Cablegate: Fhc Predicts No Reforms On Lula's Watch, Psdb/Dem

VZCZCXRO1915
PP RUEHRG
DE RUEHSO #0701/01 2281106
ZNY CCCCC ZZH
P 161106Z AUG 07
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC PRIORITY 7354
INFO RUEHAC/AMEMBASSY ASUNCION 3068
RUEHBR/AMEMBASSY BRASILIA 8470
RUEHBU/AMEMBASSY BUENOS AIRES 2823
RUEHCV/AMEMBASSY CARACAS 0529
RUEHLP/AMEMBASSY LA PAZ 3432
RUEHMN/AMEMBASSY MONTEVIDEO 2398
RUEHSG/AMEMBASSY SANTIAGO 2100
RUEHRG/AMCONSUL RECIFE 3718
RUEHRI/AMCONSUL RIO DE JANEIRO 8259
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

C O N F I D E N T I A L SECTION 01 OF 03 SAO PAULO 000701

SIPDIS

SIPDIS

STATE FOR WHA/FO, WHA/BSC, WHA/EPSC, INR
STATE PASS USTR FOR KATE DUCKWORTH
NSC FOR TOMASULO
TREASURY FOR JHOEK

E.O. 12958: DECL: 08/15/2017
TAGS: PGOV PINR ECON EFIN BR
SUBJECT: FHC PREDICTS NO REFORMS ON LULA'S WATCH, PSDB/DEM
VICTORY IN SAO PAULO MAYOR'S RACE

REF: A. SAO PAULO 560

B. SAO PAULO 295 AND PREVIOUS

Classified By: CONSUL GENERAL THOMAS J. WHITE. REASON 1.4(D)

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SUMMARY
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1. (C) During an August 14 meeting with the Consul General
(CG), former President Fernando Henrique Cardoso (FHC)
proffered his views on Lula,s inability to pass economic
reforms, whether or not sub-prime lending in the U.S. and
Europe could have an impact on the Brazilian economy, the
state of play in Sao Paulo local politics, and his thoughts
on the 2010 presidential election. FHC is optimistic about
his party,s chances in Sao Paulo,s 2008 Mayoral election.
End Summary.

2. (SBU) Fernando Henrique Cardoso (FHC ) President of
Brazil, 1995-2002) met with the CG August 14 while his visa
was being processed. (He was renewing his J visa to return
to teach at Brown University where he serves as a Professor
at Large.) FHC expressed some concern about falling
financial markets and the high level of risk in sub-prime
lending. In addition, he indicated that the lack of
regulation and supervision of US hedge funds could be an
additional area for concern. While he stated that the
current crisis appeared to be affecting the US and European
markets, he did not believe there was any immediate cause for
alarm in the Brazilian economy.

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NO REFORMS UNDER LULA
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3. (C) The CG asked whether the Government of Brazil
(GoB) can or will enact political or economic reforms of a
fundamental nature. FHC stated firmly that the Lula
government lacked the political will (in addition to the
votes in Congress), to push for any fundamental changes of a
controversial nature. He further opined that it will be
difficult enough to renew two critical pieces of fiscal
legislation: the De-earmarking of Federal Revenues (DRU),
which frees up some dedicated resources for discretionary
government spending; and the Provisional Contribution on
Financial Movements (CPMF). Because they are revenue bills,
both require a three-fifths vote (308 votes out of 513
members in the Chamber of Deputies, and 49 of 81 Senators) to
pass. FHC predicts that the DRU will pass, but the CPMF has
become controversial and will require considerable
negotiation in order to pass.

4. (C) First enacted in 1997, the CPMF is a levy of 0.38
percent on all financial transactions. It expires December
31, and Congress is considering a bill to renew it through
2011. As recently as a few months ago, the Lula
administration was confident of its renewal and even
considered a proposal to increase it to 0.8 percent.
However, two opposition parties, the Democratic Party (DEM)
and the Popular Socialist Party (PPS), are now adamantly
calling for the CPMF,s abolition. The Social Democracy
Party of Brazil (PSDB), which FHC still serves as Honorary
President, has taken a middle position, favoring elimination
but willing to support re-authorization if the tax is reduced
to 0.2 percent and if the GoB is required to share some of
the revenues with states and municipalities - a provision the
Government coalition strongly opposes. Paulo Skaf, President
of the influential Sao Paulo State Federation of Industries
(FIESP), told the Ambassador and CG last Friday that he and
FIESP were disappointed that the PSDB is so &soft8 on CPMF,
which many in the business community oppose. FHC expressed
the view that it is impossible to eliminate the CPMF, despite
popular sentiment and business community lobbying, because
the Government has become dependent on the revenues it

SAO PAULO 00000701 002 OF 003

generates. These revenues were estimated at approximately
USD 15 billion in 2006.

