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Cablegate: Despite Financial Downturn, Globa Financial Players See

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RR RUEHGH RUEHRG
DE RUEHSO #0594/01 3091009
ZNR UUUUU ZZH
R 041009Z NOV 08 ZDK
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 8677
INFO RUEHBR/AMEMBASSY BRASILIA 9838
RUEHRG/AMCONSUL RECIFE 4237
RUEHRI/AMCONSUL RIO DE JANEIRO 8911
RUEHBU/AMEMBASSY BUENOS AIRES 3310
RUEHAC/AMEMBASSY ASUNCION 3557
RUEHMN/AMEMBASSY MONTEVIDEO 2801
RUEHSG/AMEMBASSY SANTIAGO 2557
RUEHLP/AMEMBASSY LA PAZ 3965
RUEHME/AMEMBASSY MEXICO CITY 0847
RUEHKO/AMEMBASSY TOKYO 0398
RUEHBJ/AMEMBASSY BEIJING 0464
RUEHHK/AMCONSUL HONG KONG 0498
RUEHGH/AMCONSUL SHANGHAI 0012
RUCPDOC/USDOC WASHDC 3196
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 SAO PAULO 000594

SIPDIS
SENSITIVE

STATE FOR WHA/BSC, EEB/CBA
DEPT OF TREASRY FOR JHOEK, BONEILL

E.O. 12958: N/A
TAGS: ENV ECON EFIN ETRD EAG BR
SUBJECT: DESPITE FINANCIAL DOWNTURN, GLOBA FINANCIAL PLAYERS SEE
POCKETS OF OPPORTUNITY IN BRAZIL

REF: A. Sao Paulo 485; B. Brasilia 1417; C. Sao Paulo 548; D. Rio
298

SENSITIVE BUT UCLASIFIED

1. (SBU) Summary: The Country Managers for four major
international financial firms - Morgan Stanley, Carlyle roup,
American Insurance Group (AIG), and Rabobank consistently voiced
concerns over the near to medium- term impact of the financial
crisis and how it would affect their individual sectors in recent
meetings with Ambassador Sobel. Even so, all but AIG stated that
they remained committed to doing business in Brazil. One financial
player even saw a silver lining to the dark clouds on the horizon,
stating: "A bit of crisis is good for Brazil - it creates structural
improvements for the economy and the society." Financial sector
contacts also repeatedly mentioned China's increasing role as an
investor in Brazilian markets. End Summary.

AMBASSADOR MEETS WITH FINANCIAL SECTOR REPRESENTATIVES
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2. (SBU) Over a one week period, Ambassador Sobel met with the
following financial institution country managers: Eduardo Machado
and Fernando Borges, Managing Directors of the Carlyle Group's
Brazilian Real Estate and Buyout practices, respectively; Daniel
Goldberg, Senior Managing Director and Head of Mergers and
Acquisitions for Morgan Stanley Brazil; Erik Peek, General Manager
of Rabobank Brazil; and Ana Vigon, Managing Partner for AIG Brazil.


CARLYLE: CONTINUED OPTIMISM FOR PRIVATE EQUITY INVESTMENTS
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3. (SBU) Carlyle specializes in private equity investments and is
one of the largest private equity investors in the world. They
entered Brazil with a real estate fund in 2007 and are now adding a
buyout fund to purchase equity in more mature companies. Borges
remarked that he has a series of potential investors visiting Brazil
conducting due diligence on the buyout fund, mostly from
Switzerland, Sweden, and other European countries. He also noted
heavy Asian and American interest and remained optimistic that he
would be able to conduct the first closing of the fund (targeting
USD 300 million in capital) around December.

4. (SBU) Carlyle favors Brazilian real estate investments because
the projects in Brazil are generally earlier stage and allow the
company to co-invest with mid-sized companies and garner larger
returns than in many other markets. In Brazil, they are targeting
the residential real estate market as well as office and commercial
buildings. In February, Carlyle signed a deal with Fibra (a
mid-sized real estate developer) to build an office building in Rio
de Janeiro and last year they took a USD 70 million stake in Scopel,
a residential condominium developer. Machado noted that stimulating
domestic Brazilian interest in real estate investments is difficult.
Carlyle has found that the bulk of Brazil's wealthy families have
traditionally had significant real estate holdings as a hedge
against inflation and Brazil's historical economic turbulence. When
they are approached about investing in real estate in Brazil, they
often have a significant real estate portfolio and feel that they
have enough of their own expertise to invest in the market - they do
not see the need to invest in a fund. Carlyle's mission is to add
value to the marketplace by giving foreign investors the opportunity
to gain exposure to Brazilian real estate (Reftel A).

