VZCZCXRO4465
OO RUEHRG
DE RUEHBR #0609/01 0871608
ZNR UUUUU ZZH
O 281608Z MAR 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4943
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
INFO RUEHRG/AMCONSUL RECIFE 4524
RUEHSO/AMCONSUL SAO PAULO 6638
RUEHRI/AMCONSUL RIO DE JANEIRO 1770
RUEHBU/AMEMBASSY BUENOS AIRES 3896
RUEHSG/AMEMBASSY SANTIAGO 5408
RUEHAC/AMEMBASSY ASUNCION 5316
RUEHMN/AMEMBASSY MONTEVIDEO 6142
RUEHME/AMEMBASSY MEXICO 1946
RUEHCV/AMEMBASSY CARACAS 3171
RUEHBO/AMEMBASSY BOGOTA 3657
RUEHQT/AMEMBASSY QUITO 1762
RUEHLP/AMEMBASSY LA PAZ 4455
RUEHPE/AMEMBASSY LIMA 2907
RUCPDO/USDOC WASHDC

UNCLAS SECTION 01 OF 03 BRASILIA 000609 
 
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/DDEVITO/SHUPKA 
STATE PASS USAID FOR LAC 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV PREL BR
SUBJECT: BRAZILIAN FINANCE MINISTER FIRED, REPLACED BY BNDES 
PRESIDENT GUIDO MANTEGA 
 
REF: A) BRASILIA 604 
 B) BRASILIA 602 
 C) BRASILIA 546 
      D) HEARNE/OP CENTER TELCONS 3/27 
      E) PLOWMAN/TREASURY TELCONS 3/27 
 
¶1. (SBU) Summary: President Lula fired Finance Minister Palocci the 
night of March 27 after evidence came to light implicating Palocci 
personally in the leak from state-owned bank Caixa Economica Federal 
(CEF) of the confidential bank statements of handyman Francenildo da 
Costa.  Costa's bank statements, which showed some unusually large 
recent deposits, were leaked in an apparent effort to discredit his 
testimony to a Congressional Investigative Commission (CPI).  Costa 
had stated that he had seen Palocci on several occasions at a 
Brasilia house allegedly used by several of the minister's aides as 
a base for illicit deals, influence peddling, and other shady 
activities (reftels). 
 
¶2.  (SBU) Lula named the President of the Social and Economic 
Development Bank (BNDES), Guido Mantega, to replace Palocci. 
Mantega, a former Minister of Planning who had butted heads with 
Palocci over interest rate policy and the prioritization of 
investment spending, opened his first full day on the job March 28 
by affirming his commitment to economic policy continuity in morning 
television interview.  Given Lula's desire to protect his biggest 
achievement -- the restoration of economic stability -- during this 
presidential election year, we believe he has turned to the loyal 
Mantega primarily as a caretaker figure.  Nonetheless, while the 
short-term outlook is still stable, this appointment creates greater 
uncertainty about GOB policies into the longer term.  Markets are 
greeting Mantega's appointment cautiously, particularly given the 
departure of much of Palocci's skilled team of technocrats, 
including Vice Minister Murilo Portugal and Treasury Secretary Levy. 
 End Summary. 
 
Palocci Dismissed 
----------------- 
 
¶3. (SBU) Brasilia watched raptly on March 27 as the soap opera-like 
Palocci saga entered one of its most dramatic episodes.  The Federal 
Police took depositions from senior officials of state-owned bank 
Caixa Economica Federal (CEF), including its head, Jorge Mattoso, 
regarding the leak of a confidential bank information on the account 
activity of handyman Costa to weekly newsmagazine "Epoca" (ref A). 
The bank statements, which showed unusual large recent deposits, 
were leaked in an apparent attempt to discredit Costa's March 16 
testimony to a congressional CPI.  Costa had stated that he had seen 
Palocci on several occasions at a Brasilia house where several 
former Palocci aides are alleged have conducted illicit business 
deals (ref C).  According to public accounts, Mattoso told the 
police that he personally gave a copy of Costa's bank statement to 
Palocci; Mattoso subsequently resigned.  Both Palocci and Mattoso 
are potentially criminally liable for violating privacy laws in the 
leak case. 
 
