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C O N F I D E N T I A L SECTION 01 OF 03 BRASILIA 001427 
 
SIPDIS 
 
STATE FOR WHA/BSC, WHA/EPSC, EEB/DAS NELSON, EEB/OMA SAKAUE 
STATE ALSO FOR EEB/OMA WHITTINGTON 
DEPT OF TREASURY FOR IMB/BMURDEN, WMONROE, CCARNES AND 
DEPT of TREASURY ALSO FOR WHA/JHOEK 
NSC FOR GTOMASULO 
 
E.O. 12958: DECL: 10/30/2018 
TAGS: ECON EFIN BR
SUBJECT: BRAZIL'S RESPONSE TO INFO GATHERING REQUEST SUMMIT 
NOV. 15 
 
REF: A. SECSTATE 114420 
     ¶B. SAO PAULO 0548 
     ¶C. BRASILIA 1299 
     ¶D. SAO PAULO 0086 
     ¶E. BRASILIA 1417 
     ¶F. SAO PAULO 0522 
     ¶G. SAO PAULO 0486 
 ¶H. Erath/WHA-EEB e-mail October 28 
 
Classified By: DCM Lisa Kubiske; Reasons 1.4 (b) and (d). 
 
¶1.  (U) The following is in response to Ref A action 
request for information gathering leading up to the Summit 
on Financial Markets and the World Economy in Washington, 
November 15, 2008.  Post also recommends 
Refs B, C, E, F and G which all address Brazil's 
reaction and response to the U.S. financial crisis. 
 
Key Objectives and Priorities 
- - - - - - - - - - - - - - - 
 
¶2.  (C) Brazil's objectives at the Summit on Financial 
Markets and the World Economy will likely include making a 
strong statement at the outset of the meeting (in its role 
as G-20 president) about the urgency of global financial 
reform and also encouraging reforms such as stronger 
financial disclosure standards, greater prudential 
regulation, and increased limits on "shadow banks." 
Indeed, President Lula has spoken of the need for a global 
regulatory framework.  Going forward, the GOB is certain to 
want to ensure that the equities of emerging economies and 
developing countries are protected.  The Lula 
Administration was clear in its initial statements laying 
the blame at the doorstep of actors within the U.S.  Brazil 
has not yet made any specific proposals for global 
financial reform.  However, Brazil has increasingly sought 
to take a leading role.  Brazil has voiced its interest in leading a 
"regional response" and held a meeting with Mercosul-plus country 
officials on October 27 (Septel from Brasilia) and will host a G-20 
meeting of Finance Ministers November 8-9. The Brazil-hosted December 
Latin American summit is also expected to focus on the global 
financial crisis.  President Lula has been critical of the IMF, and 
Brazil is unlikely to support an expanded oversight role for the IMF 
without further reforms and an expanded Brazilian role within the 
IMF.  Brazil's wariness of supranational organizations in which it 
does not have a voice includes the Financial Stability Forum as well. 
 Contacts at the Foreign Ministry note that they would be open to the 
G-20 being a decision-making group but also want to ensure global 
transparency.  In fact the GOB has advocated outreach, but not 
decision making, through ECOSOC to permit multiple voices to be heard 
in the consensus building process. 
 
Key Concerns: FX Shortage and Lack of Trade Finance 
- - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶3.  (U) Brazil's immediate concern has been the shortage of 
foreign exchange (specifically USD) in the Brazilian market 
due to the foreign exchange outflows since September. 
These outflows have had ripple effects on the exchange 
rate, the stock market, and a shortage of trade financing, 
which is likely to be President Lula's foremost concern at 
the G20.  Likewise, credit growth has slowed sharply, some 
Brazilian companies have reported losses from derivatives 
contracts, and some small and medium banks have suffered 
from the lack of external credit financing. 
 
Impact of Financial Market Crisis on the Financial Sector 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶4.  (U) The most visible impacts have been the currency 
 
BRASILIA 00001427  002 OF 003 
 
 
depreciation and decline of the stock market resulting from 
foreign currency outflows.  Brazil's main equity index has 
declined by 50 percent since May, reflecting the readjustment of 
asset prices and international investors 
cashing in to improve liquidity in the United States and 
other markets.  Most analysts agree that the drop in the 
index does not reflect a change in the fundamentals of 
Brazilian companies. 
 
¶5.  (U) Brazilian Central Bank (BCB) data for October 
(October 1 to 21) indicate rising net foreign exchange 
outflows.  As a whole, the foreign exchange market has had 
net outflows of USD 3.4 billion this month.  Commercial 
foreign exchange transaction (i.e. trade-related) inflows 
were USD 1.5 billion, while non-commercial (i.e. financial) 
foreign exchange outflows were USD 4.9 billion.  As a 
result of the shortage of foreign exchange, the BCB has 
heavily intervened in the foreign exchange market.  Since 
September 19, the BCB has provided a total of USD 28 
billion in loans, swaps, and spot market sales (USD 5.3 
billion, 17.6 billion, and 4.9 billion respectively). 
 
