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Cablegate: Economic Crisis Helps Serra Position for 2010

VZCZCXRO1123
PP RUEHRG
DE RUEHSO #0679/01 3541741
ZNY CCCCC ZZH
P 191741Z DEC 08 ZFF6
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC PRIORITY 8800
INFO RUEHAC/AMEMBASSY ASUNCION PRIORITY 3597
RUEHBR/AMEMBASSY BRASILIA PRIORITY 9952
RUEHBU/AMEMBASSY BUENOS AIRES PRIORITY 3350
RUEHLP/AMEMBASSY LA PAZ PRIORITY 4006
RUEHMN/AMEMBASSY MONTEVIDEO PRIORITY 2821
RUEHSG/AMEMBASSY SANTIAGO PRIORITY 2597
RUEHRG/AMCONSUL RECIFE PRIORITY 4258
RUEHRI/AMCONSUL RIO DE JANEIRO PRIORITY 8952
RUEAWJF/DEPT OF JUSTICE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHMFISS/CDR USSOUTHCOM MIAMI FL PRIORITY
RUEAIIA/CIA WASHDC PRIORITY

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

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