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Cablegate: Brazil: New Scandal Could Mean Another Lost Year

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RR RUEHRG
DE RUEHBR #0286/01 0621359
ZNR UUUUU ZZH
R 021359Z MAR 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 1113
INFO RUEHAC/AMEMBASSY ASUNCION 6620
RUEHBU/AMEMBASSY BUENOS AIRES 5339
RUEHLP/AMEMBASSY LA PAZ 6003
RUEHMN/AMEMBASSY MONTEVIDEO 7250
RUEHSG/AMEMBASSY SANTIAGO 0179
RUEHRG/AMCONSUL RECIFE 7752
RUEHRI/AMCONSUL RIO DE JANEIRO 5852
RUEHSO/AMCONSUL SAO PAULO 1683
RHEHNSC/NSC WASHDC
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 03 BRASILIA 000286

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PGOV BR
SUBJECT: BRAZIL: NEW SCANDAL COULD MEAN ANOTHER LOST YEAR
FOR GOVERNMENT

REF: BRASILIA 00207

1. (SBU) Summary: The latest scandal to engulf the Lula
government was unleashed January 13 when influential daily
Estado de Sao Paulo took advantage of one of the government's
most highly touted clean-government initiatives, its
transparency web portal, to report on the exponential
increase in use of government credit cards for alleged
inappropriate purchases by thousands of government officials,
including by several Ministers, during Lula's presidency.
The government initially reacted to the news reports by
sacrificing its most conspicuous spender, Special Secretary
for Promotion of Racial Equality Matilde Ribeiro, but the
scandal quickly careened out of control before the government
found its footing and went on the offensive to stave off
further efforts by the opposition to claim additional
victims. Since the revelations, the opposition has been
engaged in a struggle for control of the congressional
investigative committee (CPI) that will soon convene to
investigate the abuse of government credit cards, and failing
that, will look for ways to pressure the government to
release its records so they can guarantee that a steady
trickle of potentially salacious revelations will weaken the
government during a year of state and municipal elections.
Depending on the scope of the investigation some believe this
scandal could have legs and could stall the government's
legislative agenda, including the government's tax reform
plan, for the year. Recent polls, however, indicate that
Lula's popularity remains undiminished, suggesting that short
of any blockbusters, he will, as in the past, personally
weather any potential problems arising from new revelations.
End Summary.

--------------------------------------------- ----
Free for All: From Beach Umbrellas to Tapioca
--------------------------------------------- ----

2. (U) On January 13, Estado de Sao Paulo reported that since
Lula took office in 2003, his administration's government
credit card expenditures have gone up by more than 2000%,
from R$3.6 million (about US$2 million) in 2002, the last
year of Fernando Henrique Cardoso's government to R$78
million (US$45.5 million) in 2007. About 75% of those
expenditures, or R$58 million (US$33.7 million), resulted
from largely untraceable cash withdrawals at ATM machines.
The remainder, or what can be accounted for in the
government's transparency portal, was spent on a vast range
of purchases, many verging on the absurd. Since January 13,
the media has had a field day reporting on the more than 7000
public employees who use the 11,000-13,000 government credit
cards, detailing purchases that range from multiple no-bid
car rentals with the same company, to video rentals, to
purchases at flower shops, butchers, wine shops, beauty
salons, duty free shops, local markets known for selling
pirated goods, and many more. One minister used his credit
card to pay for R$8 (US$4.50) worth of tapioca, leading
Planning Minister Paulo Bernardo to ridicule a possible
Congressional investigation by dubbing it the "Tapioca CPI".


3. (U) The most egregious spender, Special Secretary for
Policies to Promote Racial Equality Matilde Ribeiro, at least
the ninth minister to be forced out by scandal since the
start of Lula's presidency, got the hook because, according
to analyst Andre Miranda from the political consulting firm
PATRI, the government thought it could contain the damage by
sacrificing her. She apparently spent at least R$171,500
(US$99,000) in 2007 with the government card on a variety of
unauthorized transactions, including purchases at duty free
shops and bars and restaurants during her vacations. As a
low-key minister and someone outside Lula's circle of key
advisers, Miranda stated, she was expendable (reftel). Other
Ministers in the spotlight, such as Sports Minister Orlando
Silva, have been let off the hook by agreeing to pay back
about R$30,000 (US$17,000) in personal expenditures.

4. (U) Despite the offering of Ribeiro as a sacrificial lamb,
the opposition called for a CPI to look into the government's
alleged abuses. The opposition is demanding at least one of
the two important positions in a CPI, either that of
president or rapporteur, which the government so far has

BRASILIA 00000286 002 OF 003


resisted. Some in the opposition are also attacking the
government for its refusal to allow the CPI to look at
Planalto Palace's (the Office of the Presidency) use of the
card, citing security concerns. According to a Veja
investigative report, the ten biggest spending officials
within Planalto accounted for more than R$11.6 million (US$
6.7million) in purchases since 2003.

-----------------------------------
The "Mistakes Were Made" Defense
-----------------------------------

5. (U) After scapegoating Ribeiro, the government's new
defense focused on admitting that mistakes were made, that
some excesses were committed, that these would be
investigated and corrected, but that the vast majority of
expenditures amounted to nothing more than administrative
mistakes, due to unclear rules governing the use of the
cards, a situation for which no one was to blame. Federal
Deputy Nilson Mourao (Worker's Party- Acre), who will likely
be appointed to the CPI, reflected the government's talking
points when he told Poloff that this was a media-driven
"scandal", and that he would focus his time in the CPI to
making the necessary technical changes in the regulations.
Various prominent ministers have stepped into the fray to
defend the government as well. Both Comptroller General
Jorge Hage and Justice Minister Tarso Genro have aggressively
pursued this line of argument in the press, arguing that, if
anything, the administration should be given credit for being
as transparent as it was in creating the portal that allowed
the press to report on these excesses.