¶6.  (U) On a small scale, some of Brazil's small and medium 
banks have experienced some financial stress.  Economic 
interlocutors agreed that although the Brazilian banking 
system has enough liquidity without external credit lines, 
it is not balanced across the system.  Small and medium 
banks are less liquid because they were more reliant on external 
credit lines and have a smaller deposit base upon which to draw. 
Relative to other emerging markets and to other countries in the 
region, however, Brazil's financial system is stable and healthy. 
According to a recent World 
Economic Forum report, the overall health and stability of 
Brazil's banking system ranks 24th out of 134 countries 
worldwide.  Indeed, Brazil's banking system is well 
positioned to weather the external financial crisis.  In a 
recent conference on Brazil's financial sector, Moody's 
highlighted the advantages that Brazilian banks have over 
other regional financial institutions, including low 
dependency on USD, high profitability, high capital 
adequacy, and comparatively fewer "skeletons in the closet." 
Brazilian financial institutions are relatively 
conservative--every major Brazilian bank has a capital base 
that outpaces their respective Basel ratio.  (Note: See Ref 
B for more on the U.S. financial crisis and the Brazilian 
banking system.  End Note.) 
 
¶7.  (U) Local credit growth has slowed significantly.  A 
recent survey of local banks indicates that household 
credit growth is expected to be between five to 15 percent 
next year.  Through September, household credit had 
expanded by 34 percent, following 33 percent growth last 
year.  BCB data for the first 10 days of October showed 
that overall credit concessions plunged by approximately 13 
percent in comparison to the same period in September. 
 
¶8.  (U) Finally, some Brazilian companies have suffered 
from derivates contracts, as well as a more general lack of 
transparency with derivatives accounting.  So far, three 
prominent Brazilian firms, Votorantim (manufacturing, 
financing, new business), Aracruz (pulp), and Sadia (meat 
packing), have reported losses of approximately USD 2.5 
billion.  Rumors continue to circulate that a large number 
of medium-sized firms, most of which lack USD 
export/revenue flows, have sizeable foreign exchange 
mismatches and would suffer large losses if the Brazilian 
currency depreciates further.  The BCB has begun surveying 
Brazilian firms and banks to determine how large this 
exposure is.  Brazil's securities market regulator began 
requiring publicly traded companies to disclose their 
 
BRASILIA 00001427  003 OF 003 
 
 
derivatives exposure on a quarterly basis. 
 
Actions Taken to Address the Crisis 
- - - - - - - - - - - - - - - - - - - 
 
¶9.  (U) While Brazilians spent the last year of the 
worldwide financial crisis preaching the strength of the 
Brazilian economy, economists and government officials 
alike have slowly altered their rhetoric and actions.  The 
GOB has taken several precautionary measures to increase 
liquidity and to permit the BCB to rescue failed banks.  It 
has also encouraged larger financial institutions to make 
small loans to help shore up the more vulnerable small bank 
sector.  In a more controversial measure, the GOB submitted 
legislation to allow two state-run banks to purchase stock 
in private banks and  also suspended a federal tax on 
international financial transactions to stimulate 
investment as well as to try to stem capital flight (Ref 
E).  The BCB has also announced that it will have USD 50 
billion in derivatives to sell to the market and has held 
several USD auctions.  Finally, the BCB has postponed 
planned increases to reserve requirements on leasing 
operations (Refs C and D) and partially lifted the reserve 
requirements on longer-term deposits that the BCB estimates 
will inject approximately USD 50 billion into the system 
(Ref B).  The crisis has also encouraged Finance Minister 
Mantega and Central Bank President Meirelles to coordinate 
their message and appear to be publicly in agreement on the 
handling of the crisis, in stark contrast to past public 
disagreements over policy. 
 
Current Economic Situation/Near-Term Outlook 
- - - - - - - - - - - - - - - - - - - - - - - 
 
¶10.  (SBU) Like most other countries, Brazil has been 
strongly affected by recent global market turmoil. 
Brazil's 2009 growth forecast (3.5 percent consensus) has 
fallen by one to 1.5 percent in recent months. 
Unemployment may rise as economic growth slows.  The 
outlook for inflation, the current account, fiscal 
performance, and other key macroeconomic indicators remains 
broadly stable.  Despite the short-term inflationary 
pressures from the deprecation of the currency, the medium 
and long term decline in domestic demand resulting from the 
worldwide credit crunch is likely to keep inflation down. 
The current consensus is approximately five percent for 
¶2009.  Analysts noted, however, that Brazil's 2009 primary 
surplus could fall below the 3.8 percent of GDP target if 
growth next year slows to 2.5 percent or less. In consideration of 
these factors, Brazil's monetary policy committee (COPOM) October 29 
decided to leave the benchmark rate (SELIC) at 13.75 percent, in 
contrast to raising the rate in previous sections in an effort to 
control inflation. (Brazil's inflation target is 4.5%, with a band 
permitted to go to 6.5%.  Brazil is currently near the top of that 
band - making yesterday's COPOM conversation reportedly challenging 
in building consensus on the SELIC decision). 
 
¶11.  (U) This cable was written and coordinated by Econ Sao Paulo 
with input from Treasury Attache and Embassy Brasilia and represents 
a coordinated Mission Brazil overview in response to Ref A. 
SOBEL