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Cablegate: Brazil - Finance Minister Palocci On Somewhat

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 003092

SIPDIS

SENSITIVE

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

E.O. 12958: N/A
TAGS: ECON PGOV EFIN PREL BR CU
SUBJECT: BRAZIL - FINANCE MINISTER PALOCCI ON SOMEWHAT
FIRMER GROUND

REF: A) Brasilia 3043
B) Brasilia 3008
C) Brasilia 3051

1. (SBU) Summary: After another marathon session in front of
one of Congress' economic oversight committees, Finance
Minister Antonio Palocci appears to have solidified his
political position, allowing him some temporary respite from
the political and scandal-related crossfire he has been
receiving recently (reftels). Meanwhile, in a face-saving
compromise with opposition members of Congress, Palocci
agreed to appear voluntarily, instead of pursuant to a
formal subpoena, before the Congressional Investigatory
Committee (CPI) on bingos, where he would face questioning
regarding allegations of corruption during his tenure as
mayor of Riberao Preto and his role, as Lula's campaign
coordinator, in alleged campaign contributions from Cuban
government. Separately, Palocci had a heart-to-heart with
President Lula and, reportedly, persuaded the President to
back a small increase in the primary surplus target for the
year (to about 4.5% to 4.6% of GDP). Lula subsequently
declared Palocci's position to be "more solid than ever."
While Lula's statement undoubtedly shores up Palocci in his
fiscal policy battle with Lula chief of staff Dilma
Rousseff, any new revelations of alleged corruption and
campaign financing irregularities would further undermine
him. End Summary.

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2. (SBU) During his second appearance before Congress in
recent days (ref A), this time before the Chamber of
Deputies Finance and Tax Committee, Finance Minister Palocci
put in a solid performance defending the GoB's orthodox
economic policy line. As in his appearance before the
Senate Economic Affairs Committee, Palocci did not face
questions about allegations that he was involved in
corruption during his tenure as mayor of Riberao Preto or
about his role, as Lula's campaign coordinator, in alleged
illegal campaign contributions from the Cuban government to
the 2002 presidential campaign. Palocci, however, did face
extensive questioning about his recent public disagreement
with Lula's chief of staff, Dilma Rousseff, over fiscal
policy. While acknowledging a debate within the Lula
administration on the point, Palocci was firm, responding
that any increase in public investment had to be financed
with cuts in current expenditures, and not a reduction in
the primary surplus.

3. (SBU) Palocci appears to have made some progress in
dealing with the friendly fire on fiscal policy from
Rousseff. Palocci met with Lula and reportedly reached a
compromise that the Finance Ministry would pursue a primary
surplus target in the 4.5% to 4.6% of GDP range, above the
current 4.25% target but well below the 6.1% of GDP surplus
that the GoB ran during the first nine months of the year.
Palocci argued that a higher surplus was necessary since the
Central Bank's monetary tightening earlier this year had
increased interest outlays on GoB debt. (Comment. Given
the difficulties the GoB perennially encounters in trying to
spend appropriated monies, it easily be that primary surplus
ends up being higher than the agreed to 4.6% target. End
Comment.)

4. (U) Separately, the GoB and the opposition reached a
compromise that allows Palocci to appear voluntarily before
the CPI on bingos to face questions about several sets of
allegations made against him (ref B), instead of being
formally subpoenaed. The allegations in question include
accusations that, as Lula's 2002 campaign coordinator, he
allowed an illegal USD 3 million Cuban government campaign
contribution to enter the party coffers. Several other sets
of allegations center on alleged corruption when he was
mayor of the city of Riberao Preto, in Sao Paulo state.
While agreeing to Palocci's voluntary appearance, the
opposition reportedly insisted that Palocci will be required
to sign a statement acknowledging that his testimony before
the committee can be used against him in court should he
ever face formal charges. A date for the testimony has not
been set.

5. (SBU) Comment: Over the last twenty four hours, Palocci
has pulled off quite a balancing act, solidifying his
political position and winning himself time. The compromise
on the increase in the primary surplus target should lay the
foundation for a more coherent public line from the Lula
administration on its fiscal intentions. Lula's more
enthusiastic public embrace of Palocci in remarks on both
November 21 and 22 undoubtedly will help the Minister as
well. While Palocci has displayed considerable survival
skills, he has yet to face questioning over the various sets
of allegations of corruption and campaign-finance
irregularities. These may ultimately prove more dangerous
to his political survival than the ongoing fiscal policy
battles.

CHICOLA

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