VZCZCXRO7032
RR RUEHRG
DE RUEHBR #1417/01 3021849
ZNR UUUUU ZZH
R 281849Z OCT 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 2750
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 6804
RUEHSO/AMCONSUL SAO PAULO 2979
RUEHRG/AMCONSUL RECIFE 8637

UNCLAS SECTION 01 OF 02 BRASILIA 001417 
 
SIPDIS 
SENSITIVE 
 
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 Enacts Preventive Measures to Address Global 
Downturn 
 
REF: (A) SAO PAULO 486 (B) SAO PAULO 522 (C) BRASILIA 1299 (D) 
BRASILIA 1362 
 
SENSITIVE BUT UNCLASSIFIED 
 
¶1.  (SBU) Summary:  In response to the global financial crisis, 
Brazilian President Lula signed Provisional Measure 443 (MP443) 
October 22 that allows two federal institutions, the Bank of Brazil 
(BB), and Caixa Economica, the right to purchase stock in Brazilian 
banks, private or public, as a preventive measure to provide more 
liquidity to smaller banks in the Brazilian financial system.  The 
BB is also authorized to trade currency directly with other 
countries' central banks, within the limits and conditions imposed 
by the National Monetary Council.  As the first sign of a 
legislative challenge to the Lula Administration's handling of the 
crisis, some in Congress are planning to challenge this measure. 
Amid concern over possible excess government interference in banking 
operations, bank sector contacts told Ambassador Sobel that the GOB 
was "forcing" large banks to take over smaller and medium-sized 
ones, and that many small and medium banks are suffering more 
financial distress than official announcements indicate.  Along with 
MP443, President Lula signed a decree which eliminated the federal 
tax on financial operations (IOF) on financial transactions such as 
foreign investment in fixed income assets, on foreign loans, and on 
external financing.    The GOB also convened a meeting of regional 
finance and foreign ministers in Brasilia on October 27 to discuss 
the financial crisis and options for developing a "coordinated 
regional response."  The President has acknowledged that the 
financial crisis may require some belt tightening, while affirming 
continued commitment to PAC infrastructure spending and social 
programs. END SUMMARY. 
 
¶2.  (SBU) Finance Minister Guido Mantega and Central Bank (BCB) 
President Henrique Meirelles held a joint October 22 press 
conference to announce Provisional Measure 443 (MP443), which allows 
federal intervention in private banks in times of crisis without 
congressional approval.  The measure is intended to help small to 
medium size banks weather the current crisis- a challenge that 
Central Bank Deputy Governor Alexandre Tombini pointed out during a 
recent meeting with State Department U/S Reuben Jeffery (REFTEL D). 
Tombini said that many of the financial products that small and 
medium size banks offer, such as auto financing and consumer 
credit), were in jeopardy, threatening domestic demand growth, a key 
driver of Brazil's economic performance.  The press has reported 
that Finance Minister Guido Mantega called Treasury Secretary Henry 
Paulson and Central Bank (BCB) President Henrique Meirelles called 
Fed Chairman Ben Bernanke to discuss the measure before it was 
announced. 
¶3.  (SBU) Local reactions to MP443 have been mixed.  BB and Caixa 
reacted favorably as MP443 will facilitate BB's pending 
negotiation/purchase of Brazilian bank Nossa Caixa.  The measure 
also opens the door for Caixa to engage in sectors that it had not 
previously participated in, such as auto finance.  Negative 
commentary from sector observers and opposition politicians has 
ranged from the concern over expanding public sector intervention 
and "nationalizing" parts of Brazil's financial system to the 
measure's lack of transparency.  More specifically, some 
commentators worry that permitting government-owned Caixa to 
purchase shares of construction/real estate companies poses a risk 
to that industry.  The political opposition has focused on the 
apparent inconsistencies between this action and repeated government 
statements that no Brazilian bank is currently at risk of collapse. 
Several opposition congressmen have criticized Minister Mantega's 
congressional testimony only the day before the measure was 
announced, in which he indicated that the steps provided for under 
the measure were not under consideration by the government. 
Brazil's congress, led by Senators Francisco Dornelles and Tasso 
Jerreissati, is considering legislative steps to limit the scope of 
MP 443, perhaps requiring a timeline for reselling any shares 
purchased under 443 authority or excluding some private bank shares 
from being purchased by either BdB or Caixa, or perhaps even 
challenging its constitutionality. Brazil's construction industry 
issued a statement criticizing MP 443, stating the industry needs 
liquidity but does not welcome ownership by public sector banks 
which could slow the industry's recovery since BdB and Caixa are 
prohibited by MP 443 from any lending to firms in which they hold an 
equity position of 10 percent or more. 
¶4.  (SBU) Ambassador Sobel met with Daniel Goldberg, Morgan 
Stanley's Head of Mergers and Acquisitions and Country Manager for 
Brazil, on the day MP443 was announced.  According to Goldberg, BB 
and Caixa were being "forced" by the Central Bank to buy the loan 
portfolios of the struggling small and middle market banks to 
reassure the marketplace and provide liquidity.  Contrary to GOB 
claims that no Brazilian banks are currently at risk, Goldberg 
 
