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Cablegate: Brazil National Development Bank Head Dismissed

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 002860

SIPDIS

SENSITITVE

NSC FOR RENIGAR, SHANNON
TREASURY FOR OASIA - DAS LEE AND FPARODI
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DDEVITO/DANDERSON/EOS LON

E.O. 12958: N/A
TAGS: EFIN ECON PGOV EINV BR
SUBJECT: BRAZIL NATIONAL DEVELOPMENT BANK HEAD DISMISSED

REF: A) BRASILIA 2763 B) BRASILIA 2802

This cable is Sensitive but Unclassified, please protect
accordingly.

1. (SBU) Summary: President Lula accepted the resignation
of National Social and Economic Development Bank (BNDES)
head Carlos Lessa November 18, replacing him with Planning
and Budget Minister Guido Mantega. Lessa, a leftist
economics professor with longstanding ties to Lula and the
Workers' Party (PT), had been a thorn in the
administration's side, frequently criticizing administration
policies, Finance Minister Palocci and Central Bank Chairman
Meirelles. While the financial community will celebrate
Lessa's departure, he leaves BNDES a demoralized and
diminished institution. Mantega will face significant
challenges in rebuilding BNDES, an institution with an
annual budget of over $12 billion. Names floated in the
press to replace Mantega at the Planning Ministry include
Integration Minister Ciro Gomes and Federal Deputy Paulo
Bernardo. The episode highlights the extent to which
Palocci's policy line has won the day with the GoB. End
Summary.

2. (SBU) Lessa's replacement by Mantega is the second
cabinet change in two weeks (DefMin Viegas was replaced by
Vice President Alencar on November 8), and it may be
followed by further cabinet changes in the coming weeks.
Planning Minister Mantega has been named to replace Lessa at
BNDES; Mantega's replacement has not yet been named. A few
other positions are in play, but depend to great extent on
the outcome of the PMDB's internal deliberations on whether
to stay in the governing coalition (ref B).

Tenure a Disaster
-----------------

3. (SBU) Lessa's tenure at BNDES has been widely described
as a disaster. He argued that BNDES should return to its
roots as a "development" bank, financing industrial projects
and infrastructure as it had during the heyday of the import-
substitution industrialization push. Lessa surprised the
GoB with the purchase of a major stake in privatized mining
conglomerate CVRD, later justifying the action on the
grounds that it was a "strategic" asset over which the state
should have some control. To be fair, despite constant talk
of a nationalist economic agenda, Lessa did on occasion show
a practical bent and, for example, supported a debt-for-
equity swap with U.S. energy firm AES that resolved a sore
spot in the FDI arena. Nevertheless, Lessa's criticisms of
administration policy were constant, including last week
when he called Meirelles' Central Bank chairmanship a
"nightmare."

4. (SBU) As bad as the insubordination and constant
criticism was for the Lula administration, Lessa's tenure
was even worse for BNDES itself. He shook up the
institution immediately upon his arrival in early 2003,
forcing out not only the Bank's senior management but senior
technical level staff as well. Many other key staff chose
to leave, hollowing out the bank's capabilities. This was
reflected in BNDES' performance, failing to loan out all of
the resources it had available. When reproached by Lula and
asked to speed up BNDES lending operations, Lessa retorted -
- publicly, through the press -- that BNDES was "not a
bakery" to be handing out its product as quickly as
possible. Asked about the firing, one Rio-based economist
asked us rhetorically, "What took them so long?"

Mantega Faces a Challenge
-------------------------

5. (SBU) Mantega faces a difficult task at BNDES. The
bank's best professionals are gone. Those that remain work,
according to one contact, in a "cutthroat" atmosphere.
Mantega does have the advantage that he has built a
productive relationship with the GoB economic team, in
particular Palocci, since their ministries work closely on
budget planning and budget execution. The move to BNDES
would nominally be a demotion for Mantega, since the
position does not carry cabinet rank and reports to Minister
of Industry, Development and Foreign Commerce Furlan.
Mantega sidestepped the question when asked by the press
whether he would be reporting to Furlan.

Comment
-------

6. (SBU) Lessa's defenestration has been widely interpreted
as strengthening Palocci's position within the GoB. And,
while the episode clearly illustrates Palocci's strength,
Lessa and his outbursts had ceased long ago to pose any real
threat to Palocci and the GoB economic team. Lula
identified himself publicly with the Palocci/Meirelles
policy line early on in his administration. Lula has
reaffirmed that line at every major economic juncture since.
Lessa was, by this point, an outlier, one of the few lone
voices of the old PT left wing left crying in the neo-
liberal wilderness. That it took so long to remove him
speaks more of Lula's loyalty to an old comrade than to
Palocci's position, which was already well secured.

CHICOLA

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