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RR RUEHRG
DE RUEHBR #0286/01 0621359
ZNR UUUUU ZZH
R 021359Z MAR 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 1113
INFO RUEHAC/AMEMBASSY ASUNCION 6620
RUEHBU/AMEMBASSY BUENOS AIRES 5339
RUEHLP/AMEMBASSY LA PAZ 6003
RUEHMN/AMEMBASSY MONTEVIDEO 7250
RUEHSG/AMEMBASSY SANTIAGO 0179
RUEHRG/AMCONSUL RECIFE 7752
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RUEHSO/AMCONSUL SAO PAULO 1683
RHEHNSC/NSC WASHDC
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 03 BRASILIA 000286 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV BR
SUBJECT: BRAZIL: NEW SCANDAL COULD MEAN ANOTHER LOST YEAR 
FOR GOVERNMENT 
 
REF: BRASILIA 00207 
 
¶1. (SBU) Summary: The latest scandal to engulf the Lula 
government was unleashed January 13 when influential daily 
Estado de Sao Paulo took advantage of one of the government's 
most highly touted clean-government initiatives, its 
transparency web portal, to report on the exponential 
increase in use of government credit cards for alleged 
inappropriate purchases by thousands of government officials, 
including by several Ministers, during Lula's presidency. 
The government initially reacted to the news reports by 
sacrificing its most conspicuous spender, Special Secretary 
for Promotion of Racial Equality Matilde Ribeiro, but the 
scandal quickly careened out of control before the government 
found its footing and went on the offensive to stave off 
further efforts by the opposition to claim additional 
victims.   Since the revelations, the opposition has been 
engaged in a struggle for control of the congressional 
investigative committee (CPI) that will soon convene to 
investigate the abuse of government credit cards, and failing 
that, will look for ways to pressure the government to 
release its records so they can guarantee that a steady 
trickle of potentially salacious revelations will weaken the 
government during a year of state and municipal elections. 
Depending on the scope of the investigation some believe this 
scandal could have legs and could stall the government's 
legislative agenda, including the government's tax reform 
plan, for the year.  Recent polls, however, indicate that 
Lula's popularity remains undiminished, suggesting that short 
of any blockbusters, he will, as in the past, personally 
weather any potential problems arising from new revelations. 
End Summary. 
 
--------------------------------------------- ---- 
Free for All: From Beach Umbrellas to Tapioca 
--------------------------------------------- ---- 
 
¶2. (U) On January 13, Estado de Sao Paulo reported that since 
Lula took office in 2003, his administration's government 
credit card expenditures have gone up by more than 2000%, 
from R$3.6 million (about US$2 million) in 2002, the last 
year of Fernando Henrique Cardoso's government to R$78 
million (US$45.5 million) in 2007.  About 75% of those 
expenditures, or R$58 million (US$33.7 million), resulted 
from largely untraceable cash withdrawals at ATM machines. 
The remainder, or what can be accounted for in the 
government's transparency portal, was spent on a vast range 
of purchases, many verging on the absurd.  Since January 13, 
the media has had a field day reporting on the more than 7000 
public employees who use the 11,000-13,000 government credit 
cards, detailing purchases that range from multiple no-bid 
car rentals with the same company, to video rentals, to 
purchases at flower shops, butchers, wine shops, beauty 
salons, duty free shops, local markets known for selling 
pirated goods, and many more.  One minister used his credit 
card to pay for R$8 (US$4.50) worth of tapioca, leading 
Planning Minister Paulo Bernardo to ridicule a possible 
Congressional investigation by dubbing it the "Tapioca CPI". 
 
