VZCZCXRO1027
RR RUEHRG
DE RUEHSO #0070/01 0331611
ZNR UUUUU ZZH
R 021611Z FEB 09
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 8915
INFO RUEHBR/AMEMBASSY BRASILIA 0070
RUEHRG/AMCONSUL RECIFE 4289
RUEHRI/AMCONSUL RIO DE JANEIRO 9007
RUEHBU/AMEMBASSY BUENOS AIRES 3398
RUEHAC/AMEMBASSY ASUNCION 3645
RUEHMN/AMEMBASSY MONTEVIDEO 2844
RUEHSG/AMEMBASSY SANTIAGO 2645
RUEHLP/AMEMBASSY LA PAZ 4054
RUEHME/AMEMBASSY MEXICO 0868
RUEHGV/USMISSION GENEVA 0192
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 SAO PAULO 000070 
 
SIPDIS 
SENSITIVE 
STATE FOR WHA/BSC 
STATE FOR DRL/ILSCR MARK MITTELHAUSER 
STATE FOR EEB STEVE RHEE 
USDOL FOR ILAB CHANTENIA GAY 
 
E.O. 12958: N/A 
TAGS: ELAB ECON EIND EFIN PGOV PHUM PINR BR
SUBJECT:  LAY OFFS LEAVE THE GOB AND UNIONS PLAYING CATCH UP 
 
SENSITIVE BUT UNCLASIFIED--PROTECT ACCORDINGLY 
 
¶1.  (SBU) Summary:  After years of economic growth and relative 
labor calm, a sudden spate of layoffs and rumors of further cuts 
seem to have caught both Brazilian labor unions and the government 
off-guard.   The swift deterioration in the labor market has led to 
public demonstrations and much finger-pointing.  While politicians 
blame the intractability of the Central Bank and "corporate greed", 
labor leaders wonder if the crisis is being deliberately overblown 
by business to extract concessions from labor.  While local unions 
make concessions to save members' jobs, the Brazilian government and 
major national unions have yet to settle on a coordinated response 
to workers' plight.  Without a more concerted effort to identify 
solutions that satisfy labor and employer needs, a sustained 
economic downturn could bring new labor headaches for President Lula 
and for his Worker Party (closely aligned with labor) as it heads 
toward the 2010 presidential election.  End Summary. 
 
DECEMBER ECONOMIC DATA IS "THE WORST" 
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¶2.  (U) Recently released November and December economic data 
demonstrate the effects of the financial crisis on certain key 
sectors of the Brazilian economy.  The National Confederation of 
Industry (CNI) released November statistics that showed industrial 
capacity utilization had dropped to its lowest level since February 
2007 (81.6 percent).   During the week of January 19, the Ministry 
of Labor said that the country had lost 650,000 jobs in December. 
(The typical seasonal decline is around 300,000.)  Carlos Lupi, 
Minister of Labor, asserted that, "This is the worst December in 
history...." 
 
¶3.  (U) The auto, metalworkers, mining, construction, service and 
agricultural sectors registered the highest numbers of layoffs. 
Specifically, the manufacturing sector (which includes the 
automakers, metal and steel workers) accounted for 41.7 percent of 
the jobs lost while agriculture (20.5 percent), services (17.9 
percent,) and construction (12.6 percent) accounted for the bulk of 
the remainder.  In addition to layoffs, some plants are placing 
workers on furlough, extending "collective vacations," requesting 
salary and work week reductions, and "temporarily" suspending 
selected contracts.  (Note:  Unemployment is traditionally a lagging 
indicator and even with the very large and public number of layoffs, 
official unemployment for the major metropolitan regions remains at 
6.8 percent.  End Note.) 
 
LAYOFFS GALVANIZE POLITICIANS, INDUSTRY AND LABOR LEADERS 
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¶4.  (U) The layoffs and rumors of more to come brought 
representatives from labor, industry and government together for a 
series of high-level meetings.  Guido Mantega, Secretary of the 
Treasury, met with business leaders; President Luiz Inacio Lula da 
Silva scheduled union talks; the major unions met with each other to 
develop a protest strategy; and the Federation of Industry for the 
State of Sao Paulo (FIESP) began negotiations with Union Force 
(FS-Forca Sindical).  Despite all the dialogues, views diverge on 
how to manage this crisis. 
 
