VZCZCXRO1915
PP RUEHRG
DE RUEHSO #0701/01 2281106
ZNY CCCCC ZZH
P 161106Z AUG 07
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC PRIORITY 7354
INFO RUEHAC/AMEMBASSY ASUNCION 3068
RUEHBR/AMEMBASSY BRASILIA 8470
RUEHBU/AMEMBASSY BUENOS AIRES 2823
RUEHCV/AMEMBASSY CARACAS 0529
RUEHLP/AMEMBASSY LA PAZ 3432
RUEHMN/AMEMBASSY MONTEVIDEO 2398
RUEHSG/AMEMBASSY SANTIAGO 2100
RUEHRG/AMCONSUL RECIFE 3718
RUEHRI/AMCONSUL RIO DE JANEIRO 8259
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

C O N F I D E N T I A L SECTION 01 OF 03 SAO PAULO 000701 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/FO, WHA/BSC, WHA/EPSC, INR 
STATE PASS USTR FOR KATE DUCKWORTH 
NSC FOR TOMASULO 
TREASURY FOR JHOEK 
 
E.O. 12958: DECL: 08/15/2017 
TAGS: PGOV PINR ECON EFIN BR
SUBJECT: FHC PREDICTS NO REFORMS ON LULA'S WATCH, PSDB/DEM 
VICTORY IN SAO PAULO MAYOR'S RACE 
 
REF: A. SAO PAULO 560 
 
     ¶B. SAO PAULO 295 AND PREVIOUS 
 
Classified By: CONSUL GENERAL THOMAS J. WHITE. REASON 1.4(D) 
 
  ------- 
SUMMARY 
------- 
 
¶1.  (C) During an August 14 meeting with the Consul General 
(CG), former President Fernando Henrique Cardoso (FHC) 
proffered his views on Lula,s inability to pass economic 
reforms, whether or not sub-prime lending in the U.S. and 
Europe could have an impact on the Brazilian economy, the 
state of play in Sao Paulo local politics, and his thoughts 
on the 2010 presidential election.  FHC is optimistic about 
his party,s chances in Sao Paulo,s 2008 Mayoral election. 
End Summary. 
 
¶2.     (SBU) Fernando Henrique Cardoso (FHC ) President of 
Brazil, 1995-2002) met with the CG August 14 while his visa 
was being processed.  (He was renewing his J visa to return 
to teach at Brown University where he serves as a Professor 
at Large.)  FHC expressed some concern about falling 
financial markets and the high level of risk in sub-prime 
lending.  In addition, he indicated that the lack of 
regulation and supervision of US hedge funds could be an 
additional area for concern.  While he stated that the 
current crisis appeared to be affecting the US and European 
markets, he did not believe there was any immediate cause for 
alarm in the Brazilian economy. 
 
--------------------- 
NO REFORMS UNDER LULA 
--------------------- 
 
¶3.     (C) The CG asked whether the Government of Brazil 
(GoB) can or will enact political or economic reforms of a 
fundamental nature.  FHC stated firmly that the Lula 
government lacked the political will (in addition to the 
votes in Congress), to push for any fundamental changes of a 
controversial nature.  He further opined that it will be 
difficult enough to renew two critical pieces of fiscal 
legislation: the De-earmarking of Federal Revenues (DRU), 
which frees up some dedicated resources for discretionary 
government spending; and the Provisional Contribution on 
Financial Movements (CPMF).  Because they are revenue bills, 
both require a three-fifths vote (308 votes out of 513 
members in the Chamber of Deputies, and 49 of 81 Senators) to 
pass.  FHC predicts that the DRU will pass, but the CPMF has 
become controversial and will require considerable 
negotiation in order to pass. 
 
¶4.     (C) First enacted in 1997, the CPMF is a levy of 0.38 
percent on all financial transactions.  It expires December 
31, and Congress is considering a bill to renew it through 
¶2011.  As recently as a few months ago, the Lula 
administration was confident of its renewal and even 
considered a proposal to increase it to 0.8 percent. 
However, two opposition parties, the Democratic Party (DEM) 
and the Popular Socialist Party (PPS), are now adamantly 
calling for the CPMF,s abolition.  The Social Democracy 
Party of Brazil (PSDB), which FHC still serves as Honorary 
President, has taken a middle position, favoring elimination 
but willing to support re-authorization if the tax is reduced 
to 0.2 percent and if the GoB is required to share some of 
the revenues with states and municipalities - a provision the 
Government coalition strongly opposes.  Paulo Skaf, President 
of the influential Sao Paulo State Federation of Industries 
(FIESP), told the Ambassador and CG last Friday that he and 
FIESP were disappointed that the PSDB is so &soft8 on CPMF, 
which many in the business community oppose.  FHC expressed 
the view that it is impossible to eliminate the CPMF, despite 
popular sentiment and business community lobbying, because 
the Government has become dependent on the revenues it 
 
SAO PAULO 00000701  002 OF 003 
 
 
generates.  These revenues were estimated at approximately 
USD 15 billion in 2006. 
 
