VZCZCXRO3783
PP RUEHRG
DE RUEHBR #1334/01 1971441
ZNR UUUUU ZZH
P 161441Z JUL 07
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 9512
INFO RUEHBR/AMEMBASSY BRASILIA
RUEHRI/AMCONSUL RIO DE JANEIRO 4769
RUEHSO/AMCONSUL SAO PAULO 0374
RUEHRG/AMCONSUL RECIFE 6940
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHAC/AMEMBASSY ASUNCION 6211
RUEHBU/AMEMBASSY BUENOS AIRES 4910
RUEHSG/AMEMBASSY SANTIAGO 6356

UNCLAS SECTION 01 OF 02 BRASILIA 001334 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR CRONIN 
STATE PASS FEDERAL RESERVE BOARD FOR P.ROBITAILLE 
TREASURY FOR OASIA - J.HOEK 
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.0. 12958: N/A 
TAGS: ECON EFIN PGOV BR
SUBJECT:  BRAZIL: U.S. TREASURY SECRETARY PAULSON MEETING WITH 
FINANCE MINISTER MANTEGA 
 
 
¶1. (SBU) Summary: During their July 11 Brasilia meeting, U.S. 
Treasury Secretary Paulson and Brazilian Finance Minister Mantega 
discussed recent Brazilian economic performance, recent U.S. 
economic performance and the importance of promoting reform at the 
International Monetary Fund - including the selection of a new 
leader to replace Rodrigo de Rato.   Mantega noted Brazil's current 
strong economic performance and said that Brazil's macroeconomic 
fundamentals are in excellent condition.  Brazil still faces key 
challenges, including infrastructure and an overvalued exchange 
rate, which along with "unfair" Chinese currency regime, is causing 
problems for some Brazilian sectors.  Secretary Paulson highlighted 
the importance of concluding a bilateral tax treaty and stated that 
he believes the highest trade policy priority for both countries 
should be the conclusion of a successful, multilateral Doha 
agreement.  Both officials agreed that the IMF should become more 
representative of the global economy and should adapt to reflect the 
growth of countries whose economic importance is increasing. 
Secretary Paulson noted the USG will support the candidate the 
 
SIPDIS 
European Union favors to lead the IMF following the departure of 
Rodrigo de Rato.  End Summary. 
 
¶2. (SBU) Mantega highlighted strong current economic trends: 
Economic growth has recently accelerated; Brazil's trade surplus 
($40 billion forecast for FY 2007) remains strong; inflation is 
slightly below target (4.5% annualized); Brazil's recent primary 
surplus performance (equivalent to 4.3% of GDP) has exceeded the 
start-of-year fiscal target; and, interest rates are expected to 
continue to decline, helping to stimulate credit growth.  With 
Brazil's improved outlook, Mantega opined that it is now possible 
for investors to "make a bet on Brazil's future." 
 
¶3. (SBU) Mantega pointed to weak infrastructure and an overvalued 
exchange rate as two important challenges facing the country.  He 
indicated that key infrastructure priorities should include 
improving airports and road transportation networks and explained 
that Brazil's strong economic performance and its rising living 
standards are creating new pressures and demands for additional 
infrastructure as a growing number of Brazilians now want to travel. 
 On currency appreciation, Mantega said that Brazil's currency is 
now overvalued, which, coupled with an "unfair" Chinese currency 
regime, is causing problems for some Brazilian sectors. 
 
¶4. (SBU) Secretary Paulson indicated that, overall, the U.S. economy 
is in sound shape. He expects economic expansion to continue, though 
at a more moderate pace, and believes the most important potential 
threat to continued U.S. expansion is a rise in inflation that might 
cause a pre-emptive tightening of the money supply by the Federal 
Reserve Bank. He felt that recent problems in the sub-prime housing 
market have bottomed-out, and said he expects the economic impact of 
sub-prime problems on overall U.S. macroeconomic performance to be 
well-contained. 
 
¶5. (SBU) Secretary Paulson said he was concerned about three U.S. 
political issues with a potential negative impact on future economic 
performance: (1) trade protectionist sentiment; (2) rising income 
inequality due, in part, to pressures from globalization; and, (3) 
an inability to develop a political consensus on reforming large 
entitlement programs (such as health care and social security) that 
will require larger future USG expenditures. 
 
¶6. (SBU) On U.S.-Brazilian bilateral economic relations, Secretary 
Paulson highlighted the importance of concluding a treaty between 
the U.S. and Brazil to eliminate double taxation, since this can 
create a disincentive for private investment.  Secretary Paulson 
also stated that he favors increased bilateral trade between the 
U.S. and Brazil, but believes the highest trade policy priority for 
both countries should be the conclusion of a successful multilateral 
Doha agreement 
 
¶7. (SBU) Minister Mantega and Secretary Paulson agreed that the IMF 
should become more representative of the global economy and should 
adapt to reflect the growth of countries whose economic importance 
is increasing.  Secretary Paulson noted he will support the 
candidate the European Union favors to lead the IMF following the 
departure of Rodrigo de Rato.  He told the Minister that Robert 
 
BRASILIA 00001334  002 OF 002 
 
 
Zoellick will be a very effective leader of the World Bank, and he 
is hopeful that the European Union will select someone of comparable 
stature and qualifications to lead the IMF. Minister Mantega 
expressed appreciation for Ambassador Zoellick's recent visit to 
Brazil and for his willingness to reach out to Brazil and other 
countries before becoming World Bank President. 
 
Sobel