VZCZCXRO2118
PP RUEHRG
DE RUEHSO #0731/01 2401350
ZNR UUUUU ZZH
P 281350Z AUG 07
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC PRIORITY 7397
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UNCLAS SECTION 01 OF 03 SAO PAULO 000731 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/FO, WHA/BSC, E, EEB 
STATE PASS USTR FOR KATE DUCKWORTH 
STATE PASS FED BOARD OF GOVERNORS FOR ROBITAILLE 
NSC FOR TOMASULO 
TREASURY FOR JHOEK 
USDOC FOR 4332/ITA/MAC/WH/OLAC 
USDOC ALSO FOR 3134/USFCS 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR DEMROSE, NRIVERA, CMERVENNE 
USAID FOR LAC/AA 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV BR
SUBJECT: BRAZIL: U/S JEFFERY'S MEETING WITH CENTRAL BANK PRESIDENT 
MEIRELLES, AUGUST 21, 2007, SAO PAULO 
 
SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY 
 
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SUMMARY 
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¶1.  (SBU) Under Secretary for Economic, Energy, and Agricultural 
Affairs Reuben Jeffery III met August 21 in Sao Paulo with Henrique 
Meirelles, President of Brazil's Central Bank.  Meirelles commented 
on the recent global market turbulence and used the relatively mild 
reaction by Brazilian markets to illustrate the soundness of the 
economic fundamentals of the Brazilian economy.  While noting the 
resilience of the Brazilian economy, he stated that infrastructure 
remains an area of present and future concern, and he expressed 
interest in learning from the U.S. experience in attracting private 
investment for large infrastructure projects.  End Summary. 
 
¶2.  (U) Participants: 
 
U.S. 
 
Under Secretary Jeffery 
Consul General (CG) Thomas J. White 
Lisa Kusbiske, WHA/EPSC 
William McIlhenny, S/P 
James Story, ECONPOL Chief Sao Paulo 
Thomas Pierce, E 
Peter Higgins, POL Sao Paulo (notetaker) 
 
Brazil 
 
Central Bank President Henrique Meirelles 
Paulo Vieira da Cunha, Director, International Affairs 
Mario Toros, Director, Monetary Policy 
Alexandre Tombini, Director of Norms and Organization of Financial 
Systems 
 
¶3.  (SBU) Central Bank President Meirelles began the meeting by 
noting that global and Brazilian financial markets, struck by 
turbulence the week of August 13, were operating much better and had 
recovered some of their initial losses.  (Note: Subsequent to this 
meeting, the stock exchange, Bovespa, turned in a strong performance 
and by August 27 had recovered all the losses it had suffered during 
the crisis.  End Note.)  Meirelles said the measures announced 
August 17 by the U.S. Federal Reserve had helped restore stability, 
and that while the situation was still unfolding,  financial markets 
were improving.  He further opined that it remained to be seen 
whether everything worked as expected; in other words if the losses 
would be shared by industrial concerns and not shouldered entirely 
by financial enterprises and institutions.  U/S Jeffery noted that 
excessively low risk premiums in the sub-prime mortgage market may 
have contributed to the reverses, but re-pricing is taking place. 
 
----------------------------- 
BRAZIL'S ECONOMIC IMPROVEMENT 
----------------------------- 
 
¶4.  (SBU) Under Secretary Jeffery noted Brazil's sound fundamentals, 
which should help the country's markets weather the turbulence. 
Referring to his meetings in Brasilia with Finance Ministry 
officials, he noted that the country had seen "breathtaking" 
economic improvement in recent years, especially in achieving price 
stability.  Meirelles recalled that Brazil suffered extremely high 
inflation between 1980 and 1994, with lower inflation thereafter 
punctuated by periodic spikes.  Recent years have seen very low 
levels of inflation, including a remarkable 3.1% for 2006.  The 
target for 2007 is 4.5 percent, and current inflation is well within 
this target, running below 3.7 percent.  Other economic factors 
 
SAO PAULO 00000731  002.2 OF 003 
 
 
Meirelles offered as proof of the sound economy include a current 
account balance that is 1.3 percent of GDP, a modest (given the 1.3 
trillion dollar economy) external debt of 30 billion dollars, and 
160 billion dollars in exchange reserves held in  Treasury bonds. 
Brazil is the world's fifth largest holder of U.S. Treasury bonds, 
and these reserves potentially offer the Brazilian government a 
mechanism by which to moderate any severe exchange rate 
fluctuations.  Meirelles concluded that given these conditions, the 
Brazilian economy is better positioned than ever to ride out any 
market turbulence. 
 
