Cablegate: Brazil Considers Effect of Imf-Argentina Standoff

This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L BRASILIA 000529

SIPDIS

TREASURY FOR OASIA - NANCY LEE

E.O. 12958: DECL: 03/04/2024
TAGS: EFIN ECON PREL BR
SUBJECT: BRAZIL CONSIDERS EFFECT OF IMF-ARGENTINA STANDOFF

REF: BRASILIA 463

Classified By: Economic Counselor Roman Wasilewski, reasons 1.5 (b) and (d).

1. (C) The GoB has yet to really focus on what effect an IMF-Argentina train wreck would have on Brazil and the rest of Latin America, according to the IMF Resident Representative (protect). The Resrep, opining that the IMF was equally uncertain on the subject, held out hope that the market had learned to distinguish between Argentina and the rest of Latin America. Unlike the case of the Russian financial crisis, which touched off an emerging markets sell-off that ultimately forced the Cardoso administration to float the Real in early 1999, the IMF Resrep recalled that Brazil's currency and equity markets had notably detached from the steep dive in Argentine markets in November 2001. Nevertheless, he offered no predictions about the market-fallout for Brazil and the rest of the continent of an Argentina-IMF collision. He treated it as probable that the unexpected substitution of MD Kohler by DMD Anne Krueger at this crux of IMF's negotiations with Buenos Aires would only make the atmosphere more difficult and uncertain.

2. (C) Coming against the backdrop of negative Brazilian growth in 2003 (reftel), falling real incomes and an
unprecedented fiscal squeeze to pay the interest on its debt, an Argentina-IMF compromise that blesses a substantial debt reduction would promise political headaches for the GoB, the IMF Resrep agreed. Contrasted with the situation in Brazil, the combination of resurgent Argentine economic growth and an IMF-blessed debt write-off would prove a powerful example for those asking what Brazil's reward is for being sufficiently fiscally prudent to honor its debt. Despite such headaches, the Resrep did not believe Brazil would depart from its current economic policy course. He was likewise confident, based on former MD Kohler's meeting last weekend in Brasilia with President Lula and the results of the recent IMF mission, that there was zero substance to claims of a Brazil-Argentina debtors' negotiating block being formed.

3. (C) Comment: The GoB and Lula are concerned enough about the fallout -- both political and economic -- from an
Argentina-IMF collision for Lula to have called the White House on Argentina's behalf Tuesday, March 2. Whatever the
IMF/Argentina outcome, the GoB may feel at risk of collateral damage: almost any compromise -- regardless of the size of the "haircut" private investors take -- will be used by some political elements here to question the GoB's current economic policies. We agree with the IMF Resrep, however, that the GoB is not about to embark on, nor contemplating, a radically different policy course. The real danger is that a PT weakened by corruption scandals and a perceived failure to deliver on economic growth will be unable to push through the Congress the structural and microeconomic reforms this
economy needs to unleash its potential.

VIRDEN

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