BRASILIA 00001417  002 OF 002 
 
 
stated that Morgan Stanley had received three calls in the past week 
for "emergency" sell-side mandates for mid-sized banks.  He also 
stated that all banks in Brazil were being asked to disclose their 
on and off-shore derivatives exposure to regulatory authorities. 
(Comment: Prior to joining Morgan Stanley, Goldberg was the head of 
the Secretariat of Economic Law within the Ministry of Justice and 
reviewed transactions to ensure compliance with Brazilian anti-trust 
laws.  He maintains high- level contacts within the Brazilian 
Government and, specifically, with Henrique Meirelles (strictly 
protect).  Goldberg stated that when he received the calls for the 
sell-side mandates, he immediately called the BCB to alert them to 
the growing problem.  End Comment.) 
 
¶5.  (U) The elimination of the IOF on certain international 
transactions in Brazil represents an effort by the GOB not only to 
stimulate foreign investment in Brazil, but also to head off the 
recent capital flight that contributed to the depreciation of the 
Brazilian currency.  The depreciation of over 60 percent against the 
dollar over the past three months has made imports more expensive 
and has dampened Brazilian domestic growth.  The BCB has several 
mechanisms available to manipulate the exchange rate, ranging from 
buying and selling USD, to temporarily buying and selling USD 
through loans with fixed sell/buy back dates, to offering 
derivatives.  The BCB had been buying USD to build up foreign 
reserves and recently disclosed that it currently has USD 50 billion 
available for derivatives.  This intervention coupled with the 
elimination of the IOF, is an effort to stabilize the exchange rate 
and to stimulate domestic growth.  Market analysts warn that the 
elimination of the IOF will result in lower federal revenues and 
could be a factor in the shifting economic fortunes of Brazil that 
could possibly force the GOB to alter its spending priorities for 
¶2009. 
 
¶6.  (SBU) President Lula has publicly acknowledged that if federal 
tax collections drop, as forecasted by many local economists, the 
GOB would need to trim the 2009 budget and re-examine federal 
spending priorities.  Previous public statements by Lula and 
prominent administration members, such as Chief of Staff Dilma 
Rouseff, have affirmed continued commitment to Growth Acceleration 
Program (PAC) infrastructure spending and to social programs. On 
October 3 in Brasilia, Luiz Melin, Chief of Staff to Minister 
Mantega, told State Department U/S William Burns that Brazil would 
not repeat past mistakes in cutting infrastructure investment as it 
seeks financial discipline, a past approach which, according to 
Melin, has put Brazil at a disadvantage in terms of global trade 
competitiveness and domestic economic growth potential. 
 
¶7.  (U) The GOB convened a meeting of regional finance and foreign 
ministers in Brasilia on October 27 to discuss the financial crisis 
and options for developing a "coordinated regional response."  The 
morning discussion included Brazil, Argentina, Paraguay, Uruguay, 
and Venezuela, joined in the afternoon by Bolivia, Chile, Colombia, 
Ecuador, and Peru. While the group agreed further integration was 
key in addressing global stability and pressed for a transparent 
international approach, GOB was unable to gain consensus on a joint 
statement explicitly rejecting protectionism (see septel - 
communiqu e-mailed to WHA/EPSC and EEB/OMA). 
 
¶8.  (SBU) COMMENT: In enacting these measures, Brazil continues to 
illustrate a pragmatic approach in addressing the global economic 
crisis, albeit with a sense of concern, but not panic.  Although 
described as a preventive measure, Provisional Measure 443 is a 
departure from the non-interventionist language used by the GOB 
until only very recently.  Coupled with other measures to pacify 
regional anxiety and to stimulate domestic spending and foreign 
investment, the GOB appears to be reassessing the potential impact 
of the crisis and recalibrating its message accordingly.  END 
COMMENT. 
 
¶9.  (U) This cable was coordinated with Consulate Sao Paulo and the 
U.S. Treasury Attache in Sao Paulo. 
 
SOBEL