VZCZCXRO8392
PP RUEHRG
DE RUEHC #8408 2971957
ZNR UUUUU ZZH
P R 241941Z OCT 07
FM SECSTATE WASHDC
TO RUEHBR/AMEMBASSY BRASILIA PRIORITY 6062
INFO RUEHRG/AMCONSUL RECIFE 4840
RUEHRI/AMCONSUL RIO DE JANEIRO 7984
RUEHSO/AMCONSUL SAO PAULO 8563
RUEATRS/TREASURY DEPT WASHINGTON DC 8974
UNCLAS STATE 148408
SIPDIS
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: BR ECON EFIN PREL
SUBJECT: U/S JEFFERY,S MEETING WITH CENTRAL BANK GOVERNOR
MEIRELLES
1. (SBU) SUMMARY. Under Secretary Reuben Jeffery met with
Central Bank of Brazil (CBB) Governor Henrique Meirelles
October 21 on the margins of the World Bank/IMF Annual
Meeting. They discussed the need for and impediments to
infrastructure investment in Brazil, impact of recent
financial market turbulence on Brazil, and the prospects for
a Brazilian sovereign wealth fund (SWFs). END SUMMARY.
Infrastructure Investment a Struggle
------------------------------------
2. (SBU) Following up on themes from their meeting in Sao
Paulo in August, Meirelles told U/S Jeffery that the GoB,s
efforts to increase foreign investment in Brazil face three
"bottlenecks8: infrastructure, a lack of skilled workers,
and an inconsistent regulatory environment. He said that
bringing regulatory surety by removing Brazilian law,s
concept of Justice8 would prove the most difficult
issue to solve. Meirelles noted a large amount of capital
flowing into Brazil (maybe too much, he commented), but a
shortage of good projects and ideas are available to
effectively utilize the capital. He added that the
successful toll road concession auctions had taken 6 to 7
years, and a complete change in philosophy, to finally
overcome internal political and environmental problems.
Recent Credit Crunch Leaves No Lasting Impact
---------------------------------------------
3. (SBU) Meirelles noted that the recent problems in world
capital markets had an immediate and pronounced impact on
Brazil, with risk spreads increasing and the Real dropping
from 1.85 to 2.13 per dollar. However, as the crisis
subsided, risk spreads returned to normal and the Real
rebounded to 1.80 per dollar. He mentioned that CBB started
buying dollars again last week and that there were
significant dollar inflows to Brazil on Friday8 two
days prior to the meeting. Meirelles also sees a need to
refocus on Basel II and ensure that bank capital allocation
requirements for pledged liquidity lines are put in place.
U/S Jeffery agreed that the banking system was more leveraged
than analysts realized and that bank regulators must address
structured investment vehicle accounting.
Sovereign Wealth Funds ) No Issue in Brazil
-------------------------------------------
4. (SBU) Due to Brazil,s very strict fiscal responsibility
regulations, CBB cannot invest reserves in SFWs, according to
Meirelles. A SFW direct investment would be considered a
primary expense of the GoB and affect its budget. CBB can
only invest in corporate securities or financial instruments
if there were no prospect of controlling the company. He
added that CBB needs to stay very liquid and has
approximately $160 billion in reserves of which $90 billion
are invested in US Treasury securities. (Note: According to
press reports, Finance Minister Mantega recently said that a
Brazilian SWF could start with $10 billion in surplus foreign
exchange reserves.)
RICE