VZCZCXRO4374
PP RUEHRG
DE RUEHBR #1725/01 2301131
ZNY CCCCC ZZH
P 181131Z AUG 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 6412
INFO RUEHRG/AMCONSUL RECIFE 5314
RUEHRI/AMCONSUL RIO DE JANEIRO 2707
RUEHSO/AMCONSUL SAO PAULO 7783
RUEHSG/AMEMBASSY SANTIAGO 5694
RUEHBU/AMEMBASSY BUENOS AIRES 4205
RUEHAC/AMEMBASSY ASUNCION 5597
RUEHMN/AMEMBASSY MONTEVIDEO 6410
RUEHQT/AMEMBASSY QUITO 1942
RUEHPE/AMEMBASSY LIMA 3132
RUEHLP/AMEMBASSY LA PAZ 4786
RUEHCV/AMEMBASSY CARACAS 3394
RUEHBO/AMEMBASSY BOGOTA 3890
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/USDOC WASHDC
RHEHNSC/NSC WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 BRASILIA 001725 
 
SIPDIS 
 
SIPDIS 
 
NSC FOR FEARS 
TREASURY FOR OASIA - DAS LEE, D.DOUGLASS 
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 
STATE PASS USTR 
 
E.O. 12958: DECL:08/15/26 
TAGS: ECON EFIN PGOV ETRD PREL EINV BR
SUBJECT: BRAZIL: AMBASSADOR'S INTRODUCTORY MEETING WITH CENTRAL 
BANK PRESIDENT MEIRELLES 
 
 
Classified by Ambassador Clifford M. Sobel, Reasons 1.4 (b) and 
(d). 
 
¶1. (C) Summary:  Central Bank President Henrique Meirelles 
highlighted to the Ambassador during their August 9 introductory 
meeting the importance he places on achieving formal Central 
Bank independence, which he sees as a key part of consolidating 
Brazil's current success in fighting inflation.  He asked that 
that the USG underscore this message, privately and at high 
levels, to President Lula and Finance Minister Mantega. 
Meirelles offered to be helpful behind the scenes in pressing 
for priority regulatory reforms to improve the business climate. 
 On the economy, Meirelles manifested great confidence in the 
balance of payments outlook.  He welcomed a prospective visit by 
NYSE chairman John Thain.  End Summary. 
 
Price Stability and Central Bank Independence 
--------------------------------------------- 
 
¶2. (SBU) The Ambassador made his introductory call on Central 
Bank President Henrique Meirelles on August 9.  Meirelles told 
the Ambassador that his biggest current concern is consolidating 
the success the GoB has had in the fight against inflation.  The 
balance of payments was no longer an issue, as this year Brazil 
would run a trade surplus of almost USD45 billion and its fourth 
consecutive current account surplus as well.  Meirelles argued 
that this change was structural given a shift in the culture of 
Brazilian business toward valuing external markets.  By 
contrast, Meirelles did not believe Brazil had solved the price 
stability problem.  Business, he said, still has an 
"inflationary mentality."  There continued to be public 
criticism of the GoB's inflation-targeting policy, Meirelles 
noted, sometimes based on misinterpretation of the U.S. Federal 
Reserve's mission to target both price stability and employment. 
 
 
¶3. (C) Another key factor in the debate was that the Central 
Bank had not yet been granted formal independence to set 
monetary policy, even though President Lula repeatedly had 
backed its de facto freedom of action, Meirelles explained. 
This continued uncertainty added a risk premium to any long term 
investments in the country.  Brazil, he said, is the only one of 
the forty largest economies in the world which does not have an 
independent central bank.  Meirelles asked that the USG 
discreetly use its bilateral engagement with the GoB to argue 
the importance of pushing through the congress legislation 
granting the Central Bank such autonomy.  He argued that 
Secretary Paulson in particular would be able credibly to make 
 
SIPDIS 
that point to Lula and Finance Minister Mantega.  The Ambassador 
noted that the bilateral Treasury-Fazenda Group for Growth 
meetings perhaps could address this issue, among others. 
 
Investment Climate 
------------------ 
 
¶4. (SBU) The Ambassador told Meirelles the USG is eager to be 
helpful on efforts such as public-private partnerships (PPPs) in 
infrastructure investment.  There was much focus on Brazil among 
the investment community.  NYSE Chairman John Thain was likely 
to visit soon, the Ambassador noted, and Russell 20-20 Equity 
was planning Brazil-focused events.  To take advantage of this 
interest, the Ambassador said, Brazil's investment climate must 
be welcoming.  Meirelles noted that while it is not his direct 
responsibility, he is willing to be helpful behind the scenes. 
He highlighted regulatory roadblocks as a particular problem, 
but said the Central Bank doesn't have the staff expertise or 
authority to engage on the issue.  Meirelles undertook, were the 
USG to provide a detailed study of these roadblocks, to press 
 
BRASILIA 00001725  002 OF 002 
 
 
for changes. 
 
¶5. (C) A second set of difficulties that Meirelles identified 
for investors revolved around the lack of governmental 
experience among Lula's top advisors.  Current chief of staff 
Dilma Rousseff, he said, is a much more hands-on manager than 
her predecessor.  She is very smart and has learned quickly, 
Meirelles stated, but she still brings some ideological baggage 
to the job.  Lula had focused much more on improving public 
management in the latter part of his term, he added.  Meirelles 
affirmed that were the USG to withdraw GSP benefits from Brazil, 
it likely would reinforce "negative elements" within the local 
business community with respect to the United States. 
 
Mortgage Market 
--------------- 
 
¶6. (SBU) Meirelles stated that while the mortgage market was 
beginning to grow quickly, it was still nascent.  He explained 
that this was in large part due to how recently Brazil had 
achieved macroeconomic stability.  With hyperinflation, there 
was no long term financing and the economy was still overcoming 
this legacy. 
 
¶7. (C) Comment:  Although he was particularly frank and 
forthcoming in this meeting, Meirelles gave no hint whether he 
might try to remain on the job if Lula wins a second term.  End 
Comment. 
 
SOBEL