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

S E C R E T SECTION 01 OF 04 BRASILIA 003008 
 
SIPDIS 
 
TREASURY FOR OASIA - U/S ADAMS AND DAS LEE 
NSC FOR CRONIN 
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
 
E.O. 12958: DECL: 11/09/2015 
TAGS: ECON PGOV PREL EFIN BR CU
SUBJECT: BRAZIL - FINANCE MINISTER PALOCCI UNDER FIRE 
 
REF: A. BRASILIA 3001 
     ¶B. BRASILIA 2951 
     ¶C. BRASILIA 2237 
 
Classified By: Charge d'Affaires Philip Chicola, reason 1.5 (b) 
and (d) 
. 
 
¶1. (SBU) Summary and comment: Brazil's Finance Minister, 
Antonio Palocci, considered by many the anchor of GoB 
economic policy, has been coming under increasing fire in 
recent days as new allegations have surfaced that he had a 
role in illegal fund-raising activities by the ruling PT 
party and knew of an alleged multi-million dollar campaign 
contribution from the Cuban government (ref B).  Once former 
presidential Chief of Staff Jose Dirceu is removed from his 
congressional seat (now a foregone conclusion) the opposition 
and media spotlight will turn ever more towards the 
accusations against Palocci.  President Lula's Chief of 
Staff, Dilma Rousseff, a more leftist member of the PT, piled 
on this week, going public with acerbic criticism of a joint 
proposal advanced by Palocci and Planning Minister Paulo 
Bernardo to cap current expenditures and maintain a primary 
surplus well above the GoB's official 4.25% of GDP target. 
Palocci has threatened on three occasions to resign if he is 
called to testify by one of the Parliamentary Commissions 
(CPIs) investigating the scandals but agreed, under pressure, 
to appear before the Senate Economic Affairs Committee on 
November 22, where he might face some questioning about the 
accusations. 
 
¶2. (SBU) The timing of Rousseff's outburst on fiscal policy 
was remarkably poor for Palocci, who already was under attack 
for scandal-related reasons.  There is increasing speculation 
among the political chattering class that Palocci is a goner. 
 Indeed, we can now imagine a confluence of events, both 
scandal and policy-battle related, that would make Palocci's 
position untenable.  Palocci would likely resign rather than 
remain in the job should: 1) events render him ineffective; 
2) he be called to testify before one of the CPIs; or, 3) 
further damaging revelations surface.  We do not believe, 
however, that Rousseff's comments indicate a serious effort 
on her part to change the basic thrust of the GoB's current 
sound economic policy.  The debate thus far has been one of 
degree, i.e. by how much to over-perform the formal primary 
surplus target.  It's a debate we can live with.  End Summary 
and Comment. 
 
Palocci Scandal Links - Cuba this time? 
--------------------------------------- 
 
¶3. (S) Palocci has been the subject of several sets of 
allegations involving kickbacks on municipal contracts let 
during his tenure as mayor of the city of Riberao Preto as 
well as charges of influence peddling by people close to him. 
 The kickbacks allegedly financed off-budget PT party slush 
funds.  In the last week, a new sensational allegation has 
been made that in 2002 Palocci, then Lula's presidential 
campaign coordinator, knew of and approved a USD 3 million 
Cuban Government campaign contribution to the PT party.  Veja 
magazine (Brazil's leading news weekly) claims that Sergio 
Cervantes, a Cuban Intelligence Officer formerly assigned to 
the Cuban Embassy in Brazil, gave USD 3 million in cash to 
Ralf Barquete and Vladimir Poleto, a claim based in part on 
interviews with Poleto and Rogerio Buratti.  At the time 
Barquete, who died of cancer last year, was a special 
assistant to Palocci and the other two individuals were 
senior figures in the municipal government of Riberao Preto. 
The money reportedly was flown from Brasilia to Sao Paulo on 
a private plane belonging a businessman, Roberto Colnaghi, 
reputed to be close to Palocci.  The pilot of the aircraft 
confirmed to the magazine that he had flown Palocci's aide 
with three boxes, allegedly containing the cash, on or about 
the dates mentioned in the Veja story. 
 
¶4. (SBU) In testimony before the Congressional Investigatory 
Committee (CPI) on Bingos on November 10, Poleto recanted the 
Cuba cash story, claiming that he had been drunk when 
interviewed by the Veja reporter.  Buratti likely will be 
called to testify before the CPI as well.  No physical or 
documentary evidence has yet surfaced publicly to 
substantiate the accusations.  Palocci has threatened on 
multiple occasions to resign should the CPI call him to 
testify about his or his brother's activities (see below), a 
threat that, if carried out, would force the Congress to deal 
with the potential financial market repercussions of his 
departure.  A compromise was worked out to have Palocci 
appear before the Senate Economic Affairs Committee (on 
November 22) instead a CPI and to respond to some limited 
questioning about the allegations against him.  The deal, 
however, has not put to rest all opposition calls that 
Palocci be called to testify before a CPI or media questions 
about the viability of his continued tenure as finance 
minister. 
 
¶5. (U) Other sets of accusations have been made against 
Palocci, which we outline briefly below: 
 
Case 1 ) Interbrasil Seguradora ) Interbrasil Seguradora 
donated money to the PT campaign in Goias. After the 
elections, Interbrasil Seguradora won government contracts 
worth R$ 4.6 billion.  Andre Marques da Silva, president of 
Interbrasil Seguradora had a close relationship with Adhemar 
Palocci, brother of FINMIN Antonio Palocci and head of PT 
accounting/finance in Goias.  Allegedly, Antonio Palocci was 
a facilitator in helping Interbrasil Seguradora win public 
bids and obtain government contracts. 
 
