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Cablegate: Brazil Central Bank Deputy Governor Quits Amid

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

UNCLAS SECTION 01 OF 02 BRASILIA 001906

SIPDIS

SENSITIVE

TREASURY FOR OASIA - DAS LEE AND SSEGAL
NSC FOR RENIGAR
USDOC FOR 3134/USFCS/OIO/EOLSON/DDEVITO
USDOC FOR 4332/ITA/MAAC/WH/OLAC/DMCDOUGALL/ADRISCOLL
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSON/WBASTIAN
STATE FOR EB/IFD/OMA

E.O. 12958: N/A
TAGS: EFIN ECON PGOV BR
SUBJECT: BRAZIL CENTRAL BANK DEPUTY GOVERNOR QUITS AMID
SCANDAL


This cable is Sensitive but Unclassified, please protect
accordingly.

1. (U) Deputy Central Bank Governor for Monetary Policy Luiz
Candiota resigned July 28 after press allegations the
previous weekend of improprieties in both Candiota's and
Central Bank (CB) President Henrique Meirelles' pre-2003
Brazilian income-tax returns. In Meirelles' case, the chief
accusation is simply that he should have filed a Brazilian
tax return for 2001, i.e., that he was not entitled to claim
physical residence in the U.S. from 1997 through 2001 as
grounds for exemption from Brazilian income tax, since that
year he registered himself with the Goias state electoral
committee as locally domiciled -- a standard requirement for
his planned 2002 race for a seat in Brazil's Congress.
Meirelles defended himself in an immediate Central Bank press
release, pointing out that he had paid all U.S. taxes due
while living in the United States and asserting that he had
merely maintained a domicile in Brazil for electoral
purposes, which did not require him to pay Brazilian taxes
during that period.

2. (U) The charges against Candiota were of a different
order, involving apparent multiple cases of unreported
financial transfers, typically in the low-to-mid six figures
(U.S. dollars), some of them to offshore tax havens, through
a New York-based bank alleged to be a known money-laundering
conduit. Like Meirelles, Candiota also denied any illegality
in his conduct. However, he did not publicly offer specifics
to rebut the allegations and apparent detail of documentation
that he had hidden assets abroad. In contrast to the
immediate CB press release upholding Meirelles, the GoB made
no public move on Candiota's behalf; in fact, comments on
the case by Justice Minister Bastos were widely seen as
having the opposite effect. In his letter of resignation,
Candiota stated that despite the allegations, untruth, he
felt "personally violated" by them and was no longer willing
to remain in the job under those circumstances. He also
argued it was best for him to leave quickly lest extended
scandal harm the Central Bank or unsettle financial markets.

3. (SBU) A senior advisor to the Central Bank Board gave no
credence to the allegations against Candiota and Meirelles in
a July 28 conversation with Emboff and argued that the media
to-do over the two top CB figures was simply an example of
election-year politics, driven by opposition efforts to
discredit the Lula administration. He predicted more of the
same as October municipal elections draw near.

4. (SBU) Simultaneous with the announcement of Candiota's
resignation, Meirelles, after consultation with Finance
Minister Palocci, nominated CSFB Managing Director Rodrigo
Azevedo to replace him. Azevedo is well and favorably known
to the Embassy and to Consulate Sao Paulo as a keen, and
orthodox economic analyst with impeccable academic
credentials. His nomination has drawn universal plaudits
from the financial community, and markets responded calmly
both to Candiota's resignation and replacement. The
nomination will require Senate confirmation, tentatively
scheduled for the second or third week of August. At this
point the only obvious obstacle to a quick confirmation is
the greater difficulty of obtaining a quorum during this
electoral season.

5. (SBU) Comment: Candiota's exit is plainly a GoB effort
quickly to put this scandal in the past, and defuse any
danger to Meirelles himself, which at this stage seems to be
the likely outcome. Had these charges surfaced
two-and-a-half months ago, amidst the sustained bad economic
news and criticism of the Central Bank's tough monetary line
that prevailed at the time, it might have caused serious
political and market damage. But the improved economic data
and trends since then give the GoB and Meirelles much more
political leeway. Indeed, the very fact that the GoB gave
Meirelles full authority to pick Candiota,s replacement
usefully reinforces the perception of de facto Central-Bank
autonomy, even in the absence of formal CB "independence,"
which Finance Minister Palocci recently re-announced as a key
prospective GoB legislative goal for 2005.

DANILOVICH

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