¶5.     (C) Tax reform, FHC noted, is difficult under the best 
of circumstances.  He asserted that Lula is not interested in 
any reforms, but only in maintaining his own popularity. 
There is some hope that the administration will move forward 
on much-needed infrastructure improvements, but this is 
impeded by a lack of administrative capacity.  (Comment: The 
administration,s Growth Acceleration Program (PAC), the 
flagship economic initiative of Lula,s second term, is 
moving forward slowly.  One impediment is that recent Federal 
Police investigations have uncovered alleged cozy and 
potentially corrupt relationships between major construction 
companies and government officials.  These relationships have 
undermined the public,s confidence in the GoB,s contracting 
practices.  End Comment.) 
 
-------------- 
LOCAL POLITICS 
-------------- 
 
¶6.  (SBU) On the issue of local politics and the 2008 
municipal elections, FHC was buoyant.  Polls published August 
12 by Datafolha show Geraldo Alckmin (PSDB former Sao Paulo 
Governor and unsuccessful 2006 presidential candidate) with a 
solid lead over other likely contenders under a range of 
likely scenarios.  Minister of Tourism Marta Suplicy (Sao 
Paulo Mayor from 2001-2004 and a leader in President Lula,s 
Workers, Party (PT)), announced August 13 that she does not 
intend to run for Mayor, though she holds out the possibility 
of running for Governor in 2010.  Suplicy said her decision 
was not dictated by the polls, which she considered &very 
good,8 but by her desire to stay on in the &challenging8 
job of Minister of Tourism.  (Comment: Some consider that 
Suplicy may have damaged her chances for elective office in 
June when, per ref A, she publicly exhorted Brazilians 
affected by the country,s aviation crisis to &relax and 
enjoy.8  End Comment.)  PT insiders have told us that if 
Suplicy does not run, the party has other possible 
candidates.  Some of these include: Chamber of Deputies 
President Arlindo Chinaglia; Education Minister Fernando 
Haddad; and Senator Aloizio Mercadante.  It is generally 
agreed that these candidates could make a strong showing, but 
would have a difficult time defeating Alckmin. 
 
¶7.  (SBU) FHC did state that because incumbent Mayor Gilberto 
Kassab (DEM) has been steadily improving in the polls, if he 
proves to be too strong a candidate, Alckmin may also 
withdraw from the race and instead run for Governor in 2010. 
(Note: The PSDB and DEM have a strong alliance in Sao Paulo 
state and are not expected to run competing candidates.  End 
Note.)  Alckmin will not likely try to gain the PSDB,s 2010 
presidential nomination, FHC said, because he lacks a 
national profile.  In the second round of the 2006 election, 
Lula defeated Alckmin in populous, impoverished northeastern 
Brazil by 77-23 percent.  Only two likely presidential 
candidates, in FHC,s view, are strong in the northeast: Sao 
Paulo Governor Jose Serra (PSDB) and Ciro Gomes, a Socialist 
Party (PSB) Federal Deputy from Ceara who served as Minister 
of National Integration during Lula,s first term. 
 
¶8.     (C) &Whichever of the two ends up running for Mayor 
) Alckmin or Kassab ) will win8, FHC said.  He was further 
quoted in the press to the effect that &our adversaries in 
Sao Paulo8 ) a reference to the PT ) &don,t have 
anything.8  FHC added that while Governor Serra would prefer 
that Kassab be the candidate, he will not oppose Alckmin.  On 
the expected competition within his own party between Serra 
and Minas Gerais Governor Aecio Neves for the 2010 
presidential nomination, FHC predicted that the two will 
reach some sort of understanding, but not until much closer 
to the election. 
 
------- 
 
SAO PAULO 00000701  003 OF 003 
 
 
COMMENT 
------- 
 
¶9.  (C) FHC, who turned 76 in June, remains active not only 
in his party, but in national politics and the international 
scene as well.  His description of his upcoming travels to 
the U.S., Europe, and Africa are more ambitious than would be 
expected of an elder statesman who has retired to a life of 
academia.  While not everyone in the PSDB appreciates his 
speaking out as frequently as he does, especially since he is 
sometimes quite critical of the party,s leaders and elected 
officials, few of them would dare to ignore him.  End Comment. 
 
¶10.  (U) This cable was cleared by Embassy Brasilia. 
WHITE