 
¶3. (U) The most egregious spender, Special Secretary for 
Policies to Promote Racial Equality Matilde Ribeiro, at least 
the ninth minister to be forced out by scandal since the 
start of Lula's presidency, got the hook because, according 
to analyst Andre Miranda from the political consulting firm 
PATRI, the government thought it could contain the damage by 
sacrificing her.  She apparently spent at least R$171,500 
(US$99,000) in 2007 with the government card on a variety of 
unauthorized transactions, including purchases at duty free 
shops and bars and restaurants during her vacations.  As a 
low-key minister and someone outside Lula's circle of key 
advisers, Miranda stated, she was expendable (reftel).  Other 
Ministers in the spotlight, such as Sports Minister Orlando 
Silva, have been let off the hook by agreeing to pay back 
about R$30,000 (US$17,000) in personal expenditures. 
 
¶4. (U) Despite the offering of Ribeiro as a sacrificial lamb, 
the opposition called for a CPI to look into the government's 
alleged abuses.   The opposition is demanding at least one of 
the two important positions in a CPI, either that of 
president or rapporteur, which the government so far has 
 
BRASILIA 00000286  002 OF 003 
 
 
resisted.  Some in the opposition are also attacking the 
government for its refusal to allow the CPI to look at 
Planalto Palace's (the Office of the Presidency) use of the 
card, citing security concerns.  According to a Veja 
investigative report, the ten biggest spending officials 
within Planalto accounted for more than R$11.6 million (US$ 
6.7million) in purchases since 2003. 
 
----------------------------------- 
The "Mistakes Were Made" Defense 
----------------------------------- 
 
¶5. (U) After scapegoating Ribeiro, the government's new 
defense focused on admitting that mistakes were made, that 
some excesses were committed, that these would be 
investigated and corrected, but that the vast majority of 
expenditures amounted to nothing more than administrative 
mistakes, due to unclear rules governing the use of the 
cards, a situation for which no one was to blame.  Federal 
Deputy Nilson Mourao (Worker's Party- Acre), who will likely 
be appointed to the CPI, reflected the government's talking 
points when he told Poloff that this was a media-driven 
"scandal", and that he would focus his time in the CPI to 
making the necessary technical changes in the regulations. 
Various prominent ministers have stepped into the fray to 
defend the government as well.  Both Comptroller General 
Jorge Hage and Justice Minister Tarso Genro have aggressively 
pursued this line of argument in the press, arguing that, if 
anything, the administration should be given credit for being 
as transparent as it was in creating the portal that allowed 
the press to report on these excesses. 
 
---------------------------------------- 
Government and PT go on the Offensive 
---------------------------------------- 
 
¶6. (U) Aside from the government's "mistakes were made" 
defense, it also mounted a political offensive, first by 
opening up the Congressional inquiry to cover expenditures 
going back to 1998, the middle of Fernando Henrique Cardoso's 
government, and having the Worker's Party contingent in the 
Sao Paulo State legislative assembly attempt to open up an 
inquiry in Sao Paulo against current Governor and possible 
Brazilian Social Democracy Party (PSDB) presidential 
candidate in 2010, Jose Serra.  Taking aim at the main 
opposition party, powerful minister Dilma Rousseff compared 
the government's expenditures against both Cardoso's record 
and Serra's record.  Although the card did not come into use 
until the last year of Cardoso's government, the government 
succeeded in making argument that expenditures using "contas 
tipo B" (bank accounts that can be used to pay by check by a 
limited number of government officials) during the Cardoso 
era should be included in the probe.  Counting those 
expenditures, the Lula government can compare itself 
favorably with the Cardoso government (R$176 million, or 
US$102.4 million, in 2007 versus R$233 million, or US$ 135.6 
million, with both the credit card and the B accounts in 
2002).  They further succeeded in cutting a deal with the 
PSDB to exclude the presidency's expenditures from the 
investigation, although analyst Miranda questioned if the 
deal could hold for long.  Furthermore, according to most 
press accounts, Planalto is quite openly insisting on 
loyalists to make up its portion of the CPI, to ensure that 
no one goes off the reservation, as happened with the tough 
investigation that followed the "CPI dos Correios" headed by 
Senator Delcidio do Amaral (PT-MS) and Federal Deputy Osmar 
Serraglio (PMDB-PR). 
 
