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Cablegate: Brazil: U.S. Treasury Secretary Paulson Meeting With

VZCZCXRO3783
PP RUEHRG
DE RUEHBR #1334/01 1971441
ZNR UUUUU ZZH
P 161441Z JUL 07
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 9512
INFO RUEHBR/AMEMBASSY BRASILIA
RUEHRI/AMCONSUL RIO DE JANEIRO 4769
RUEHSO/AMCONSUL SAO PAULO 0374
RUEHRG/AMCONSUL RECIFE 6940
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHAC/AMEMBASSY ASUNCION 6211
RUEHBU/AMEMBASSY BUENOS AIRES 4910
RUEHSG/AMEMBASSY SANTIAGO 6356

UNCLAS SECTION 01 OF 02 BRASILIA 001334

SIPDIS

SENSITIVE
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STATE PASS USTR FOR CRONIN
STATE PASS FEDERAL RESERVE BOARD FOR P.ROBITAILLE
TREASURY FOR OASIA - J.HOEK
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/SHUPKA
STATE PASS USAID FOR LAC

E.0. 12958: N/A
TAGS: ECON EFIN PGOV BR
SUBJECT: BRAZIL: U.S. TREASURY SECRETARY PAULSON MEETING WITH
FINANCE MINISTER MANTEGA


1. (SBU) Summary: During their July 11 Brasilia meeting, U.S.
Treasury Secretary Paulson and Brazilian Finance Minister Mantega
discussed recent Brazilian economic performance, recent U.S.
economic performance and the importance of promoting reform at the
International Monetary Fund - including the selection of a new
leader to replace Rodrigo de Rato. Mantega noted Brazil's current
strong economic performance and said that Brazil's macroeconomic
fundamentals are in excellent condition. Brazil still faces key
challenges, including infrastructure and an overvalued exchange
rate, which along with "unfair" Chinese currency regime, is causing
problems for some Brazilian sectors. Secretary Paulson highlighted
the importance of concluding a bilateral tax treaty and stated that
he believes the highest trade policy priority for both countries
should be the conclusion of a successful, multilateral Doha
agreement. Both officials agreed that the IMF should become more
representative of the global economy and should adapt to reflect the
growth of countries whose economic importance is increasing.
Secretary Paulson noted the USG will support the candidate the

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European Union favors to lead the IMF following the departure of
Rodrigo de Rato. End Summary.

2. (SBU) Mantega highlighted strong current economic trends:
Economic growth has recently accelerated; Brazil's trade surplus
($40 billion forecast for FY 2007) remains strong; inflation is
slightly below target (4.5% annualized); Brazil's recent primary
surplus performance (equivalent to 4.3% of GDP) has exceeded the
start-of-year fiscal target; and, interest rates are expected to
continue to decline, helping to stimulate credit growth. With
Brazil's improved outlook, Mantega opined that it is now possible
for investors to "make a bet on Brazil's future."

3. (SBU) Mantega pointed to weak infrastructure and an overvalued
exchange rate as two important challenges facing the country. He
indicated that key infrastructure priorities should include
improving airports and road transportation networks and explained
that Brazil's strong economic performance and its rising living
standards are creating new pressures and demands for additional
infrastructure as a growing number of Brazilians now want to travel.
On currency appreciation, Mantega said that Brazil's currency is
now overvalued, which, coupled with an "unfair" Chinese currency
regime, is causing problems for some Brazilian sectors.

4. (SBU) Secretary Paulson indicated that, overall, the U.S. economy
is in sound shape. He expects economic expansion to continue, though
at a more moderate pace, and believes the most important potential
threat to continued U.S. expansion is a rise in inflation that might
cause a pre-emptive tightening of the money supply by the Federal
Reserve Bank. He felt that recent problems in the sub-prime housing
market have bottomed-out, and said he expects the economic impact of
sub-prime problems on overall U.S. macroeconomic performance to be
well-contained.

5. (SBU) Secretary Paulson said he was concerned about three U.S.
political issues with a potential negative impact on future economic
performance: (1) trade protectionist sentiment; (2) rising income
inequality due, in part, to pressures from globalization; and, (3)
an inability to develop a political consensus on reforming large
entitlement programs (such as health care and social security) that
will require larger future USG expenditures.

6. (SBU) On U.S.-Brazilian bilateral economic relations, Secretary
Paulson highlighted the importance of concluding a treaty between
the U.S. and Brazil to eliminate double taxation, since this can
create a disincentive for private investment. Secretary Paulson
also stated that he favors increased bilateral trade between the
U.S. and Brazil, but believes the highest trade policy priority for
both countries should be the conclusion of a successful multilateral
Doha agreement

7. (SBU) Minister Mantega and Secretary Paulson agreed that the IMF
should become more representative of the global economy and should
adapt to reflect the growth of countries whose economic importance
is increasing. Secretary Paulson noted he will support the
candidate the European Union favors to lead the IMF following the
departure of Rodrigo de Rato. He told the Minister that Robert

BRASILIA 00001334 002 OF 002


Zoellick will be a very effective leader of the World Bank, and he
is hopeful that the European Union will select someone of comparable
stature and qualifications to lead the IMF. Minister Mantega
expressed appreciation for Ambassador Zoellick's recent visit to
Brazil and for his willingness to reach out to Brazil and other
countries before becoming World Bank President.

Sobel

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