 
Mercadante may be replaced by Calheiros as the coalition's 
floor leader in the Senate.)  Liberal Party Senator Magno 
Malta, leader of the PL's Senate caucus, was badly damaged by 
his insistence on requesting the CPI, despite the fact that 
the administration and PL leadership were opposed.  (The PL 
is a coalition member and the party of Vice President 
Alencar.) Malta gave a tearful mea culpa on the Senate floor 
on March 9, but he may be forced out of his leadership 
position, if not out of the party altogether. 
 
BINGO PARLORS OUT OF LUCK 
------------------------- 
¶9. (C) Bingo parlors are losers, and an estimated 120,000 or 
more gaming employees are out of work.  On February 20, Lula 
issued a decree closing all bingo games and slot machines in 
Brazil.  Bingo was originally legalized in 1993 to allow 
gaming houses to affiliate with sports clubs and donate 7% of 
their revenues to the clubs' upkeep.  However, many clubs 
complain that they never received the promised bingo 
revenues.  PT Federal Deputy Jose Eduardo Cardozo told us the 
system is "a fraud", and the bingo parlors are simply money 
laundering operations.  PT floor leader Arlindo Chinaglia 
assured us that Congress will support Lula's decree (which 
must be approved by Congress to remain in force), and no 
thought is being given to reopening the parlors anytime soon. 
 
WORKERS' PARTY IMAGE TARNISHED 
------------------------------ 
¶10. (C)  And of course the Workers' Party has lost political 
capital.  It is too early to say whether the scandal will 
have an impact on October's municipal elections, and there 
are still seven months for the party to recover, but the 
declining popularity of the PT-led administration indicates 
that the party has suffered a black eye.  The PT's code of 
ethics is more than just image (of 76 members of Congress who 
are currently defendants in criminal or electoral cases, none 
is a PT member), but the spate of bad press is damaging, and 
PT candidates will be hard-pressed to point fingers at their 
opponents' misdeeds in the election run-up. 
¶11. (C) The PT showed itself inexperienced in crisis 
management, precisely because it is rarely faced with ethical 
crises.  The fact that it was saved by behind-the-scenes 
support from figures like Senators Jose Sarney and Antonio 
Carlos Magalhaes, both widely perceived as 
ethically-challenged, but who have therefore developed superb 
crisis management skills, is surely not lost on the public or 
the Workers' Party rank-and-file.  The PT learned some tough 
lessons that it hoped never to need, and finds itself 
diminished as a result. 
 
COMMENT - PT NOW A HOSTAGE? 
--------------------------- 
¶12. (C) Pundits here wonder whether, and to what extent, the 
PT now finds itself held hostage by its coalition allies. 
The large PMDB party, in particular, is never shy about 
demanding pork, the right to fill federal job vacancies, 
compromises on controversial legislation, and now deals on 
local-level coalitions in the upcoming elections.  One PT 
Deputy told us with a sigh that campaign finance reform and 
labor reform will not pass this year because the PT will have 
to limit its exposure on controversial bills.  There still 
may be time and political capital to pass important 
legislation, but the expectations have been sharply reduced 
by the scandal.  This is surely not how Lula and the PT 
wanted to begin their second year. 
VIRDEN