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C O N F I D E N T I A L SECTION 01 OF 03 SAO PAULO 000679 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR KDUCKWORTH 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE 
DEPT OF TREASURY FOR JHOEK, BONEILL 
 
E.O. 12958: DECL: 01/01/2019 
TAGS: PGOV ECON EFIN EINV ETRD BR
SUBJECT: ECONOMIC CRISIS HELPS SERRA POSITION FOR 2010 
 
REF: SAO PAULO 581 
 
Classified By: Consul General Thomas White; Reasons 1.4 (b) and (d). 
 
¶1.  (C) Summary: The PSDB leadership sees an opportunity for 
their party as the ongoing global economic crisis hits 
Brazil.  In this context, Sao Paulo state governor Jose 
Serra, the most likely PSDB nominee right now, has started a 
campaign of economic activism at the state level, promoting 
programs to strengthen the economy, improve mass transit, and 
generate employment in both Sao Paulo state and in the city. 
Serra's efforts would appear designed to create a formidable 
track record for his run in 2010 and demonstrate his capacity 
to be an effective manager and first-responder to any 
economic crisis.  The Sao Paulo Governor has complemented 
these moves with efforts to reach out to other parties, 
building a strong and diverse support base in his home 
region.  End Summary. 
 
¶2.  (C) Sao Paulo Governor Jose Serra's campaign to position 
himself to run for Brazil's presidency in 2010 continues in 
earnest.  The flagship of his efforts was his successful 
effort to get his ally, incumbent Sao Paulo Mayor Gilberto 
Kassab (DEM party), re-elected (Ref).   Kassab's landslide 
win over PT candidate Marta Suplicy was important, but should 
not obscure the other deft moves Serra has been making to 
both secure the PSDB nomination and win Brazil's presidency 
in 2010.  Serra seeks to present himself as an effective 
manager who can protect Brazil's prosperity against the 
ongoing global economic crisis.  These efforts have 
intensified since Kassab's mayoral victory on October 26. 
 
The Context: Opportunity in Economic Difficulty 
 
¶3.  (C) Contacts in the PSDB say that the ongoing global 
economic crisis will set the context for the 2010 elections. 
They expect the effects of the crisis to hit Brazil hard in 
the first trimester of 2009 and continue into early 2010.  So 
far, they argue, President Lula and his economic team have 
not been challenged.  They inherited a sound 
political-economy from PSDB President Cardoso and have only 
made slight modifications, maintaining an orthodox 
macroeconomic policy.  The crisis will test President Lula's 
economic team as well as his own sky-high popularity, which 
is a product of the President's considerable charisma, and 
the economic good times during which he's governed and, most 
recently, of the fact that Brazilians felt only minimal 
effects from the global financial crisis--something certain 
to change.  PSDB insiders say that the coming economic 
difficulties will create an opening for Governor Serra to 
present himself as an excellent manager who can protect 
Brazil's prosperity during a difficult global economic 
situation.  They also see the crisis, and the Governor's 
response, as an opportunity for Serra to win over the 
financial community, which has sometimes viewed him with 
skepticism.  When the crisis hits in full force, reluctant 
financiers will see virtue in the kind of economy-supporting 
state activism that Serra champions, according to Serra 
advisor Luis Henrique Reis Lobo (protect). 
 
Serra Establishes his Bona Fides: A Mini-New Deal 
 
¶4.  (C) Sao Paulo Governor Serra has been moving on a variety 
of fronts to establish his managerial and programmatic bona 
fides for the electorate:  shoring up state finances, 
extending credit to industry, and building infrastructure. 
His approach, which includes a heavy dose of state activism, 
represents a likely rehearsal of the measures he might take 
as President.  Taken together, his initiatives look like a 
kind of mini-New Deal for Sao Paulo State.  Among the actions 
taken: 
 
--Getting Resources:  Serra oversaw the sale of the Sao Paulo 
state bank, Nossa Caixa, to Banco do Brazil for USD 2.2 
 
SAO PAULO 00000679  002 OF 003 
 
 
billion on November 20, a move that raised significant cash 
for the Sao Paulo state government. 
 
--Extending the Metro to Sao Paulo's Periphery:  Serra first 
announced his "Plan for the Expansion of Metropolitan 
Transport 2007-2010" last June.  He proposed to build a 
modern and efficient transportation system for Sao Paulo 
through massive investment of approximately USD 8 billion 
financed from a variety of sources, including the 
Interamerican Bank, the World Bank and the Japan Bank of 
International Cooperation.  The Governor followed this up on 
December 5 with an announcement to add an additional branch 
to the metro that would construct 8.4 kilometers of new lines 
and 17 new stations, extending the metro into the northern 
part of Sao Paulo.  The resulting project will provide 
transport for 650,000 commuters a day and will cost 
approximately USD 1 billion.  This would establish the first 
metro links between the city center and two outlying 
peripheral regions of the city.  In announcing this latest 
transport link with Sao Palo's outer north, Serra said, "We 
sold Nossa Caixa, a bank we didn't need, and we traded it for 
a metro." 
 
--Developing a State Economic Promotion Agency:  Serra 
announced on November 20 that the Sao Paulo state government 
would use about USD 500 million from the sale of Nossa Caixa 
to create a new, state-level economic promotion agency, to be 
formed in April 2009.  The new state entity will focus on 
state investments primarily to promote employment as well as 
make improvements in transport, health, education, and 
security. 
 
