VZCZCXRO5935
RR RUEHRG
DE RUEHBR #1299/01 2751100
ZNR UUUUU ZZH
R 011100Z OCT 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 2553
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 6680
RUEHSO/AMCONSUL SAO PAULO 2830
RUEHRG/AMCONSUL RECIFE 8519

UNCLAS SECTION 01 OF 02 BRASILIA 001299 
 
SIPDIS 
SENSITIVE 
 
STATE FOR WHA/BSC, WHA/EPSC, EEB/CIP, EEB/IFD 
STATE ALSO FOR E:HASTINGS, WHA:KELLY, WHA:MCMULLEN 
STATE PASS USTR FOR KDUCKWORTH 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE 
DEPT OF TREASURY FOR JHOEK, BONEILL 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD BR
SUBJECT: Brazil Responds to U.S. Financial Crisis 
 
REF: SAO PAULO 486 
 
¶1.   (SBU)   Summary:  In response to the U.S. financial crisis, 
Brazil's Central Bank (CB) has partially reversed its hawkish 
anti-inflationary policies by adding 13.2 billion reais to the 
financial system in hopes of freeing up credit and has indicated 
that future interest rate hikes are unlikely given the diminishing 
threat of inflation due to a global slowdown and falling commodity 
prices.  Brazil's Foreign Minster continues to assert that Brazil is 
well positioned to weather the crisis, while he and a key Central 
Bank contact also confirm moves to try to mitigate the effect of the 
crisis. President Lula continues to criticize the United States for 
a lack of financial regulation, claiming that a global regulatory 
body is needed to address the situation. Lula has admitted, for the 
first time, that the Brazilian economy may be adversely impacted by 
the crisis, drawing widespread criticism for not having a real grasp 
on the potential of the crisis.  Brazilian market reactions are 
being reported by ConGen Sao Paulo SEPTEL. END SUMMARY 
 
CENTRAL BANK ACTIONS AND INTROSPECTIONS 
--------------------------------------- 
 
¶2.  (SBU)   The CB announced, on September 24th, a suspension in the 
implementation of new, higher reserve rate levels required for 
commercial banks.  The new levels were to have been implemented in 
November, but the CB decided to delay this implementation by two 
more months.  The CB also raised the threshold on commercial banks' 
exemptions for cash, time and savings deposits, which was previously 
at 100 million reais (approximately 200 million USD) to 300 million 
reais (approximately 600 million USD).  The measure will return 13.2 
billion reais( USD7.16 billion) to the financial system in what is a 
reversal  to the original policy of removing 40 billion reais from 
the credit markets in an effort by the CB to slow lending growth 
that was fueling inflationary pressures.  Responding to the U.S. 
financial crisis, the CB announced that this was a preventative 
measure meant to ensure sufficient availability of liquidity in the 
Brazilian financial markets.  In their recently released quarterly 
inflation report, the CB diminished the role of inflationary 
pressures, claiming that the global economic slowdown and falling 
commodity prices will offset a devaluation of the Brazilian real and 
keep inflation in check.  In fact, many economists have steadily 
lowered the year end inflation rate from 6.45 to 6.17 and many view 
the CB's most recent inflationary report as an indication that the 
CB will temporarily abandon their hawkish inflation stance and 
deviate from their recent rounds of rate hikes that saw an increase 
from 13 to 13.75 at their most recent meeting on September 9th. 
¶3.  (SBU) Central Bank of Brazil Senior Advisor Alexandre Pundek 
told Econ FSN, the main possible fallout from the Congressional 
rejection of the bailout package would be a reduction of credit 
lines to finance Brazilian foreign trade. Pundek also worries that 
if the crisis leads risk-averse Americans to shy away from investing 
abroad, countries such as Brazil could experience a reduction in 
foreign direct investment.  On the Brazilian monetary/credit policy 
side, Pundek reports that in addition to the measures reported 
above, the Central Bank has decided to postpone plans to subject 
lease lending (long term purchase installment plans)to phased-in 
application of new reserve requirements.  The Central Bank will now 
apply the new requirements at a rate of 15 percent in March 2009 and 
25 percent in June 2009.  On the exchange rate policy side, Pundek 
says that the Central Bank recently sold two lots of 80 day forward 
purchase agreements at USD 500 million each in order to contain 
volatility. Finally, Pundek noted that inflation will likely fall 
depending both on international commodity prices, as well as the 
continued relative strength of the Real.  Pundek observed that there 
is still a great deal of uncertainty and as a result, economic 
policymakers will refrain from forecasting. 
¶4.  (SBU) Alvaro Vereda, Deputy Secretary of International Affairs 
of the Finance Ministry confirmed for Econ FSN public statements by 
Finance Minister Mantega that the Ministry believes that the USD 700 
billion White House package will be approved on a second round in 
the House of Representatives, and that as soon as it is approved, 
the credit situation will stabilize.  After meeting with President 
Lula, Development Minister Jorge, Agriculture Minister Stephanes and 
Central Banker Meirelles, Finance Minister Mantega assessed that the 
Brazilian economy is functioning normally, although the CB (see 
previous paragraph) has recently conducted USD auctions to increase 
dollar liquidity.  He also said that the Brazilian agricultural 
sector has sufficient resources, and that the GOB can tackle any 
problems ahead.  Mantega asserted that Brazil has been suffering 
from the crisis, through the reduction of credit by private banks, 
but reinforced that the GOB is ready to act whenever necessary. 
According to the Minister, "the market is fine, the companies are 
solid, the banks are solid and the government is ready to respond to 
any problems put to them." Mantega noted that there should be a 
 