¶7.  (U) On February 12, in light of reports by Folha de S. 
Paulo that his administration had spent more than R$ 108 
million using government-issued debit cards, Governor Serra 
suspended the use of such cards for cash withdrawals and 
ordered an internal review of spending practices.  The PT 
leader in the Legislative Assembly, Simon Pedro, sought to 
establish a CPI. However, PT State Deputy Rui Falcao told 
Poloff on February 15 that the PSDB and its allies had the 
votes to block any legislative investigation.    Instead, 
Falcao has filed complaints with the state Public Ministry 
(prosecutor's office) asking for a criminal investigation and 
especially demanding that the state government publish its 
expenditure reports on the internet as the federal government 
 
BRASILIA 00000286  003.3 OF 003 
 
 
does. 
 
--------------------------------------- 
Allied Parties Stand to Gain the Most 
--------------------------------------- 
 
¶8. (U) Andre Miranda sees the Brazilian Democratic Movement 
Party (PMDB) and other parties in the allied base as the 
chief beneficiaries of the scandal.  A CPI is an excellent 
opportunity for the PMDB, the PT's main coalition partner, to 
extract concessions, such as key government posts, from the 
government.  The PMDB's less than loyal way of doing business 
means that many of its members will not hesitate to abandon 
the government if they sense the government is on the losing 
side of an argument and will pounce if they sense the 
government is weak.  The fact that the government appears to 
be moving ahead with its tax reform plan, according to 
Miranda, gives the PMDB even more leverage over the 
government. 
 
--------------------------- 
Potential Minefield Ahead 
--------------------------- 
 
¶9. (U) Although polls show that Lula is as popular as ever 
and the government appears to have reached some kind of 
agreement to limit the scope of the investigation, a number 
of obstacles remain for the government to overcome over the 
next few months.  First, the opposition remains ready and 
willing to push for a separate Senate-only CPI, where the 
proportion of opposition members would mean a more favorable 
balance.  Second, although not an incredibly important or 
influential entity, the Tribunal de Contas (TCU, the 
government's accounting office) has launched its own inquiry, 
the findings of which, when released, could lead to a new 
round of embarrassing news stories unfavorable to the 
government.  A potential source of embarrassment could come 
when the CPI or the TCU asks for receipts for purchases made 
using cash withdrawals.  The possibility that these may not 
have been kept, or that if they were will reveal more abuses, 
could result in a new round of unfavorable press coverage. 
Third, the independent Public Ministry could launch its own 
probe.  Fourth, if Planalto stonewalls the CPI, the Brazilian 
Supreme Court (Supremo Tribunal Federal-STF) could choose to 
get involved and demand an opening of the presidency's 
records.  Public remarks by STF justices Celso de Mello and 
Marco Aurelio Mello attacking the notion that the presidency 
can keep its records secret suggest they could continue the 
federal judiciary's increasingly activist tendency to rule on 
political issues, as demonstrated in their "mensalao" and the 
party switching decisions. 
 
---------------------------- 
Comment: Another Lost Year? 
---------------------------- 
 
¶10. (SBU) Lula appears to be as popular as at any time since 
the beginning of his presidency in 2003, and the government 
seems to be succeeding in its counteroffensive.  It is not, 
however, out of the woods yet.  Even with a 
government-controlled CPI, once one is established all bets 
are off, particularly in an election season.  Any agreement 
to keep the presidency's records secret could break easily 
and the opposition and press can probably continue to find 
enough information to create problems for at least the worst 
offenders, even if the public buys into the government's 
defense and agrees that the majority of the spending was 
legitimate, if badly regulated.  Even if nothing coming out 
of a CPI is likely to damage Lula personally, it could 
continue to erode the PT's reputation going into important 
municipal elections this year that could have national 
repercussions in 2010, claim additional victims within the 
government, and would probably make the government's efforts 
to advance its agenda nearly impossible. The government, 
which agreed to the CPI in order to co-opt it from the 
opposition, may have opened a Pandora's Box it may not be 
able to close before more damage is done.   End Comment. 
 
Sobel 
SOBEL