----------------------------------------
Government and PT go on the Offensive
----------------------------------------

6. (U) Aside from the government's "mistakes were made"
defense, it also mounted a political offensive, first by
opening up the Congressional inquiry to cover expenditures
going back to 1998, the middle of Fernando Henrique Cardoso's
government, and having the Worker's Party contingent in the
Sao Paulo State legislative assembly attempt to open up an
inquiry in Sao Paulo against current Governor and possible
Brazilian Social Democracy Party (PSDB) presidential
candidate in 2010, Jose Serra. Taking aim at the main
opposition party, powerful minister Dilma Rousseff compared
the government's expenditures against both Cardoso's record
and Serra's record. Although the card did not come into use
until the last year of Cardoso's government, the government
succeeded in making argument that expenditures using "contas
tipo B" (bank accounts that can be used to pay by check by a
limited number of government officials) during the Cardoso
era should be included in the probe. Counting those
expenditures, the Lula government can compare itself
favorably with the Cardoso government (R$176 million, or
US$102.4 million, in 2007 versus R$233 million, or US$ 135.6
million, with both the credit card and the B accounts in
2002). They further succeeded in cutting a deal with the
PSDB to exclude the presidency's expenditures from the
investigation, although analyst Miranda questioned if the
deal could hold for long. Furthermore, according to most
press accounts, Planalto is quite openly insisting on
loyalists to make up its portion of the CPI, to ensure that
no one goes off the reservation, as happened with the tough
investigation that followed the "CPI dos Correios" headed by
Senator Delcidio do Amaral (PT-MS) and Federal Deputy Osmar
Serraglio (PMDB-PR).

7. (U) On February 12, in light of reports by Folha de S.
Paulo that his administration had spent more than R$ 108
million using government-issued debit cards, Governor Serra
suspended the use of such cards for cash withdrawals and
ordered an internal review of spending practices. The PT
leader in the Legislative Assembly, Simon Pedro, sought to
establish a CPI. However, PT State Deputy Rui Falcao told
Poloff on February 15 that the PSDB and its allies had the
votes to block any legislative investigation. Instead,
Falcao has filed complaints with the state Public Ministry
(prosecutor's office) asking for a criminal investigation and
especially demanding that the state government publish its
expenditure reports on the internet as the federal government

BRASILIA 00000286 003.3 OF 003


does.

---------------------------------------
Allied Parties Stand to Gain the Most
---------------------------------------

8. (U) Andre Miranda sees the Brazilian Democratic Movement
Party (PMDB) and other parties in the allied base as the
chief beneficiaries of the scandal. A CPI is an excellent
opportunity for the PMDB, the PT's main coalition partner, to
extract concessions, such as key government posts, from the
government. The PMDB's less than loyal way of doing business
means that many of its members will not hesitate to abandon
the government if they sense the government is on the losing
side of an argument and will pounce if they sense the
government is weak. The fact that the government appears to
be moving ahead with its tax reform plan, according to
Miranda, gives the PMDB even more leverage over the
government.

---------------------------
Potential Minefield Ahead
---------------------------

9. (U) Although polls show that Lula is as popular as ever
and the government appears to have reached some kind of
agreement to limit the scope of the investigation, a number
of obstacles remain for the government to overcome over the
next few months. First, the opposition remains ready and
willing to push for a separate Senate-only CPI, where the
proportion of opposition members would mean a more favorable
balance. Second, although not an incredibly important or
influential entity, the Tribunal de Contas (TCU, the
government's accounting office) has launched its own inquiry,
the findings of which, when released, could lead to a new
round of embarrassing news stories unfavorable to the
government. A potential source of embarrassment could come
when the CPI or the TCU asks for receipts for purchases made
using cash withdrawals. The possibility that these may not
have been kept, or that if they were will reveal more abuses,
could result in a new round of unfavorable press coverage.
Third, the independent Public Ministry could launch its own
probe. Fourth, if Planalto stonewalls the CPI, the Brazilian
Supreme Court (Supremo Tribunal Federal-STF) could choose to
get involved and demand an opening of the presidency's
records. Public remarks by STF justices Celso de Mello and
Marco Aurelio Mello attacking the notion that the presidency
can keep its records secret suggest they could continue the
federal judiciary's increasingly activist tendency to rule on
political issues, as demonstrated in their "mensalao" and the
party switching decisions.

----------------------------
Comment: Another Lost Year?
----------------------------

10. (SBU) Lula appears to be as popular as at any time since
the beginning of his presidency in 2003, and the government
seems to be succeeding in its counteroffensive. It is not,
however, out of the woods yet. Even with a
government-controlled CPI, once one is established all bets
are off, particularly in an election season. Any agreement
to keep the presidency's records secret could break easily
and the opposition and press can probably continue to find
enough information to create problems for at least the worst
offenders, even if the public buys into the government's
defense and agrees that the majority of the spending was
legitimate, if badly regulated. Even if nothing coming out
of a CPI is likely to damage Lula personally, it could
continue to erode the PT's reputation going into important
municipal elections this year that could have national
repercussions in 2010, claim additional victims within the
government, and would probably make the government's efforts
to advance its agenda nearly impossible. The government,
which agreed to the CPI in order to co-opt it from the
opposition, may have opened a Pandora's Box it may not be
able to close before more damage is done. End Comment.

Sobel
SOBEL

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