VZCZCXRO0393
PP RUEHRG
DE RUEHBR #0281/01 0391926
ZNR UUUUU ZZH
P 081926Z FEB 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 4455
INFO RUEHRG/AMCONSUL RECIFE 4292
RUEHRI/AMCONSUL RIO DE JANEIRO 1471
RUEHSO/AMCONSUL SAO PAULO 6300
RUEHMN/AMEMBASSY MONTEVIDEO 6035
RUEHBU/AMEMBASSY BUENOS AIRES 3771
RUEHAC/AMEMBASSY ASUNCION 5209
RUEHSG/AMEMBASSY SANTIAGO 5314
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNSC/NSC WASHDC
RUCPDO/USDOC WASHDC

UNCLAS SECTION 01 OF 02 BRASILIA 000281 
 
SIPDIS 
 
 
NSC FOR CRONIN 
TREASURY FOR OASIA - DAS LEE AND FPARODI 
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DDEVITO/DANDERSON/EOL SON 
AID/W FOR LAC/SA 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON PGOV EFIN BR
SUBJECT:  BRAZIL:  FINANCE MINISTRY REACHES OUT TO G-8 EMBASSIES 
 
¶1.  Action Request - paragraph 6. 
 
¶2. (SBU)  Summary.  On February 2, the Ministry of Finance's 
Assistant Secretary for International Affairs, Luiz Pereira, called 
in Emboffs from the German, French, Italian, Canadian, Japanese, 
British, Canadian, and U.S. Embassies to brief on the themes that 
FinMin Palocci has discussed during recent G-8 and G-20 sessions. 
Key among the Minister's concerns were perennial GOB hobby horses 
such as the creation of a new IMF facility for moderate income, low 
risk countries such as Brazil and the establishment of international 
tax to fight hunger.  During the course of the February 2 session, 
Pereira proposed that the group meet informally every three months 
or so (prior to upcoming G-8 sessions) to discuss pending macro and 
micro issues related to both the Brazilian and the world economy. 
While Pereira characterized the proposed meetings as an informal 
discussion group involving G-8 countries, our guess is that part of 
the motivation for the idea is simply to reduce the number of 
bilateral meetings with key embassies by meeting with them en masse. 
 We suspect that at any future sessions, as was the case at the 
first, the GOB will do most of the talking.  End Summary. 
 
¶3.  (SBU)  Pereira began by noting that in Finance Minister 
Palocci's remarks at both recent G-8 and G-20 meetings, the latter 
has emphasized five general themes:  a) risk scenarios for the 
worldwide economy, b) the potential for a soft landing in the wake 
of necessary adjustments, c) the need to reform the international 
financial architecture (i.e., create a new IMF line of credit for 
countries such as Brazil), d) rethink the structure of international 
assistance, and e) the ongoing WTO Doha Round talks. 
 
--  Risk Scenarios.  On this point, Pereira chiefly noted the 
current prevailing high energy prices and the inability of producing 
countries to increase supply in the short-term, adding that any 
increase in worldwide refining capacity would be welcome as well. 
The degree to which Chinese demand would keep markets tight, he 
declared, was an open question. 
 
--  Soft Landing.  Pereira worried that strong growth in the new 
emerging markets (like Brazil), coupled with the United States's 
twin budget and trade deficits, might spark an abrupt - and painful 
- correction.  Although he felt that the elements of the problem 
could be dealt with, he acknowledged that there were a range of 
varying opinions on this issue - many of which had differing views 
on the pattern of international savings. 
 
--  International Financial Architecture.  Here Pereira lamented the 
fact that the IMF had no facility aimed at middle-income countries 
who desired a ready line of credit as insurance against possible 
external shock.  What was needed, he concluded, was a serious 
rethink of the focus of the Fund's activities. 
 
--  International Assistance.  While Pereira acknowledged the recent 
HIPC initiative, he stated that more needed to be done to help out 
the poor.  He then launched into a spirited argument in support of 
President Lula's 2004 UNGA hunger initiative, calling for 
international tax mechanisms to increase ODA. 
 
--  WTO.  On this issue, Pereira merely noted the greater level of 
insertion of the newly-emerging countries into the world economy - 
and underscored the importance to Brazil of the Doha Round talks on 
agriculture. 
 
¶4.  (SBU)  Moving to the domestic economy, Pereira stated that in 
2006 GDP would expand briskly regardless of who was elected 
president in the October elections.  Interest rates would fall 
gradually during the course of year and, given the overall societal 
consensus on sound macro policies, the upcoming election would not 
lead to any significant appreciation of Brazil's EMBI country risk. 
That said, he did not foresee any significant micro reforms being 
enacted prior to the election, although perennial favorites such as 
tax reform, increased infrastructure investment, and incentives for 
export would remain on the agenda.  In the longer term, he thought 
that the country's possible rise to investment grade status in 2007 
would help to lower debt levels, while exports would remain stable, 
notwithstanding the strength of the Brazilian real, because of the 
 
BRASILIA 00000281  002 OF 002 
 
 
diverse mix of products and destinations.  Finally, Pereira opined 
that the "right fiscal/monetary policy mix" (read: the passage of a 
budget-cutting mechanism after the election) would give the 
government the necessary space to cut interest rates even further. 
 
¶5.  (SBU)  Pereira proposed that the group meet informally every 
three months to continue discussions.  We suspect that at any future 
sessions, as was the case at the first, the GOB will do most of the 
talking. 
 
¶6.  (SBU)  Post requests guidance on the appropriateness of 
participating in the series of informal meetings the GOB has 
proposed. 
 
Chicola