GOVERNMENT OFFICIALS FAR FROM UNIFIED ON PLAN OF ACTION 
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¶5.  (U) Carlos Lupi, Minister of Labor, took a hard stance against 
layoffs.  In press interviews, Lupi noted that many of the 
industries that laid off workers benefitted from government tax 
breaks, federal loan programs and other types of assistance.  He 
said that these industries should provide some "compensation" to the 
GOB by maintaining employment.  Lupi wants to tie government 
assistance programs under his purview (the Temporary Service 
Guarantee Fund or "FGTS" and the Workers Aid Fund "FAT") to 
employment guarantees for workers. 
¶6.  (U) Mantega supports Lupi in his call to tie government help to 
job creation/preservation.  On January 22, Mantega announced a R$100 
billion (US$ 43.5 billion) infusion to the National Economic and 
Social Development Bank (BNDS), but stated that any new loans would 
come with employment requirements for contractors.  President Lula 
 
SAO PAULO 00000070  002 OF 003 
 
 
has remained quiet on the issue of mandating employment and is said 
to be "reviewing various proposals."  (Comment: Press articles 
indicate that Lula remains committed to providing credit to 
industries and companies in need without any employment 
requirements, although he has publicly urged companies not to lay 
off employees.  End Comment.) 
¶7.  (U) Brazil's Central Bank stands at the center of the debate as 
to how to respond to the financial crisis.  Leaders across the 
political, business and labor spectrum routinely criticize Henrique 
Meirelles, President of the Central Bank, for keeping interest rates 
too high.  Inflation fears have kept the Selic (the benchmark 
interest rate) at 13.75 percent since September 2007.  With the 
tumbling economy, mass protests took place, and on January 21 unions 
marched in various cities to demand rate cuts.  While denying that 
it bowed to political pressure, the Monetary Policy Committee 
(Copom) authorized a one percent cut in interest rates on January 
¶21.  Although the move was lauded by virtually all sectors, many 
business and union leaders continue to argue for further 
reductions. 
UNIONS AT ODDS WITH BIG BUSINESS AND EACH OTHER 
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¶8.  (SBU) Despite meetings between the national labor unions, there 
is little consensus among the major players.  Union Force (FS) is in 
negotiations with FIESP and hopes to establish a non-binding 
umbrella agreement that would set out parameters for labor and 
industry to cooperate in their response to hard times.  (Note:  FS 
is the second largest labor organization in Brazil and is widely 
considered to be more moderate than its rivals.  End Note.) 
Because it counts among its membership the bulk of the metalworkers 
unions, many of its members have suffered layoffs.  In a January 22 
meeting, Union Force General Secretary, Joao Carlos Goncalves 
(commonly known as "Juruna"), told Poloff that his union will 
negotiate with FIESP as long as workers' rights are protected. 
Union Force is the only union that openly states its willingness to 
consider salary or work week reductions in exchange for employment 
stability.  Juruna said that "in certain sectors - the ones that are 
hardest hit - this [wage/hours concessions] may be acceptable.  We 
want to avoid having other industries take advantage of the 
situation and pressure workers for concessions when their sectors 
are not in trouble." 
 
¶9.  (SBU) The Central Worker's Union (CUT) is standing firm against 
layoffs or salary reductions.  CUT has the largest membership of all 
the labor syndicates with over 3,000 member unions and seven million 
members.  CUT is commonly associated with President Lula's Worker's 
Party (PT) and a large percentage of its members come from the 
public sector or from white collar labor unions.  Many believe that 
because the public sector has not suffered many lay offs, CUT can 
afford to take a hard line.  In a January 22 meeting, CUT General 
Secretary, Quintano Severo, told Poloff that CUT proposes moving to 
a system where companies can "bank hours" over the course of a year. 
 Under the CUT plan, workers would be expected to work a set number 
of hours over the course of a year but within that year, companies 
could reduce hours in some weeks and raise hours in others, 
depending on the level of economic activity.  Salaries would be kept 
flat regardless of hours worked.  While this would not reduce salary 
costs, it would allow industries to run fewer shifts, close one day 
a week or idle production lines for set times, thereby saving on 
electricity and other expenses and reducing the risk of product 
over-supply. 
 