¶4. (SBU) Lula decided to fire Palocci after learning that he had 
been involved in the leak despite his protestations of innocence, 
both public and, reportedly, to Lula himself.    Palocci initially 
tried to spin his departure as an amicable parting of ways, leading 
to some initial confusion  as Palocci's resignation letter described 
events in ambiguous terms.  The presidency later clarified that 
Palocci had been fired.  (Comment: In a case not lacking in ironies, 
it appears that what finally sealed Palocci's fate was not the 
numerous allegations of corruption during his tenure as mayor of 
Riberao Preto, but rather Palocci's clumsy attempt to discredit his 
accusers.  End Comment.) 
 
Who is Mantega? 
 
BRASILIA 00000609  002 OF 003 
 
 
--------------- 
 
¶5. (U) Lula named current BNDES President and former Planning 
Minister Guido Mantega to replace Palocci.  The nomination will 
require Congressional confirmation.  Mantega is an academic 
(economics undergraduate degree and Ph.D. in Sociology) who taught 
at the Catholic University of Sao Paulo.  He is a PT party stalwart, 
Lula loyalist and long-time advisor economic advisor to the 
president.  He has written books on Brazil's economy.  Current BNDES 
Vice President Demian Fiocca will replace Mantega as BNDES 
President. 
 
¶6. (SBU) During his tenure as Planning Minister, as well as more 
recently as BNDES President, Mantega on occasion butted heads with 
Palocci over economic policy.  He publicly criticized the high 
prevailing level of real interest rates and argued that achieving 
high primarily surpluses should not come at the cost of public 
investment spending.  Nevertheless, Mantega sounded a note of 
continuity in his first interview the morning of March 28, stating 
that he would implement President Lula's economic policies.  In that 
nationally televised interview, Mantega sidestepped pointed 
questions about his previous policy criticisms, noting simply that 
the Central Bank already is bringing interest rates down, a trend 
that should help deal with the problem of the strong Real (another 
Mantega pet peeve). 
 
¶7. (SBU) Mantega's first order of business is to choose a Vice 
Minister, as Murilo Portugal also announced his departure March 27. 
Coupled with the April 1 departure of Treasury Secretary Joaquim 
Levy for a job at the IDB as well as that of Levy's assistant 
secretary, Antonio Gragnani, Mantega will have several key technical 
 
SIPDIS 
positions to fill.  There is speculation that Mantega may ask some 
senior personnel from BNDES to join him at the Ministry, perhaps 
including Carlos Carvalho, a Citibank alum who currently is a BNDES 
director.  Another possibility is that Finance Ministry Economic 
Policy Secretary (and PT party member) Bernard Appy would return to 
his previous job as Vice Minister. 
 
Markets Cautious 
---------------- 
 
¶8. (SBU) Markets have been reacting cautiously.  After an initial 
depreciation of 2.7% at the opening of trading on March 27, the Real 
had stabilized, trading around 2.22 Reais per dollar as of mid-day. 
CSFB Chief Economist Nilson Teixeira told Econoff that his foreign 
clients are seeking to understand the import of the changes, but 
there are no signs of serious concern, either by domestic or foreign 
market actors.  Teixeira's assessment was that Mantega would seek to 
maintain policy continuity in the short term.  He worried that in 
the longer term, particularly in a potential second Lula term, the 
Finance Ministry would no longer play the role of stalwart defender 
of orthodox policies that Palocci had carved out for it. 
 
¶9. (SBU) Comment:  Lula's appointment of a loyalist to the Finance 
Ministry is likely aimed at protecting his biggest achievement, a 
healthy economy, in this presidential election year.  On the fiscal 
side, while there may be increased pressures on the finance ministry 
to loosen spending, several institutional factors, including the 
fact that Congress has not yet passed the 2006 budget and that 
election-related spending limits kick in at the end of June, mean 
that the bureaucracy has even more limited ability than normal to 
spend quickly.  On the monetary side, Lula is unlikely to 
countenance abrupt changes in policy which might destabilize nervous 
markets.  Overall, Mantega's appointment will have bigger 
repercussions for policy in the longer term, particularly if Lula is 
reelected and keeps Mantega in that position.  A key early sign of 
Mantega intentions will be his personnel choices. 
 
 
BRASILIA 00000609  003 OF 003 
 
 
LINEHAN