--Developing a State Investment Agency:  Serra announced the 
creation of a state investment agency, Invest Sao Paulo, with 
USD 5 billion on December 8.  The agency's resources will 
support 40 projects in diverse sectors of the Sao Paulo state 
economy with the idea of encouraging investment.  It will 
support diverse projects, including road building, metro 
improvements as well as health and education.  It will be run 
by a board composed of government officials and private 
business persons.  (Comment: Some of Serra's programs appear 
overlapping and duplicative.  Nonetheless, the multiplicity 
of start-up announcements gives the Governor both media 
placement and excellent momentum.  End Comment.) 
 
--Extending Lines of Credit:  Serra extended a line of credit 
of approximately USD 600 million to the machine tools and 
auto-parts industry on December 12.  The plan also postpones 
certain taxes owed by industrialists and provides tax rebates 
to small businesses.  The Governor announced his program to 
stimulate industry the day after President Lula put forward a 
similar stimulus program at the national level. 
 
The Counter-Dilma 
 
¶5.  (C) Serra's recent actions appear designed to give him a 
track record to use against his likely opponent, President 
Lula's Chief of Staff, Dilma Rousseff.  Rousseff oversees 
Brazil's national-level program for public-private 
partnerships to accelerate economic growth (PAC), an 
opportunity that observers feel was given to her precisely to 
burnish her credentials as a potential presidential 
candidate.  In the meantime, Serra is creating an impressive 
history of state-level accomplishments that could counter 
Rousseff's achievement as PAC Director. 
 
¶6.  (SBU) Recent public opinion polls would appear to reflect 
Serra's strengthened position.  A November 25 Datafolha 
survey that matched Serra against a variety of candidates had 
him coming in first place in all scenarios with varying 
levels of support depending on the depth of the field. 
Probable PT Rival Dilma Rousseff is well behind in these 
polls, although none of the current scenarios have them head 
to head and the number of "don't know" and blank answers 
 
SAO PAULO 00000679  003 OF 003 
 
 
represents a significant percentage of the total.  (Comment: 
Polling almost two years out from an election should always 
be viewed with caution, but Brazilians are particularly 
fickle in their affinities.  Some 90 percent of Brazilian 
voters have no party affiliation, and the recent municipal 
elections saw many candidates go from footnote to 
front-runner over a matter of weeks prior to voting day.  End 
Comment.) 
 
Casting a Wide Net for Allies 
 
¶7.  (C) Serra has complemented his strategy of state-based 
economic activism with a successful effort to engage a wide 
range of political allies.  On the right, he has a strong 
partnership with DEM leader and Sao Paulo Mayor Gilberto 
Kassab.  On the left, his party is allied with the Popular 
Socialist Party, a descendent of the once pro-Soviet branch 
of Brazil's communist party.  (The other formerly pro-Chinese 
faction, the Communist Party of Brazil, is allied with 
President Lula and provided Marta Suplicy's running mate in 
the Sao Paulo Mayoral race.)  Finally, Serra has built a 
strong alliance with Sao Paulo PMDB leader and former Sao 
Paulo Governor Orestes Quercia.  Quercia told Poloff that he 
does not trust the PT, calling it a party "that doesn't keep 
its promises."  It is widely thought that Serra has promised 
to support Quercia in the latter's quest to become a Senator. 
 While no one ally can deliver the regionally-based PMDB, 
Quercia's support and the backing of the Sao Paulo faction of 
the party give Serra an important inroad with this key group. 
 (Comment:  The PMDB won more of the recent municipal 
elections than any other party in the country and can use 
these bully pulpits in support of whoever becomes the party's 
preferred candidate in 2010.  Although currently allied with 
Lula and the PT at the national level, without any obvious 
candidate of their own, PMDB leaders are keeping their 
options open for 2010.  End Comment.) 
 
PSDB Leadership and the Quest for the "Dream Ticket" 
 
¶8.  (C) Despite Serra's smart moves and recent political 
wins, he still faces a rival in his own party in the form of 
Minas Gerais Governor Aecio Neves.  Behind the scenes, former 
President Fernando Henrique Cardoso is reportedly working 
hard to pull together a PSDB "dream ticket," which would 
launch Serra as the party's presidential candidate with Neves 
running as his Vice President.  A recent report in Estado de 
Sao Paulo suggested that, in an effort to gain Neves' buy-in 
to serve as his running mate, Serra has offered to support a 
constitutional amendment against re-election beginning with 
the 2010 election, which would ensure, should Serra win, that 
Neves could run as his successor.  Given Neves' relative 
youth (he is only 48 while Serra is 66), the dream ticket 
could have appeal for Neves, helping both his Party and 
paving the way for his own future candidacy.  So far, 
however, Neves has given no indication of interest in such a 
deal. 
 
Comment: The Man to Beat 
 
¶9.  (C) Serra has followed his Sao Paulo Mayor's race victory 
with a series of moves that establish him as an efficient 
manager and first-responder to the early stages of the 
financial crisis, which has begun to hit Brazil.  Poll 
numbers appear to indicate that his moves in creating a 
positive track record of activism in confronting the economic 
crisis are paying off.  Though obstacles remain, Serra is off 
to a strong start in his campaign to succeed President Lula. 
End Comment. 
 
¶10.  (U) This cable was coordinated/cleared by Embassy 
Brasilia. 
WHITE