¶10.  (SBU) CUT favors government tax breaks to stimulate demand. 
Severo cited the recent government reduction of the Tax on 
Industrial Products (IPI) for automobile sales.  Minister Lupi 
claims that preliminary January sales data shows an improvement in 
auto sales because of the IPI reduction and lamented publicly that 
"if only auto manufacturers had waited fifteen or twenty more days, 
they might not have needed to lay off workers."  CUT also advocates 
bringing more industry representatives to the bargaining table. 
Severo claimed that FIESP only represents large companies, but that 
the bulk of Brazilian employment comes from small and mid-sized 
companies.  He said that CUT is already in negotiations with the 
Micro and Small Industry Syndicate (SIMPI).  CUT hopes to map out an 
agreement that preserves salary and employment with SIMPI and then 
take it to the government. 
 
SAO PAULO 00000070  003 OF 003 
 
 
 
IN THE MIDST OF THE DEBATE, 130 COMPANIES CUT THEIR OWN DEALS 
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¶11.  (U) Since the beginning of the financial crises, 130 companies 
and nine local unions have negotiated their own deals for wage/hours 
concessions without waiting for agreement from the national 
syndicates or business representatives.  In the Sao Paulo 
metropolitan area, 92 companies have negotiated such contracts with 
the metalworkers union.  Sao Paulo state accounts for over 40 per 
cent of Brazil's industrial production and labor accords in this 
region can have far-reaching implications for the rest of the 
country.  Agreements include various concessions by the unions 
including the FS and CUT elements of "hour banks" and work week and 
salary cuts. 
 
¶12.  (SBU) When Poloff asked FS leaders Juruna and Severo for their 
views on the individual deals, the responses were mixed.  While 
Severo (CUT) avoided the question and implied that these local 
unions were being taken advantage of by big business, Juruna (FS) 
was more pragmatic.  He conceded that the local unions had to "do 
what they needed to do" and stated that FS hoped to use these 
individual deals as a barometer for the types of concessions the 
national leadership might offer in its discussions with FIESP.  He 
did insist, however, that FIESP and other pro-business interests 
could be using the media to create an artificial "climate of panic" 
to extract concessions from labor.  He even pointed to recently 
released unemployment statistics as proof that the economic crisis 
was not severe.  (Note:  He did not seem to consider that 
unemployment is a lagging indicator.  End Note.) 
 
ARTIFICAL "CLIMATE OF PANIC" OR THE TIP OF THE ICEBERG? 
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¶13.  (SBU) COMMENT:  It is doubtful that the recently released 
economic data tells the full story of the labor market in Brazil. 
As nearly 50 per cent of Brazil's 100 million strong labor force 
works in the informal economy, the recently released IBGE statistics 
only capture part of the story.  Due to the fact that Brazil's labor 
laws make it difficult and expensive to lay off formally employed 
workers, it is unclear whether, in this economic climate, informal 
workers have so far been relatively unaffected (because they are 
cheaper to employ and generally work outside of export industries 
like autos) or have born the brunt of the costs (because they are 
more vulnerable). 
 
¶14.  (SBU) While President Lula publicly repeats his desire to 
create employment, he has released few concrete plans.  He remains 
popular and is the beneficiary of widespread support from labor. 
That said, this is the first large scale economic crisis of Lula's 
presidency and, while labor clamors for the GOB to do more, they 
have so far hesitated in public criticism of President Lula. 
 
¶15.  (SBU) The GOB, labor, and industry remain divided on how to 
respond to the financial crisis.  President Lula has had relatively 
few problems maintaining consensus on economic and wage policy in 
times when a constantly rising tide has lifted all boats.  If, as we 
expect, Brazil is at the beginning of a period of slower economic 
growth, the relatively tranquil labor sector could become a growing 
thorn in Lula's side, testing both his popularity and his political 
skills, with clear implications for the prospects of his chosen 
successor and the likely Worker Party presidential candidate, Dilma 
Rousseff, in the 2010 elections.  END COMMENT. 
 
¶16.  (U) This cable has been cleared by the Embassy in Brasilia. 
 
WHITE