VZCZCXRO2651
RR RUEHRG
DE RUEHSO #0019/01 0151607
ZNR UUUUU ZZH
R 151607Z JAN 08
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 7821
INFO RUEHBR/AMEMBASSY BRASILIA 8968
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RUEHAC/AMEMBASSY ASUNCION 3273
RUEHRG/AMCONSUL RECIFE 3957
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UNCLAS SECTION 01 OF 04 SAO PAULO 000019 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR WHA/BSC, WHA/EPSC, AND EB/IFD/OMA 
STATE PASS TO USTR FOR KDUCKWORTH 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR MORONESE, RIVERA, MERVENNE 
NSC FOR TOMASULO 
USDOC FOR 4332/ITA/MAC/OLAC 
USDOC FOR 3134/USFCS/OIO 
TREASURY FOR JHOEK 
AID/W FOR LAC/AA 
 
REF A) 07 Sao Paulo 780; B) 07 Sao Paulo 1005; C) Sao Paulo 12; D) 
07 Brasilia 2151; E) Brasilia 0006 
 
E.O. 12958:  N/A 
TAGS: PGOV PREL ECON EINV ETRD BR VE
SUBJECT: FORMER FINANCE MINISTER ON BRAZILIAN POLITICS AND RELATIONS 
WITH VENEZUELA 
 
SENSITIVE BUT UNCLASSIFIED; PLEASE PROTECT ACCORDINGLY 
 
Summary 
------- 
 
¶1.  (SBU) During a January 7 meeting with the Ambassador, former 
Minister of Finance Antonio Delfim Netto (strictly protect), who is 
currently working as a political and business consultant, discussed 
the opposition's victory over the government in a major tax battle 
and its implications for domestic politics and the 2010 presidential 
elections.  Delfim also emphasized Brazil's focus on infrastructure 
development and said that the country will continue to pursue 
large-scale privatization efforts.  On the subject of Brazil's 
relations with Venezuela, Delfim stated that Lula is concerned about 
Chavez's foreign policy agenda, especially his desire to annex one 
third of Guyana's territory.  End Summary. 
 
CPMF Tax Defeat 
--------------- 
 
¶2.  (SBU) Delfim labeled the Brazilian Senate's December rejection 
of the renewal of the Provisional Financial Transactions Tax (CPMF - 
see ref B), as a significant defeat for the government alliance.  In 
his view, the opposition worked to eliminate the tax, which was 
projected to generate 40 billion Reals (about USD 23 billion) in 
revenue in 2008, in order to "starve the beast," or attempt to 
control what government opponents see as unjustified public 
spending.  In addition to the lost source of income that expiration 
of the CPMF will create, rejection represented a political setback 
for the Lula Administration as the President expended significant 
political capital in supporting the continuation of this tax.  The 
opposition is now mounting a legal challenge to the Ministry of 
Finance's efforts to compensate for anticipated revenue losses by 
raising the Financial Operations Tax (IOF) and Corporate Profits Tax 
(CSLL) contributions - which Delfim mentioned are in effect very 
small increases - in the Supreme Federal Tribunal (ref C).  Delfim 
predicted that the court will rule against the government and find 
the IOF and CSLL adjustments unconstitutional. 
 
Internal Politics and 2010 Presidential Elections 
--------------------------------------------- ---- 
 
¶3.  (SBU) Delfim rebutted rumors that the CPMF defeat would lead to 
internal political fallout and stated that Lula is unlikely to 
replace Guido Mantega as Finance Minister because, even though 
Mantega is not a strong or independent minister, Lula and his main 
advisor, Civil Household Minister (Chief of Staff equivalent) Dilma 
Rousseff, would prefer to keep him on board.  According to Delfim, 
Lula personally likes Mantega; both he and Rousseff believe Mantega 
can be easily controlled and is a convenient scapegoat for Lula on 
politically unpopular issues, someone that Lula can use "like a pen" 
because Mantega, unlike some other ministers, does not question the 
president's decisions.  Delfim dispelled rumors that Belo Horizonte 
Mayor Fernando Pimentel would replace Mantega (ref B) and further 
stated that Lula is not grooming Pimentel to become the presidential 
candidate of his Workers' Party (PT) in 2010 as some analysts have 
suggested.  (Note: During a January 7 meeting with FIESP, the 
Federation of Industries of Sao Paulo President Paulo Skaf [ref C], 
Skaf stated that he believed Pimentel would replace Minister Mantega 
this year as a stepping stone to becoming Governor of Minas Gerais. 
 
SAO PAULO 00000019  002 OF 004 
 
 
End Note.)   Delfim said Lula's preferred successor would be 
Minister Rousseff or Social Development and Hunger Combat Minister 
Patrus Ananias, but noted that neither is actually apt to win the 
election.  Delfim stated instead that Sao Paulo Governor Jose Serra 
of the opposition Social Democracy party (PSDB) is most likely to 
become Brazil's next president. 
 
Infrastructure Development and Privatization 
-------------------------------------------- 
 
¶4.  (SBU) Delfim acknowledged that the 2010 elections might also 
have an impact on infrastructure investment, which will continue to 
increase by at least 1.5 percent of GDP in 2008.  Governor Serra is 
expected to push privatization in Sao Paulo State, especially in the 
road and energy sectors,   as a means of both boosting economic 
growth and enhancing his credentials as a market reformer in the 
run-up to the 2010 elections.  Besides calling for a large road 
construction expansion program, Serra is also working actively with 
the Inter-American Development Bank (IDB) to promote private-sector 
infrastructure investment.  Serra's probable primary opponent in the 
national elections of 2010, Minas Gerais Governor Aecio Neves, is 
looking to carry out similar policies in his own state to viably 
compete with Serra on the economic development front, Delfim said. 
 
