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 02 BRASILIA 001849 
 
SIPDIS 
 
E.O. 12958: DECL: 07/12/2015 
TAGS: PGOV PREL ECON BR
SUBJECT: LULA FACES WORST CRISIS OF HIS PRESIDENCY 
 
REF: A. BRASILIA 1682 
     ¶B. BRASILIA 1819 
 
Classified By: POLOFF RICHARD REITER FOR REASONS 1.4 B AND D. 
 
¶1. (C) SUMMARY.  Since mid-May, when a series of interlocking 
scandals (dubbed the "Postal Service" and the "Big Monthly" 
scandals) began to unfold in Brazil, President Lula da Silva, 
his administration, his coalition, and his Workers' Party 
(PT) have been battered by the gravest political crisis of 
his presidency.  The list of casualties is long, and may grow 
longer.  Lula's powerful Chief of Staff, Jose Dirceu, 
resigned on June 16, PT party president Jose Genoino (a close 
Lula confidant) and two other party officials resigned on 
July 9.  Three right-of-center parties in Lula's coalition in 
Congress (PTB, PL, and PP) have been directly implicated in 
the scandals.  As a result, Lula has been forced to shake up 
his cabinet, sending two cabinet ministers to take over the 
wounded PT party leadership and offering as many as four 
cabinet slots to its unreliable coalition partner, the PMDB 
party. 
 
¶2. (C) Lula himself has not been touched by the scandals, and 
his personal popularity is relatively unscathed.  But with 
the administration in a state of rolling crisis, the 
coalition in disarray, and Congress spending most of its time 
engaged in finger-pointing and investigative committees, Lula 
is facing a challenge to his governability.  He is still 
odds-on to run for, and win, a second term in the October 
2006 elections, but his prospects have been damaged.  It 
seems unlikely that any significant legislation will pass in 
the meantime unless it gathers support from the opposition or 
(like a political party reform bill now in committee) gets a 
push from the current crisis.  Lula has shown no signs of 
altering either his fiscal stability or foreign policies, but 
the crises will prevent him from taking the initiative in 
most other areas.  END SUMMARY. 
 
CORRUPTION CHARGES DOG THE PT PARTY 
----------------------------------- 
¶3. (C) The mid-May revelations that senior officials in the 
Brazilian Postal Service, linked to the coalition's PTB 
party, were soliciting bribes kicked off an expanding series 
of scandals that continues to batter the Brazilian 
government.  As those caught up in the allegations scrambled 
to defend themselves, they revealed further schemes, and the 
crisis widened.  Among the most serious allegations to date 
is that senior officials in President Lula's Workers' Party 
(PT) managed a scheme fueled by undeclared cash used for 
everything from campaign financing of PT and allied 
candidates to vote-buying in Congress.  These allegations 
have triggered the resignations of Lula's Chief of Staff, 
Jose Dirceu, and the three most senior PT party officials 
including party president Jose Genoino, a long-time Lula 
confidant. 
 
PT'S FUTURE AT STAKE 
-------------------- 
¶4. (C)  Looking to restore order in the party, Lula sent two 
well-regarded cabinet ministers --Education Minister Tarso 
Genro and Labor Minister Ricardo Berzoini-- to take over the 
PT leadership.  Genro quickly announced new accountability 
rules for members.  Though the PT has long nurtured an image 
of probity, in recent years it has moved aggressively toward 
the center and grown dramatically in size while allying with 
center-right parties of dubious character.  Party moderates, 
led by Dirceu and Genoino, who masterminded this evolution 
are now among those feeling the greatest heat.  Diehard 
leftists in the party, feeling doubly betrayed, are clamoring 
to take the PT in a new direction, and they will get their 
chance in September when party-wide elections choose new 
directors. 
 
¶5. (C) The new PT directors will decide whether to stay the 
course of a moderate "PT Lite" and will also set the tone for 
the administration's direction heading into the 2006 
elections.  Moderates such as interim PT president Tarso 
Genro still command the majority of the rank-and-file and are 
likely to be reelected to lead the party.  But if the 
leftists  capitalize on outrage over the scandals and take 
over the PT leadership, look for them to push Lula to shed 
untrustworthy allies (PTB, PL, PP) and even to break with the 
large but divided PMDB.  In such a scenario, the effect on 
administration policies and policy platforms for the 2006 
campaign would be entirely unpredictable. 
 
CABINET SHUFFLE AND COALITION DYNAMICS IN PLAY 
--------------------------------------------- - 
¶6. (C) Dirceu's June 16 resignation was the first round of 
the cabinet shuffle.  Since then, Lula has swapped out five 
more cabinet ministers --two of whom took over the top posts 
at the PT party, one replaced Dirceu as Chief of Staff, and 
two others stepped down for other reasons (ref B).  The 
shakeup is likely to continue in the coming days as Lula asks 
for resignations of Ministers planning to run for office in 
¶2006.  Two trends are apparent in Lula's choices: one is an 
attempt to shore up a crumbling coalition by locking in the 
large but divided PMDB party as an ally --which, if 
successful, would allow Lula the luxury of relying less on 
the medium-sized parties-for-rent that have gotten him into 
such trouble in recent weeks.  To make it work, Lula will 
have to win over the PMDB's substantial "anti-Lula" wing, 
with a combination of cabinet posts, patronage jobs, and 
pledges of mutual support in the 2006 elections.  The second 
trend is that Lula is showing himself unafraid to name 
"technical experts" rather than "political" cabinet 
ministers, in a quest for competence and to reduce political 
complications. 
 
COMMENT - LULA'S GOVERNABILITY AT RISK 
-------------------------------------- 
¶7. (C) Lula's personal exposure in the scandals appears 
limited to the nature of "what he knew and when he knew it". 
A poll last week indicates about 40 percent of Brazilians 
surveyed believe Lula had some knowledge of improprieties. 
If this were proved, he would be vulnerable to allegations 
that he was remiss in his duty to address corruption brought 
to his attention.  With Dirceu's resignation as Chief of 
Staff, the administration hopes to quarantine the President 
from the crisis, keeping it restricted to Congress and the 
affected parties.  But Lula's political problems are acute. 
With the cabinet in flux, the administration is enduring a 
rolling crisis and revolving door of ministers.  The 
coalition is in tatters, with the allies accusing each other 
of wrongdoing and some expulsions from Congress on the menu. 
The result is an administration that has neither the floor 
votes nor the political capital to push its agenda through 
Congress.  Congress is in semi-recess in July, but the noisy 
investigative committees continue unabated, calling witnesses 
and generating headlines. 
 
¶8. (C) By all accounts, Lula still seems certain to run for a 
second term in 2006 and should be the odds-on favorite, 
though he looks less invincible than he did a few months ago. 
 But the future of the PT party, both internally and in its 
image with voters, remains a question mark at least through 
the party convention in September.  Lula's ability to 
reanimate his supporters with sweeping policy initiatives is 
hampered by his coalition problems.  In short, the 
administration's field of action for the foreseeable future 
may be restricted to foreign and economic policies, the two 
areas where many Brazilians give Lula his highest marks and 
where he seems most likely to stay the course. 
CHICOLA