5. (C) Tax reform, FHC noted, is difficult under the best
of circumstances. He asserted that Lula is not interested in
any reforms, but only in maintaining his own popularity.
There is some hope that the administration will move forward
on much-needed infrastructure improvements, but this is
impeded by a lack of administrative capacity. (Comment: The
administration,s Growth Acceleration Program (PAC), the
flagship economic initiative of Lula,s second term, is
moving forward slowly. One impediment is that recent Federal
Police investigations have uncovered alleged cozy and
potentially corrupt relationships between major construction
companies and government officials. These relationships have
undermined the public,s confidence in the GoB,s contracting
practices. End Comment.)

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LOCAL POLITICS
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6. (SBU) On the issue of local politics and the 2008
municipal elections, FHC was buoyant. Polls published August
12 by Datafolha show Geraldo Alckmin (PSDB former Sao Paulo
Governor and unsuccessful 2006 presidential candidate) with a
solid lead over other likely contenders under a range of
likely scenarios. Minister of Tourism Marta Suplicy (Sao
Paulo Mayor from 2001-2004 and a leader in President Lula,s
Workers, Party (PT)), announced August 13 that she does not
intend to run for Mayor, though she holds out the possibility
of running for Governor in 2010. Suplicy said her decision
was not dictated by the polls, which she considered &very
good,8 but by her desire to stay on in the &challenging8
job of Minister of Tourism. (Comment: Some consider that
Suplicy may have damaged her chances for elective office in
June when, per ref A, she publicly exhorted Brazilians
affected by the country,s aviation crisis to &relax and
enjoy.8 End Comment.) PT insiders have told us that if
Suplicy does not run, the party has other possible
candidates. Some of these include: Chamber of Deputies
President Arlindo Chinaglia; Education Minister Fernando
Haddad; and Senator Aloizio Mercadante. It is generally
agreed that these candidates could make a strong showing, but
would have a difficult time defeating Alckmin.

7. (SBU) FHC did state that because incumbent Mayor Gilberto
Kassab (DEM) has been steadily improving in the polls, if he
proves to be too strong a candidate, Alckmin may also
withdraw from the race and instead run for Governor in 2010.
(Note: The PSDB and DEM have a strong alliance in Sao Paulo
state and are not expected to run competing candidates. End
Note.) Alckmin will not likely try to gain the PSDB,s 2010
presidential nomination, FHC said, because he lacks a
national profile. In the second round of the 2006 election,
Lula defeated Alckmin in populous, impoverished northeastern
Brazil by 77-23 percent. Only two likely presidential
candidates, in FHC,s view, are strong in the northeast: Sao
Paulo Governor Jose Serra (PSDB) and Ciro Gomes, a Socialist
Party (PSB) Federal Deputy from Ceara who served as Minister
of National Integration during Lula,s first term.

8. (C) &Whichever of the two ends up running for Mayor
) Alckmin or Kassab ) will win8, FHC said. He was further
quoted in the press to the effect that &our adversaries in
Sao Paulo8 ) a reference to the PT ) &don,t have
anything.8 FHC added that while Governor Serra would prefer
that Kassab be the candidate, he will not oppose Alckmin. On
the expected competition within his own party between Serra
and Minas Gerais Governor Aecio Neves for the 2010
presidential nomination, FHC predicted that the two will
reach some sort of understanding, but not until much closer
to the election.

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SAO PAULO 00000701 003 OF 003

COMMENT
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9. (C) FHC, who turned 76 in June, remains active not only
in his party, but in national politics and the international
scene as well. His description of his upcoming travels to
the U.S., Europe, and Africa are more ambitious than would be
expected of an elder statesman who has retired to a life of
academia. While not everyone in the PSDB appreciates his
speaking out as frequently as he does, especially since he is
sometimes quite critical of the party,s leaders and elected
officials, few of them would dare to ignore him. End Comment.

10. (U) This cable was cleared by Embassy Brasilia.
WHITE

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