¶5. (SBU) Minister Rousseff is a key player in further driving 
infrastructure development, Delfim said.  Rousseff has become a 
stronger supporter of private sector investment in the aftermath of 
Brazil's successful road concessions in October 2007.  Her present 
position is a significant change because Rousseff, an erstwhile 
leftist militant described by Delfim as the "most important person 
in Brazil's government" after the president, has an overwhelming 
amount of influence on Brazil's national agenda.  Although Rousseff 
continues to harbor suspicions about the private sector - Delfim 
stated that Rousseff believes Brazilian business is run like a 
"cartel and always has tricks up its sleeve" - she now sees the 
benefits of non-government investment.  Spanish firms, with active 
support from Spain's government which, according to Delfim, 
practices an "aggressive industrial policy," are likely to be the 
largest foreign investors in Brazilian infrastructure.  With respect 
to Brazil's ongoing civil aviation crisis, Delfim predicted that 
Rousseff will support privatizing some of the country's airports, a 
move which could be the beginning of a larger privatization process 
encompassing such areas as railroads and ports. 
 
Further Economic Views 
---------------------- 
 
¶6.  (SBU) Delfim stated that Minister Mantega's proposal to 
establish a Brazilian sovereign wealth fund is a "terrible idea" and 
is unlikely to materialize because Brazilian foreign reserves are 
inadequate and will not grow by a sufficient amount over the next 
year due to a decline in Brazil's terms-of-trade.  Delfim added that 
Brazil's exchange rate (approximately 1.75 Reals per U.S. Dollar) is 
currently overvalued which has a significant impact on the current 
account balance.  Turning to WTO Doha Round negotiations, Delfim 
remarked that the talks will not succeed because all countries 
negotiating trade agreements want self-sufficiency in food 
production and he does not expect the United States to make adequate 
concessions in the agricultural sector to conclude a Doha agreement. 
 
 
SAO PAULO 00000019  003 OF 004 
 
 
 
Venezuela's Relations with its Neighbors 
---------------------------------------- 
 
¶7.  (SBU) Brazil's relations with Venezuela are tense and 
deteriorating, but Lula is seeking to avoid an open confrontation 
that could cause a serious rupture in bilateral relations and have 
an impact on the continent as a whole, Delfim said.  He stated that 
Lula's presidency represents an "important inflection point" for 
Brazil because Lula is the first Brazilian president "to put poverty 
on Brazil's economic agenda in a serious way."  Having come from a 
poor background himself, Lula understands the implications of 
growing up among a vastly neglected part of society.  Delfim 
characterized Lula as someone who "believes deeply in South American 
unity" and thinks Latin American poverty brings the region's people 
together, enabling them to resolve conflicts through negotiation. 
Delfim, who stated his opposition to Venezuela's entry in Mercosul, 
said that Hugo Chavez is a "psychopath" (while Evo Morales is just a 
"poor man") but that Lula does not want to alienate the Venezuelan 
leader.  Lula is worried about Venezuela's "serious" border problems 
with its neighbors, particularly Colombia and Guyana.  Chavez has 
his sights on "one third" of Guyana's territory, and if Venezuela 
were to invade Guyana, Caracas would likely militarize all of 
Venezuela's south, antagonizing the indigenous populations there. 
(Comment: Former President and sitting Senator Jose Sarney has 
expressed similar concerns with regard to Chavez's designs on 
Guyana, per reftels D and E.  End comment.)  Delfim said this will 
have an impact on Brazil because the territories of at least one 
tribe, the Yanomami Indians spills over the Venezuela-Brazil border. 
 Delfim believes that, should Venezuela invade Guyana, the Yanomamis 
will declare independence, forcing Brazil to get involved in a 
Venezuela-Guyana war. 
 
Comment 
------- 
 
¶8.  (SBU) Considered by analysts to be one of Brazil's most 
influential economic commentators, Delfim supported Lula's 
re-election bid and is said to meet with him regularly to provide 
informal economic advice.  At the beginning of Lula's second term, 
he was expected to be appointed to a Cabinet position or as head of 
the Brazilian Development Bank (BNDES).  While some of his views 
come across as exaggerated, unorthodox, or idiosyncratic, his long 
experience and knowledge of the players afford him unique insight 
into machinations and conflicts involving the government and 
opposition.  End Comment. 
 
Biographical Information 
------------------------ 
 
¶9.  (U) Born on May 1, 1928, Delfim is a University of Sao Paulo 
(USP) professor emeritus of macroeconomics and a Brazilian 
politician.  In 1966-1967, Delfim was Sao Paulo State Finance 
Secretary and subsequently national Minister of Finance, a post he 
 
SIPDIS 
held until 1974.  During his tenure under the military dictatorship, 
Brazil underwent what many analysts call an "economic miracle" with 
seven successive years of over 10 percent growth.  He was Ambassador 
to France (1975-1978) and served as Minister of Agriculture (1979) 
and Planning (1979-1985).  Delfim was elected Federal Deputy in 1986 
and was re-elected five times before being defeated in 2006.  He was 
 
SAO PAULO 00000019  004 OF 004 
 
 
instrumental in creating financial regulations that increased the 
role of the federal government and centralized more power in 
Brasilia at the expense of states and municipalities.  Delfim is a 
regular columnist on economic issues for Carta Capital Magazine 
mass-circulation daily Folha de Sao Paulo, as well as a political 
and business consultant. 
 
¶10.  (U) This message was cleared through the U.S. Treasury Attache 
in Sao Paulo and Embassy Brasilia. 
 
¶11. (U) Minimize considered. 
 
WHITE