Cablegate: Brazil: Chipping Away at the Fiscal Responsibility
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 03 BRASILIA 000949
SIPDIS
SENSITIVE
NSC FOR BREIER, RENIGAR
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/EOL SON
E.O. 12958: N/A
TAGS: ECON EFIN PGOV EINV BR
SUBJECT: BRAZIL: CHIPPING AWAY AT THE FISCAL RESPONSIBILITY
LAW
REF: Brasilia 321
This cable is Sensitive but Unclassified, please protect
accordingly.
1. (SBU) Summary. Faced with the awkward prospect of
enforcing the Fiscal Responsibility Law (LRF) against
former Sao Paulo mayor, friend of Lula and prominent
Workers' Party (PT) figure Marta Suplicy (reftel), the GoB
has been less than coherent. Finance Minister Palocci sent
to Congress a letter acknowledging that Suplicy had
violated the law in taking out a loan to finance a public
lighting program without the Finance Ministry's prior
approval. Then, in an apparent about face, the GoB issued
an executive decree that retroactively created an exception
to the LRF for public investments of just that sort.
Despite Lula Administration efforts to shield her, the
matter may soon be out of the GoB's hands since Suplicy's
replacement as Sao Paulo mayor, Jose Serra of the
opposition PSDB, has forwarded to the municipal Accounts
Tribunal (a fiscal oversight body) the final financial
report for 2004, Suplicy's last year in office, indicating
that her administration left uncovered obligations of over
a billion Reals. In addition, State Deputy Alberto
Goldman, the President of the Sao Paulo PSDB party filed a
complaint with the Federal Public Prosecutor's office
listing her alleged LRF violations. Prosecutors, we are
told, are itching to get their hands on such a high profile
case. For her part, Suplicy is reportedly considering a
run in 2006 under the PT banner for the Sao Paulo state
governorship. While the GoB's actions in this case have
chipped away at the integrity of the LRF system, they have
not yet struck its foundations. End Summary.
Marta's Law
-----------
2. (SBU) Apparent violations of the fiscal responsibility
law (LRF) by Lula associate and prominent PT member Marta
Suplicy during her 2001-2004 tenure as mayor of Sao Paulo
(reftel) have put the GoB on the defensive. Finance
Minister Palocci admitted in a January letter to Congress
that one Suplicy administration action, the contracting of
debt to fund a public lighting program without prior
Finance Ministry approval, had violated LRF provisions
restricting such actions by cities whose debt stock is
above 120% of revenues. Shortly thereafter the GoB
inserted in Provisional Measure (MP) 237, a decree dealing
primarily with other issues, a few paragraphs that created
a retroactive exemption to the LRF specifically for the
type of investment in question. While four other cities
also benefited from this rule change, no one doubts that
the measure was meant to create an exemption for Suplicy's
Sao Paulo administration. (Note: Meant to deal with urgent
problems, provisional measures are a peculiarity of the
Brazilian system. They are executive decrees with the
force of law that take effect immediately upon publication.
To become permanent legislation, however, they must be
ratified by Congress, which in turn is required to vote on
them within a defined time period. End note.) The MP has
not yet been voted out of Congress, where some have
questioned its constitutionality.
3. (U) The Finance Ministry separately issued a resolution
changing the interpretation of "mid-course" debt ceilings,
set by Congress at the same time the LRF was passed, so
that they would not be binding for another decade. The
debt ceilings at issue were set by Congress to limit
states' and municipalities' ability to take out new debt.
The GoB's action appears aimed at bypassing a somewhat
arcane technical miscalculation in the inflation indexing
that was used to correct state and city nominal debt stocks
for inflation (reftel). The LRF uses an exchange rate-
sensitive inflation index, the IGP-DI, to adjust for
inflation the debt that states and cities owe the Federal
Government. State and municipal revenues, however, tend to
closely track consumer inflation levels, which are much
less exchange rate sensitive. This mismatch makes it
possible for a state or municipality's debt to the GoB to
grow much more quickly than its revenues, even without new
debt. And, while Sao Paulo did take out some new debt, the
bulk of growth in its debt stock was due to this indexation
problem, setting the stage for a somewhat artificial
violation of the Congressionally-set debt ceilings.