Case 2 - Leao and Leao )  During his 2nd term as Mayor of 
Ribeirao Preto, in 1999, Palocci's municipal administration 
awarded government contracts to waste management company Leao 
and Leao.  The trash company is claimed to have been given 
preferential treatment in these public contract bids.  Leao 
and Leao was one of the major contributors to the PT 
campaigns in the State of Sao Paulo.  The main actor in this 
case is Palocci's municipal planning secretary, Rogerio 
Buratti, who has said that he had the approval of Palocci to 
work with Leao and Leao.  Buratti claims that kickbacks from 
Leao and Leao were channeled via the now-deceased Ralf 
Barquete to PT party Treasurer Delubio Soares.  One of the 
CPIs investigating the interlocking scandals has just 
recommended that Soares be indicted for illegal fundraising 
activities (not involving the Cuba connection). 
 
Case 3 ) Banco Prosper.  Raul Barquete and Vladimir Poleto 
were both municipal secretaries when Palocci was Mayor of 
Ribeirao Preto.  Barquete and Poleto allegedly were paid 
consultancy fees by private companies for helping them obtain 
loans from the National Social and Development Bank (BNDES), 
all done using Palocci's political influence. 
 
Other Cases - There are several other cases about which less 
information has surfaced or which have an indirect Palocci 
nexus:  a) Palocci's former aide Rogerio Buratti allegedly 
tried to extort money from U.S. company G-Tech in order to 
obtain a federal lottery contract renovation; b) The city of 
Riberao Preto in 2002 carried out a questionable Reals 1.25 
million tender for a particular peas and tomato sauce, made 
exclusively by one company, to be included in basic food 
baskets for the poor; c) other Riberao Preto city contracts 
for social and infrastructure projects are under 
investigation by State of Sao Paulo prosecutors for alleged 
overbilling and payment of questionable consultancy fees; 
and, d) the Brazilian Reinsurance Institute (IRB), which 
Palocci supervised as Finance Minister, has been accused of 
corruptly awarding bids and jobs. 
 
Rousseff Piles On 
----------------- 
 
¶6. (U) In an interview published by major daily Estado de Sao 
Paulo on Wednesday November 9, Lula Chief of Staff Rousseff 
roundly criticized a proposal advanced jointly by Bernardo 
and Palocci to cap current expenditures and maintain a high 
primary surplus into the medium term.  The proposal was based 
on a study by the GoB-linked Institue for Applied Economic 
Research (IPEA) that suggested these steps would allow: 1) 
increases in public investment; 2) reductions in the GoB 
borrowing requirement, thus allowing interest rates to fall; 
and, 3) eventual reductions in the tax burden.  Rousseff 
mocked the proposal as "rudimentary."  She said it would not 
be debated within the administration and appeared frustrated 
with the Finance Ministry's pursuit of ever-higher primary 
surpluses.  On Friday November 11, Vice President Alencar 
seconded Rousseff's criticisms. 
 
¶7. (SBU) This surplus versus spending debate has been raging 
within the administration for a while.  Recently, Fazenda 
Secretary General Portugal told Emboffs that his Ministry 
 
SIPDIS 
unofficially had raised the primary surplus target above 
4.25% of GDP, knowing that they would receive political flak 
if they attempted to do so formally.  Meanwhile, worried 
about surging non-discretionary expenditures, influential 
opposition figures are flogging proposals for a 
constitutional amendment requiring a zero nominal deficit -- 
i.e., a gimmick to keep spending under control.  (Note: the 
GoB ran a 4.61% of GDP primary surplus in the first three 
quarters of 2005, well above the formal target of 4.25%. 
This greater savings made little dent in overall debt levels, 
however, because interest expenses were higher due to the 
cycle of monetary policy tightening earlier this year.  End 
Note.) 
 
¶8. (SBU) Rousseff, while not questioning the necessity for 
the 4.25% target, called for the GoB to use revenues in 
excess of the target to finance investments.  While there was 
frequent tension on fiscal policy between Palocci and 
Rousseff's predecessor, Jose Dirceu, the GoB always kept 
these disagreements in the background.  Rousseff's public 
criticism reportedly has stung both Palocci and Bernardo and 
made Palocci consider resigning unless Rousseff publicly 
retracts her comments. 
 
Markets "Serene" 
---------------- 
 
¶9. (SBU) In a November 8 conversation, the Chief Economist at 
Credit Suisse First Boston (CSFB) told Emboff that the 
markets, still focused on Brazil's solid fundamentals, 
largely had taken in stride the allegations that Palocci knew 
of Cuban campaign contributions and the separate Palocci 
threat to resign if called to testify in the Interbrasil 
Seguradora case.  He emphasized that Congress was treading 
carefully with regard to Palocci in order to insulate the 
economy from the scandal goings-on.  The allegations against 
Palocci's brother, the CSFB economist said, have been refuted 
by Electronorte, the supposed source of the crooked 
contracts.  And the markets do seem to be nonplussed by these 
events:  Standard and Poors changed its rating outlook for 
Brazilian debt to positive and the Real is trading at 
three-year highs against the dollar, almost reaching 2.17 in 
early trading November 10.  A JP Morgan economist echoed 
these points in a November 10 conversation with Econoff, 
arguing that since Palocci's economic policy was Lula's only 
success, there was little danger that Lula would let him go. 
He surmised that Palocci was in a more secure political 
position now than when the first set of accusations against 
him (the Leao and Leao allegations) were made on August 19 
(ref C). 
 
CHICOLA