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DE RUEHSO #0907/01 2301324
ZNR UUUUU ZZH
P 181324Z AUG 06
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC PRIORITY 5643
INFO RUEHBR/AMEMBASSY BRASILIA 6717
RUEHAC/AMEMBASSY ASUNCION 2730
RUEHBU/AMEMBASSY BUENOS AIRES 2411
RUEHMN/AMEMBASSY MONTEVIDEO 2120
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RUEHRI/AMCONSUL RIO DE JANEIRO 7369
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RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 2543
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/CDR USSOUTHCOM MIAMI FL

UNCLAS SECTION 01 OF 03 SAO PAULO 000907 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR MSULLIVAN 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR MORONESE, RIVERA, MERVENNE 
NSC FOR FEARS 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/USFCS/OIO/WH/SHUPKA 
TREASURY FOR OASIA, DAS LEE AND DDOUGLASS 
DOL FOR ILAB MMITTELHAUSER 
SOUTHCOM ALSO FOR POLAD 
USAID/W FOR LAC/AA 
 
E.O. 12958: N/A 
TAGS: PGOV PINR ECON BR
SUBJECT: PMDB LEADER PREDICTS NARROW LULA VICTORY, AND A 
GROWTH-BASED ECONOMIC POLICY IN THE SECOND TERM 
 
REF: (A) 05 SAO PAULO 1372 
 
SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY 
 
------- 
SUMMARY 
------- 
 
¶1.  (SBU) Federal Deputy Delfim Netto predicted President Lula will 
win a "fairly close" election in the second round if he can avoid 
committing too many more gaffes.  Lula's Workers Party (PT), 
however, will take a serious hit because of corruption scandals and 
will end up with fewer than 50 Federal Deputies.  However, the 
centrist Brazilian Democratic Movement Party (PMDB), of which Netto 
is a recent member, will hold a bloc of about 80 seats and will ally 
with Lula's administration to get jobs and other favors.  Lula will 
be able to patch together enough support from smaller parties to get 
legislation passed.  In fact, Netto said, Lula was perhaps the only 
one who could push critical legislation like social security reform 
and labor reform through the Congress.  Leftist forces would accept 
such reforms if sponsored by Lula, but would oppose and ultimately 
defeat them if PSDB candidate Geraldo Alckmin won the presidency and 
tried to pursue such reforms.  For this reason, Netto himself plans 
to vote for Lula.  In a second administration, Netto predicted, Lula 
will continue his macro-economic orthodoxy but with more 
flexibility, leaving in place Central Bank President Henrique 
Meirelles while appointing other officials who will likely push down 
interest rates and promote pro-growth policies.  In Sao Paulo state, 
Netto predicted that former Mayor Jose Serra will win the 
governorship in the first round, though scenarios could yet arise 
that might undermine his chances.  END SUMMARY. 
 
--------------------------------------------- - 
LULA EXPECTED TO WIN A "FAIRLY CLOSE" ELECTION 
--------------------------------------------- - 
 
¶2.  (SBU) In a recent meeting with Poloff and Political Assistant, 
Antonio Delfim Netto (reftel), an elder statesman of Brazil's 
political class, shared his predictions for the electoral campaign. 
Netto expects that opposition candidate Geraldo Alckmin will narrow 
the gap separating him from President Lula and force the election 
into a second round.  Lula is probably at his ceiling right now, 
whereas Alckmin has plenty of room to grow.  Third-party candidate 
Heloisa Helena will also rise above her current 10 percent, Netto 
predicted, because her brand of radical socialism mixed with 
Christianity appeals to many voters on the fringes.  However, faced 
with the prospect of an Alckmin victory, many such voters will opt 
for Lula in the second round, and he should win a narrow victory. 
Lula's greatest challenge between now and the election, in Netto's 
view, will be to avoid saying things that may alienate voters (e.g., 
recent gaffe of his was interpreted by many as denigrating the 
intelligence of the elderly). 
 
