VZCZCXRO3105
OO RUEHRG
DE RUEHBR #0604/01 0861640
ZNR UUUUU ZZH
O 271640Z MAR 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4933
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
INFO RUEHRG/AMCONSUL RECIFE 4517
RUEHSO/AMCONSUL SAO PAULO 6631
RUEHRI/AMCONSUL RIO DE JANEIRO 1763
RUEHBU/AMEMBASSY BUENOS AIRES 3889
RUEHSG/AMEMBASSY SANTIAGO 5400
RUEHAC/AMEMBASSY ASUNCION 5309
RUEHMN/AMEMBASSY MONTEVIDEO 6135
RUEHME/AMEMBASSY MEXICO 1944
RUCPDO/USDOC WASHDC

UNCLAS SECTION 01 OF 02 BRASILIA 000604 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
NSC FOR CRONIN 
TREASURY FOR OASIA - DAS LEE, 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/SHUPKA 
STATE PASS USAID FOR LAC 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV PREL BR
SUBJECT: BRAZILIAN FINANCE MINISTER'S FATE TO BE DECIDED THIS WEEK 
 
REF: A) BRASILIA 546 
 B) BRASILIA 602 
 C) BRASILIA 551 
 
¶1. (SBU) Press speculation about the possible resignation of Finance 
Minister Antonio Palocci resignation is at a fever pitch, with 
nearly identical story lines stating that Palocci's future as 
minister is to be decided March 27, reportedly at an planned meeting 
between Lula and Palocci.  The opposition has been attacking 
relentlessly after the leaking by state-owned bank Caixa Economica 
Federal (CEF) of handyman Francenildo da Costa's bank statements in 
an apparent effort to undermine his credibility.  Costa alleged in 
recent testimony before a Congressional Investigative Commission 
(CPI) that he saw Palocci on multiple occasions at a Brasilia house 
where several former Palocci aides are supposed to have conducted 
illicit business (reftels).  Costa, however, has provided fairly 
credible explanations for the unusually large recent deposits shown 
on his leaked bank statements. 
 
¶2. (SBU) The Federal Police have been forced to open an inquiry into 
the leak of the bank statements, which are protected by Brazilian 
privacy laws.  The next step in that investigation is today's 
deposition to the Federal Police by Jorge Mattoso, the head of CEF. 
Mattoso's testimony has become politically charged because the 
state-owned bank is overseen by the Finance Ministry and the bank's 
management is rife with partisans from the ruling Workers Party 
(PT).  Although Mattoso has stated publicly that he had nothing to 
do with the leak and that he had not received any pressure from 
Palocci to divulge the handyman's banking statements, any new 
information suggesting someone in Palocci's entourage or in PT party 
was behind the leak, as the opposition is alleging, would be 
seriously damaging. 
 
¶3. (SBU) Palocci's only public appearance since the handyman's 
testimony was on Friday March 24 at the Sao Paulo Amcham. 
(Reportedly, he is camping out at the presidency, and not even 
bothering to go into the ministry.) Participants in the AmCham 
session have said that Palocci admitted that he had "made mistakes," 
but stressed that there would be continuity of economic policy 
regardless of who is finance minister.  One of Palocci's advisors 
told Emboff the morning of March 27 that Lula would be out of town 
most of the day and that, contrary to the press reports, Palocci did 
not have any scheduled meetings with the President. 
 
¶4. (SBU) Comment:  While the press looks to be getting a bit ahead 
of actual events, it is very likely that Lula will make a decision 
on Palocci's tenure in the job by the end of the week (March 31), 
which is the deadline for executive branch officials to resign so 
that they can run for public office in the October elections. 
Several of Lula's ministers plan to leave by this deadline anyway, 
which offers Lula a (slightly) face-saving option of having Palocci 
leave to run for Congress as part of the broader cabinet reshuffle. 
While Palocci's departure is by no means a foregone conclusion, Lula 
may well decide that his finance minister has become too big a 
liability to carry into the election campaign. 
 
¶5.  (SBU) The most frequently mentioned possible replacement for 
Palocci, is PT Senator Aloizio Mercadante.  While Mercadante is part 
of the moderate wing of the PT, he has criticized the degree to 
which the finance ministry pursued primary surpluses in excess of 
the formal 4.25% of GDP target.  A financial market participant told 
us March 23 that financial market actors likely would give 
Mercadante the benefit of the doubt were his appointment accompanied 
by a strong Lula re-statement of the GoB's commitment to sound 
policies. 
 
¶6.  (SBU) Other potential successors include finance ministry 
Vice-Minister Murilo Portugal (who reportedly does not want the 
job), Planning Minister Paulo Bernardo (who has his own, unrelated, 
ethics challenges), National Development Bank President Guido 
Mantega (a loyal PT stalwart), and Joao Sayad (the GOB's failed 
candidate for the presidency of the IDB).  According to the press, 
all this uncertainty, combined with the expected departure of the 
ministry's Treasury Secretary, Joaquim Levy, could mean that the 
Brazilian contingent will find itself distracted at the upcoming 
 
BRASILIA 00000604  002 OF 002 
 
 
April 3-5 Annual IDB meeting, hosted by the GOB in Belo Horizonte. 
 
 
LINEHAN