MORGAN STANLEY: CRISIS WILL PROMOTE BRAZILIAN BANK CONSOLIDATION
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5. (SBU) Daniel Goldberg, Head of Mergers and Acquisitions, said
the liquidity crunch will likely bring down some small and mid-sized
Brazilian banks. At the same time, it is also creating business in
the mergers and acquisitions market. Morgan Stanley had received
three calls for "emergency" sell-side mandates for mid-sized banks

SAO PAULO 00000594 002 OF 003


in the week prior to the Ambassador's October 22 meeting (Reftel B).
Goldberg added that while the company has yet to feel the true
effects of Mitsubishi's recent purchase of a 21 percent stake of
Morgan Stanley, the company is looking to expand its global
financial dealings with Mitsubishi. In the interim, Goldberg
maintained that he has a mandate to expand in the Brazilian
marketplace. Morgan Stanley's economic forecasts for Brazilian GDP
growth are below consensus Wall Street estimates (around two percent
for 2009 vs. 3.5 percent for the consensus). Despite this, Goldberg
stated that Morgan sees Brazil as better prepared to weather this
crisis than many other Latin American countries and he believed
Morgan would reduce its exposure to most of Latin America, including
Mexico, but would not reduce in Brazil (Reftels C and D).

6. (SBU) Goldberg also confirmed Morgan Stanley is watching
continued Chinese investment in Brazil. He mentioned that Banco
Santander is scheduled to bring a "huge" Chinese delegation to
Brazil in the beginning of November. The group will likely include
representatives from the China's Sovereign Wealth Fund, China
Investment Corp (CIC), Industrial and Commercial Bank of China
(ICBC), and National Social Security Fund (NSSF).

RABOBANK: AGRICULTURAL CREDIT - TIGHTER AND GETTING TIGHTER
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7. (SBU) Rabobank is a co-operative of 161 local banks in the
Netherlands plus international subsidiaries and is one of the few
AAA rated banks in the world. It was founded as an agricultural
lender and maintains it dominance as a food and agri-bank. Country
Manager Erik Peek stated that the bank's "sweet spot" is large-scale
agri-business. According to Peek, current credit constraints were
slow to hit Brazilian farmers and are only now starting to ripple
throughout the marketplace. Peek noticed a credit tightening in the
corporate market long before he saw it impact the agricultural
sector. Peek speculated that, even now, Brazilian farmers - who are
used to having the occasional line of credit denied - still do not
realize that this credit crunch is different from normal cycles in
agricultural lending.

8. (SBU) Peek opined that, among the major players in Brazilian
agricultural lending (Banco do Brasil; Banco do Nordeste; Cargill;
Archer Daniels Midland; Santander -through its acquisition of ABN
Amro; and John Deere - through its equipment finance arm), he
expected many of Rabobank's competitors to significantly reduce
exposure to agricultural loans. The double punch of falling
commodities prices coupled with a credit crunch will force many
lenders to exit the market. He revealed that, in the current
environment, when Rabobank reviews credits and makes new lending
decisions, it now reviews the transaction as if Rabobank would be
the sole lender to the agri-business. The bank assumes that
existing lenders will not renew lines of credit and that, if
Rabobank decides to maintain the relationship, Rabobank may have to
shoulder the entire loan portfolio alone. He did note that while
many private lenders may exit the market, the GOB was likely to
become a lender of last resort to many agri-businesses to keep the
sector from a significant decline.

9. (SBU) Peek estimated the total market for agricultural lending
in Brazil to be about R$ 45 billion (approximately USD 23 billion at
the current R$2.1 exchange rate). Of this market, Rabobank has a
portfolio of slightly under R$2 billion (USD 950 million) in crop
financing and R$ 3billion (USD 1.43 billion) in equipment financing.
Peek claimed that Rabobank is still asset hungry and he wants to
increase the bank's Brazilian exposure.

10. (SBU) When asked about the effect of the liquidity crunch on
the upcoming planting season, Peek remained optimistic. He
explained that even if farmers could not get loans in the short
term, they were likely to offset this by reducing or eliminating
fertilizer (the most expensive import product). Assuming they have
been fertilizing properly in recent years, they will likely still
have acceptable crop yields for at least one and possibly two

SAO PAULO 00000594 003 OF 003


harvests. Because of this, he did not see yields dropping in 2009,
but agreed that if the situation does not improve by 2010, the
crisis is likely to have an impact on crops.

AIG - TIMES ARE HARD AND GETTING HARDER
- - - - - - - - - - - - - - - - - - - -

11. (SBU) AIG's Ana Vigon, Managing Partner for Brazil, was the
only financial sector player who expected her company to reduce
Brazilian exposure. Due to AIG's well-publicized financial woes and
its need to raise cash, Vigon stated that AIG is likely to sell off
all of its businesses outside of its casualty insurer. While she
did not see AIG exiting Brazil entirely, clearly the country is not
a top priority for the company given AIG's financial woes.

12. (SBU) Comment: The consistent bullishness of large financial
players regarding opportunities in Brazil despite the overall
economic downturn is encouraging. Post will watch whether Carlyle is
successful raising the first tranche of its buyout fund in this
economic environment. Whether the GOB actually undertakes the
structural reforms that Peek predicted when he noted that "a little
crisis is good for Brazil" also remains to be seen. Finally, the
common refrain of global companies reducing exposure in other
marketplaces but not Brazil raises concerns that interlocutors may
be slow to recognize that the repercussions of the global financial
crisis may seriously impact their businesses too. End Comment.

13. (SBU) This cable has been cleared by the Embassy in Brasilia
and Ambassador Sobel and coordinated with the U.S. Treasury
Financial Attach and Foreign Agricultural Service in Sao Paulo.

WHITE

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