¶3.  (SBU) Netto noted that in 2002, Lula had carried his Workers 
Party (PT) to power, not the other way around.  The 2002 elections 
represented a vote against Fernando Henrique Cardoso's (FHC) Social 
Democracy Party of Brazil (PSDB) due to the economic problems he 
bequeathed.  In issuing his "Letter to the Brazilian People," 
pledging responsibility in economic management, Lula broke with many 
PT economists and has never paid much attention to them since.  He 
has managed to retain his own popularity even while his party has 
been seriously damaged by the political corruption scandals.  The PT 
may win as few as 45 seats in elections for the Chamber of Deputies, 
Netto predicted. 
 
¶4.  (SBU) In the race for Sao Paulo Governor, Netto thought former 
Mayor Jose Serra was on track for a first-round victory.  This could 
 
SAO PAULO 00000907  002 OF 003 
 
 
change, however, if PMDB candidate Orestes Quercia overtakes PT 
Senator Aloysio Mercadante.  (NOTE: The most recent polls showed 
Serra with 49 percent, Mercadante with 17 percent, and Quercia with 
10 percent.  END NOTE.)  In that case, the well-organized PMDB could 
arouse the enthusiasm of its base and run an aggressive campaign 
against Serra, focusing on his somewhat controversial record, and 
forcing him into a second round. 
 
------------------------ 
A SECOND LULA GOVERNMENT 
------------------------ 
 
¶5. (SBU) Netto believes, as do many political observers, that many 
of Lula's social programs were designed to garner votes.  But he 
also said that Lula has genuine empathy for the poor and, if 
re-elected, will devote his energies to trying to create more jobs. 
He is also likely, in Netto's opinion, to keep on Central Bank 
President Henrique Meirelles and to continue his orthodox 
macro-economic policies, but will exercise more flexibility and will 
appoint other officials more open to lowering interest rates. 
 
¶6.  (SBU) Netto was somewhat cynical about the Congressional 
elections, noting that many deputies implicated in the "mensalao" 
scandal were running for re-elections and predicting that "the ones 
who stole will be re-elected."  He noted that with the entry into 
force of the "Barrier Clause," some four to six parties will 
disappear after failing to get five percent of the vote.  But many 
of the members of these dying parties will join the government 
coalition, as will the PMDB, which will again elect around 80 
deputies. 
 
------------------- 
THE NEED FOR REFORM 
------------------- 
 
¶7.  (SBU) For the duration of the campaign, Netto predicted, neither 
Lula nor Alckmin will make much in the way of concrete proposals on 
what programs they would undertake.  Doing so would gain them no 
voters and would likely cost them some.  Rather, they will campaign 
on generalities and platitudes, and will also expend some energy 
trying to "deconstruct" one another.  But whoever is in office in 
January will face certain hard realities, Netto pointed out.  A 
Social Security reform is urgently needed; without it, he said, 
Brazil will soon face a fiscal crisis.  Labor reform is also 
critical.  However, Netto believed it would be difficult for a 
President Alckmin to push such reforms through Congress, since the 
PT and other leftist parties would vociferously oppose them. 
However, if President Lula, coming off re-election, were to put them 
forward, he could likely win leftist support (or, if not support, 
acquiescence) for the measures, and even the opposition PSDB and 
Liberal Front Party (PFL) would have to vote for some of the reforms 
on their merits.  For this reason, Netto said he himself will vote 
for Lula, because he believes Lula is in a better position to have a 
successful government. 
 
------- 
COMMENT 
------- 
 
¶8.  (SBU) Netto's stated reason for preferring Lula over Alckmin is 
novel and interesting (and likely self-serving), but begs the 
question of whether a re-elected President Lula would in fact decide 
to take on social security and labor reform, and other much-needed 
initiatives.  For many observers, Lula's first term has lacked focus 
and vision, which does not augur well for a serious reform agenda in 
the second term, since such an agenda would require Lula's direct 
and sustained attention and involvement in order to get it through 
 
SAO PAULO 00000907  003 OF 003 
 
 
an inherently fractious Congress. END COMMENT. 
 
¶9.  (U) This cable was coordinated with Embassy Brasilia. 
 
MCMULLEN