---------------- 
CHALLENGES AHEAD 
---------------- 
 
¶5.  (SBU) Brazil's economy is nonetheless facing a number of 
challenges, Meirelles acknowledged.  He cited infrastructure - 
especially in the aviation sector - as an example and noted that 
Brazil also needed to improve roads, highways, railroads, and energy 
infrastructure in order to continue to expand economic growth. 
 
¶6.  (SBU) The Under Secretary expressed interest in the GoB's Growth 
Acceleration Program (PAC) and asked how much of it would be 
financed by private investment.  Meirelles replied that of the PAC's 
three components - public direct investment, state-owned company 
investment, and private investment - the private-sector component 
hadn't taken off yet.  There were a number of regulations and 
requirements imposed by the Government Accounting Board (TCU) that 
inhibited full private-sector participation, he said. 
 
----------------------------------- 
FINANCING INFRASTRUCTURE INVESTMENT 
----------------------------------- 
 
¶7.  (SBU) In response to the Under Secretary's questions on how the 
United States could help Brazil with its investment climate issues 
and help make U.S. private investors aware of the opportunities 
available in Brazil, Meirelles said he was interested in learning 
from the U.S. experience with attracting private investment in 
infrastructure projects.  "Besides the availability of capital, how 
does the U.S foster growth in such investment?" Meirelles asked.  CG 
White mentioned OPIC financing and TDA assistance with feasibility 
studies as examples of USG programs that help the U.S. private 
sector engage with countries. 
 
¶8.  (SBU) Under Secretary Jeffery promised to share with Meirelles 
studies that have been done on this subject.  He noted that the 
United States has been fortunate in the growth of development 
capital markets over the past five years, and in the increasing 
involvement of state and local government in assessing their 
important infrastructure deficiencies and bringing in private 
capital to help address those shortcomings.  Private capital had 
been especially involved in toll roads and, to a lesser extent, 
airports.  In Brazil, Meirelles stated, concerns remain about 
capitalization and the need for the government to set a minimum 
price, which is sometimes not accepted by the private sector.  It is 
possible, he suggested, that the rules in Brazil are not open enough 
for international companies. 
 
¶9.  (SBU) In the U.S., U/S Jeffery explained, the rules were often 
transaction-specific.  Even so, a specific process could be 
politically charged, and caution was necessary to ensure a fair, 
competitive, responsible process.  CG White noted that a group of 
U.S. institutional investors would be visiting Brazil in early 
September, representing both private and public sector investment 
funds.  Meirelles reiterated Brazil's interest in fostering 
cooperation so that Brazil could have access to American know-how 
and benefit from the transfer of U.S. technology.  One way Meirelles 
 
SAO PAULO 00000731  003 OF 003 
 
 
could help Brazil learn from other countries' experiences, U/S 
Jeffery suggested, would be to consult his colleagues in the world 
of central banking, such as Bank of Italy Governor Mario Draghi. 
 
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BIOFUELS 
-------- 
 
¶10.  (U) International Affairs Director Paulo Vieira da Cunha noted 
that Brazil would host the G-20 meetings next year and was planning 
to organize a seminar on clean energy for Central Bank Governors and 
Finance Ministers.  U/S Jeffery briefly outlined U.S.-Brazil 
cooperation under the bilateral biofuels cooperation MOU in the 
areas of creating standards, making biofuels into commodities, and 
financing new and expensive technologies. 
 
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COMMENT 
------- 
 
¶11.  (SBU) Meirelles and his senior advisors appeared to be fully 
engaged and on top of Brazil's macroeconomic situation.  Most 
important, Meirelles was frank about Brazil's weaknesses and 
vulnerabilities and eager to learn from the U.S and other countries 
to help Brazil's economy and financial sector.  End Comment. 
 
¶12.  (U) This cable was cleared by Embassy Brasilia and by U/S 
Jeffery's delegation. 
 
WHITE