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 003092 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR OASIA - DAS LEE AND FPARODI 
NSC FOR CRONIN 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DDEVITO/DANDERSON/EOL SON 
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE 
 
E.O. 12958: N/A 
TAGS: ECON PGOV EFIN PREL BR CU
SUBJECT: BRAZIL - FINANCE MINISTER PALOCCI ON SOMEWHAT 
FIRMER GROUND 
 
REF: A) Brasilia 3043 
     B) Brasilia 3008 
     C) Brasilia 3051 
 
¶1. (SBU) Summary: After another marathon session in front of 
one of Congress' economic oversight committees, Finance 
Minister Antonio Palocci appears to have solidified his 
political position, allowing him some temporary respite from 
the political and scandal-related crossfire he has been 
receiving recently (reftels).  Meanwhile, in a face-saving 
compromise with opposition members of Congress, Palocci 
agreed to appear voluntarily, instead of pursuant to a 
formal subpoena, before the Congressional Investigatory 
Committee (CPI) on bingos, where he would face questioning 
regarding allegations of corruption during his tenure as 
mayor of Riberao Preto and his role, as Lula's campaign 
coordinator, in alleged campaign contributions from Cuban 
government.  Separately, Palocci had a heart-to-heart with 
President Lula and, reportedly, persuaded the President to 
back a small increase in the primary surplus target for the 
year (to about 4.5% to 4.6% of GDP).  Lula subsequently 
declared Palocci's position to be "more solid than ever." 
While Lula's statement undoubtedly shores up Palocci in his 
fiscal policy battle with Lula chief of staff Dilma 
Rousseff, any new revelations of alleged corruption and 
campaign financing irregularities would further undermine 
him.  End Summary. 
 
¶2. (SBU) During his second appearance before Congress in 
recent days (ref A), this time before the Chamber of 
Deputies Finance and Tax Committee, Finance Minister Palocci 
put in a solid performance defending the GoB's orthodox 
economic policy line.  As in his appearance before the 
Senate Economic Affairs Committee, Palocci did not face 
questions about allegations that he was involved in 
corruption during his tenure as mayor of Riberao Preto or 
about his role, as Lula's campaign coordinator, in alleged 
illegal campaign contributions from the Cuban government to 
the 2002 presidential campaign.  Palocci, however, did face 
extensive questioning about his recent public disagreement 
with Lula's chief of staff, Dilma Rousseff, over fiscal 
policy.  While acknowledging a debate within the Lula 
administration on the point, Palocci was firm, responding 
that any increase in public investment had to be financed 
with cuts in current expenditures, and not a reduction in 
the primary surplus. 
 
¶3. (SBU) Palocci appears to have made some progress in 
dealing with the friendly fire on fiscal policy from 
Rousseff.  Palocci met with Lula and reportedly reached a 
compromise that the Finance Ministry would pursue a primary 
surplus target in the 4.5% to 4.6% of GDP range, above the 
current 4.25% target but well below the 6.1% of GDP surplus 
that the GoB ran during the first nine months of the year. 
Palocci argued that a higher surplus was necessary since the 
Central Bank's monetary tightening earlier this year had 
increased interest outlays on GoB debt.  (Comment.  Given 
the difficulties the GoB perennially encounters in trying to 
spend appropriated monies, it easily be that primary surplus 
ends up being higher than the agreed to 4.6% target.  End 
Comment.) 
 
¶4. (U) Separately, the GoB and the opposition reached a 
compromise that allows Palocci to appear voluntarily before 
the CPI on bingos to face questions about several sets of 
allegations made against him (ref B), instead of being 
formally subpoenaed.  The allegations in question include 
accusations that, as Lula's 2002 campaign coordinator, he 
allowed an illegal USD 3 million Cuban government campaign 
contribution to enter the party coffers.  Several other sets 
of allegations center on alleged corruption when he was 
mayor of the city of Riberao Preto, in Sao Paulo state. 
While agreeing to Palocci's voluntary appearance, the 
opposition reportedly insisted that Palocci will be required 
to sign a statement acknowledging that his testimony before 
the committee can be used against him in court should he 
ever face formal charges.  A date for the testimony has not 
been set. 
 
¶5. (SBU) Comment:  Over the last twenty four hours, Palocci 
has pulled off quite a balancing act, solidifying his 
political position and winning himself time.  The compromise 
on the increase in the primary surplus target should lay the 
foundation for a more coherent public line from the Lula 
administration on its fiscal intentions.  Lula's more 
enthusiastic public embrace of Palocci in remarks on both 
November 21 and 22 undoubtedly will help the Minister as 
well.  While Palocci has displayed considerable survival 
skills, he has yet to face questioning over the various sets 
of allegations of corruption and campaign-finance 
irregularities.  These may ultimately prove more dangerous 
to his political survival than the ongoing fiscal policy 
battles. 
 
CHICOLA