BRASILIA 00001299  002 OF 002 
 
 
distinction between advanced economies, the core of the crisis with 
financial institutions in trouble, and emerging and developing 
countries, whose economies are solid, domestic markets are robust, 
financial accounts are balanced and are growing more.  The Minister 
mentioned that the Brazilian fiscal surplus in line with and above 
previous years' and that inflation is under control, within the 
ceiling limit of the target band (note: the limit is 6.5), which in 
turn enables the country to deal with the global situation on stable 
footing. 
 
WHAT THE PRESIDENT SAYS 
------------------------ 
¶5.  (SBU) President Lula meanwhile continued his public criticism of 
the U.S. financial crisis, commenting in interviews with Folha de 
Sao Paulo and Estado de Sao Paulo today (September 30)that the 
situation is the result of "casino-type" deregulatory practices and 
that the ultimate victims will be the poor. President Lula, at the 
UN General Assembly, called for a global solution to the financial 
crisis while proposing that the global financial crisis can only be 
resolved through multi lateral forums. Lula added that the crisis 
has proven market fundamentalists wrong and demonstrated the need 
for state interventions.  Lula asserted at the U.N. that only 
decisive action by governments, especially those at the heart of the 
crisis, can correct the disorder that has spread throughout the 
global financial markets.  In commenting yesterday on the proposal's 
failure to gain house passage, Lula implored the U.S. Congress to 
stop politicizing the bailout package and put national interest 
first. Lula has recently adjusted his position on what impact the 
crisis will have on the Brazilian economy, declaring initially that 
Brazil would be immune to the problems while admitting today that 
the crisis could do harm due to the enormity of the U.S. economy and 
the inevitable ripple effects.  In today's editorial in Folha de Sao 
Paulo, Lula was criticized for not correctly predicting the crisis' 
impact on the economy; deriding him for his change in position and 
accusing him of not have the capacity to understand the gravity of 
the crisis.  The editorial also depicted the CB president Henrique 
Meirelles as a curious, confused and powerless spectator. 
¶6.  Comment:  Brazilians are very cognoscente of the country's past 
economic turmoil caused by global downturns (most recently the Asian 
crisis in 1997) and are quick to point out the advances in economic 
growth that the country has achieved, potentially partially 
insulating Brazil from the current crisis.  Despite the efforts of 
both President Lula and well respected commentators in easing the 
anxiety surrounding the U.S. crisis' potential impact, no one seems 
to know exactly how this will affect Brazil.  The CB's attempt to 
maintain capital flows by partially reversing their monetary policy 
indicates that there is some recognition of the potential of the 
crisis' impact despite the rosy scenarios given officially (reftel). 
 Whether that will be enough to mitigate a crisis of yet 
undetermined magnitude remains to be seen.  The issue will likely be 
a topic of great interest during the planned visit of Under 
Secretary for Economic, Energy and Agricultural Affairs, Reuben 
Jeffery, to Brasilia on October 3rd when several interlocutors will 
likely look to the Undersecretary for insights into the unfolding 
developments surrounding the crisis.  End Comment. 
 
KUBISKE