VZCZCXRO3441
PP RUEHRG
DE RUEHBR #0665/01 0951808
ZNR UUUUU ZZH
P 051808Z APR 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 5027
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEHRG/AMCONSUL RECIFE 4576
RUEHSO/AMCONSUL SAO PAULO 6697
RUEHRI/AMCONSUL RIO DE JANEIRO 1834
RUEHBU/AMEMBASSY BUENOS AIRES 3931
RUEHSG/AMEMBASSY SANTIAGO 5434
RUEHAC/AMEMBASSY ASUNCION 5349
RUEHMN/AMEMBASSY MONTEVIDEO 6176
RUEHME/AMEMBASSY MEXICO 1955
RUEHCV/AMEMBASSY CARACAS 3192
RUEHBO/AMEMBASSY BOGOTA 3675
RUEHQT/AMEMBASSY QUITO 1781
RUEHLP/AMEMBASSY LA PAZ 4489
RUEHPE/AMEMBASSY LIMA 2928
RUCPDO/USDOC WASHDC

UNCLAS SECTION 01 OF 02 BRASILIA 000665 
 
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: BRAZIL - NEW FINANCE MINISTER'S EARLY CHOICES REASSURE 
MARKETS 
 
REF: A) BRASILIA 609  B) BRASILIA 640 
 
¶1. (SBU) Summary.  New Finance Minister Guido Mantega has moved 
cautiously in his early days on the job, reassuring financial 
markets.  His choices for Vice Minister and Treasury Secretary, 
Bernard Appy and Carlos Kawall, respectively, have been well 
received.  On March 31, Mantega supported a measured, 85-basis point 
reduction in the interest rate that his former employer, the 
National Economic and Social Development Bank (BNDES), charges on 
its lending.  Separately, President Lula stated that the Central 
Bank would now report directly to him, instead of the finance 
minister, in a maneuver designed to keep Central Bank President 
Meirelles from leaving.  The carefully calibrated moves appear to 
have mitigated concerns about the direction of economic policy in 
the near term.  Indeed, at an April 4 Sao Paulo lunch, the chief 
economists of several banks told visiting Treasury Assistant 
Secretary for International Affairs, Clay Lowery, that they expected 
 
SIPDIS 
no changes in macroeconomic policy from Mantega for the remainder of 
Lula's term, or even in a potential second Lula administration.  End 
Summary. 
 
Reassuring Personnel Choices 
---------------------------- 
 
¶2. (SBU) New Finance Minister Guido Mantega on March 30 named 
Bernard Appy, currently the finance ministry's Economic Policy 
Secretary, to be his Vice Minister (or in the Brazilian lexicon, 
 
SIPDIS 
Executive Secretary), replacing Murilo Portugal, who resigned 
immediately after Antonio Palocci's dismissal from the ministry. 
Appy is a well-regarded technocrat who served as Palocci's Executive 
Secretary for two years, before taking over the economic policy 
 
SIPDIS 
secretariat after the former incumbent, Marcos Lisboa, departed. 
 
SIPDIS 
Appy never maintained a high profile in either of his ministry jobs, 
but his orthodox policy credentials are well known to financial 
market participants.  Appy, for instance, was the sounding board of 
first recourse for Palocci, a medical doctor by training, as he 
dealt with more complex economic issues. 
 
¶3. (SBU) Mantega also named Carlos Kawall to the key position of 
Treasury Secretary, taking the slot vacated by Joaquim Levy, who 
departed to work at the Inter-American Development Bank (IDB).  The 
appointment was closely watched by the markets as the official 
filling that post is charged with doling out funding to the various 
ministries and is thus crucial to fiscal policy execution.  During 
his tenure at the finance ministry, Levy had developed a 
particularly strong reputation as a bulwark against fiscal 
irresponsibility.  Indeed, Levy was the driving force for the GoB's 
over-performance, by large margins, of its primary surplus targets. 
Previously, Kawall worked for Mantega as a director at BNDES. 
Financial market players are familiar with Kawall from his prior 
work as chief economist for Citibank's Brazil operations.  In a 
March 17 conversation with Econoff (prior to the announcement), a 
CSFB economist concluded that Kawall would be a sterling choice. 
Separately, prominent fiscal expert Raul Velloso evaluated Kawall as 
having much the same orthodox policy credentials as Levy.  Revenue 
Secretary Jorge Rachid also will remain on the job. 
 
SIPDIS 
 
Cautious Choice on Long-term Interest Rate 
------------------------------------------ 
 
¶4. (U) In another closely watched decision, the National Monetary 
Council (CNM), in its first meeting chaired by Mantega, voted 
unanimously to lower the interest rate on BNDES loans (the TJLP) by 
85 basis points, from 9% to 8.15%.  Mantega's recent job change put 
him in the unique position of having to vote on his own proposal, 
made as BNDES President, to reduce the TJLP by 2 percentage points. 
(Note: All proposed changes in the TJLP must by approved by the CMN, 
which consists of the Finance Minister, Planning Minister Paulo 
 
BRASILIA 00000665  002 OF 002 
 
 
Bernardo and Central Bank President Meirelles.)  Given Mantega's 
previous criticisms of administration monetary policy, the markets 
saw the meeting as a bellwether of Mantega's intentions.  In the 
event, the CMN voted unanimously for a measured 85-basis point 
reduction, a drop that does not quite keep pace with recent Central 
Bank reductions in the benchmark overnight interest rate (SELIC). 
 
 
Central Bank President Stays 
---------------------------- 
 
¶5. (SBU) On March 28, the day after Palocci resigned, President Lula 
organized an effort to keep Central Bank Chairman Meirelles from 
leaving.  A Central Bank staffer assured Econoff that the media was 
exaggerating the extent of previous interest rate policy battles 
between the Central Bank and Mantega dating back to the latter's 
tenure both at BNDES and as planning minister.  Meirelles reportedly 
nevertheless felt it necessary to obtain guarantees from President 
Lula about continued policy independence of the Central Bank.  Lula 
agreed that the Central Bank would now report directly to him, 
instead of the finance ministry. 
 
Bankers to A/S Lowery: "no change" 
---------------------------------- 
 
¶6. (SBU) In an April 4 Sao Paulo luncheon, senior economists from 
several banks told visiting Treasury A/S Clay Lowery that they 
expected Mantega would not change macroeconomic policy prior to the 
elections, or even in a potential second Lula administration.  Bank 
Boston Chief Economist Jose Pena Garcia elaborated that while he did 
not expect Mantega to pursue primary surpluses in excess of the 
formal 4.25% of GDP target, as Palocci's finance ministry had done, 
he believed Mantega would strive to meet the 4.25% target.  Echoing 
this assessment, Alexandre Bassoli of HSBC Bank stated that while 
Lula might make some personnel changes among the directors of the 
Central Bank were he reelected, these moves would not affect the 
Central Bank's "conservative" monetary policy stance. 
 
¶7. (SBU) Comment:  The GoB's careful scripting of Mantega's first 
days/week appears to have successfully conveyed the 
policy-continuity message.  The real, after initially dropping 2.7% 
to 2.23 Reais/Dollar in the wake of Palocci's departure, has now 
made up the lost ground and is trading at about 2.13 Reais/Dollar as 
of mid-day April 5.  The fact that the GoB was forced to undertake a 
rear-guard action to ensure Meirelles stayed on, however, reinforces 
the case for formal legislation establishing Central Bank 
independence.  But we do not expect that this or any other 
microeconomic reform legislation will make it through Congress 
during this electoral year. 
 
CHICOLA