4. (SBU) Raul Velloso, a financial consultant and economist
linked to new Sao Paulo mayor Jose Serra acknowledged to
Econoff April 1 that the indexation mismatch needed to be
addressed. He argued, however, that the GoB's approach,
which boiled down to saying the debt ceilings will not be
enforced in the near term, failed both to address the
underlying technical problem and created the distinct
impression that it was doing so to protect Suplicy. (Note:
Most media that covered the issue sounded a note of alarm
on precisely that point.) Velloso, however, was not
worried that the vitiation of the debt ceilings would open
the way for uncontrolled spending by the states and
municipalities. He pointed out that the LRF's real
procedural teeth were the requirements for prior Finance
Ministry approval for contracting debt and the Federal
Government's ability to withhold transfer payments to the
states and municipalities should they miss debt payments.
5. (SBU) Reflecting on the Suplicy case, UN Economic
Commission economist Carlos Mussi told Econoff that the
GoB's actions raised clear concerns about its ability to
maintain fiscal discipline among states and municipalities.
Now that one exception had been made, he predicted that
governors and mayors would be lining up at the Finance
Ministry's door asking that they be given the similar
treatment. While concerned, Mussi did not believe the GoB
had undermined the foundations of the LRF.
Out of the GoB's Hands?
------------------------
6. (U) The Serra administration in Sao Paulo, meanwhile,
has sent to the municipal-level Accounts Tribunal (a
judicial branch fiscal oversight body) the final report on
the city's accounts for 2004, the last year of the Suplicy
administration. According to the Serra administration's
calculations, Suplicy left over a billion Reals of bills to
be paid, but only 379 thousand Reals cash on hand in city
coffers at the end of 2004. It is a violation of the LRF
for elected officials to leave unpaid obligations without
the resources to cover them at the end of their
administration. The Accounts Tribunal has 90 days to
evaluate the financial accounts before deciding whether to
accept or reject the annual report. If irregularities are
found in the accounts, the Tribunal is expected to refer
them to the Public Prosecutor's office (Ministerio Publico)
for action.
7. (SBU) Independently, the state president of the PSDB in
Sao Paulo last week filed a complaint with the Federal
Prosecutor's office, with a case file on alleged breaches
of the LRF under the Suplicy administration. According to
Velloso, the primary accusation is that Suplicy did not
leave funds to cover unpaid bills, a violation of the LRF.
Velloso felt this alleged breach of the LRF, which includes
the supplier debt that Suplicy reneged on as she left
office (reftel), was much more serious than the separate
violations of the debt ceiling and the procedural failure
to get Finance Ministry approval for the public lighting
program loan. MP 232 and the separate Finance Ministry
resolution addressing the latter two points do not shield
Suplicy from prosecution under the former. Velloso
believed that the Municipal Accounts Tribunal would forward
the case to the Public Ministry for prosecution within a
few months. Velloso said the prosecutors were salivating
at the thought of getting their hands on such a high
profile case, implying that they would move the case to
trial.
Comment
-------
8. (SBU) Other than looking the other way, the GoB appears
not to have a strategy to deal with the Suplicy problem.
This likely reflects the many directions it is being pulled
by political forces and, within some parts of the GoB, a
desire not to undermine the LRF. Those actions they have
taken so far to protect Suplicy, however, have been
unalloyed bad news. We nevertheless agree with Mussi that
the foundations of the LRF system have not yet been shaken.
The LRF system was designed to have a life of its own and
gave other actors, such as the courts, the ability to press
enforcement action. So, Suplicy may yet have her day in
court. That alone would help shore up the LRF's
credibility. On the parallel political track, the case
promises to be a practice match for the 2006 elections,
with the PSDB working to undermine the PT party's, and
thereby the Lula Administration's carefully cultivated
image of fiscal responsibility.
9. (U) This cable was coordinated with Consulates Sao Paulo
and Rio de Janeiro.
CHICOLA