VZCZCXRO7032
RR RUEHRG
DE RUEHBR #1417/01 3021849
ZNR UUUUU ZZH
R 281849Z OCT 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 2750
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 6804
RUEHSO/AMCONSUL SAO PAULO 2979
RUEHRG/AMCONSUL RECIFE 8637
UNCLAS SECTION 01 OF 02 BRASILIA 001417
SIPDIS
SENSITIVE
STATE PASS USTR FOR KDUCKWORTH
STATE PASS EXIMBANK
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE
DEPT OF TREASURY FOR JHOEK, BONEILL
E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD BR
SUBJECT: Brazil Enacts Preventive Measures to Address Global
Downturn
REF: (A) SAO PAULO 486 (B) SAO PAULO 522 (C) BRASILIA 1299 (D)
BRASILIA 1362
SENSITIVE BUT UNCLASSIFIED
1. (SBU) Summary: In response to the global financial crisis,
Brazilian President Lula signed Provisional Measure 443 (MP443)
October 22 that allows two federal institutions, the Bank of Brazil
(BB), and Caixa Economica, the right to purchase stock in Brazilian
banks, private or public, as a preventive measure to provide more
liquidity to smaller banks in the Brazilian financial system. The
BB is also authorized to trade currency directly with other
countries' central banks, within the limits and conditions imposed
by the National Monetary Council. As the first sign of a
legislative challenge to the Lula Administration's handling of the
crisis, some in Congress are planning to challenge this measure.
Amid concern over possible excess government interference in banking
operations, bank sector contacts told Ambassador Sobel that the GOB
was "forcing" large banks to take over smaller and medium-sized
ones, and that many small and medium banks are suffering more
financial distress than official announcements indicate. Along with
MP443, President Lula signed a decree which eliminated the federal
tax on financial operations (IOF) on financial transactions such as
foreign investment in fixed income assets, on foreign loans, and on
external financing. The GOB also convened a meeting of regional
finance and foreign ministers in Brasilia on October 27 to discuss
the financial crisis and options for developing a "coordinated
regional response." The President has acknowledged that the
financial crisis may require some belt tightening, while affirming
continued commitment to PAC infrastructure spending and social
programs. END SUMMARY.
2. (SBU) Finance Minister Guido Mantega and Central Bank (BCB)
President Henrique Meirelles held a joint October 22 press
conference to announce Provisional Measure 443 (MP443), which allows
federal intervention in private banks in times of crisis without
congressional approval. The measure is intended to help small to
medium size banks weather the current crisis- a challenge that
Central Bank Deputy Governor Alexandre Tombini pointed out during a
recent meeting with State Department U/S Reuben Jeffery (REFTEL D).
Tombini said that many of the financial products that small and
medium size banks offer, such as auto financing and consumer
credit), were in jeopardy, threatening domestic demand growth, a key
driver of Brazil's economic performance. The press has reported
that Finance Minister Guido Mantega called Treasury Secretary Henry
Paulson and Central Bank (BCB) President Henrique Meirelles called
Fed Chairman Ben Bernanke to discuss the measure before it was
announced.
3. (SBU) Local reactions to MP443 have been mixed. BB and Caixa
reacted favorably as MP443 will facilitate BB's pending
negotiation/purchase of Brazilian bank Nossa Caixa. The measure
also opens the door for Caixa to engage in sectors that it had not
previously participated in, such as auto finance. Negative
commentary from sector observers and opposition politicians has
ranged from the concern over expanding public sector intervention
and "nationalizing" parts of Brazil's financial system to the
measure's lack of transparency. More specifically, some
commentators worry that permitting government-owned Caixa to
purchase shares of construction/real estate companies poses a risk
to that industry. The political opposition has focused on the
apparent inconsistencies between this action and repeated government
statements that no Brazilian bank is currently at risk of collapse.
Several opposition congressmen have criticized Minister Mantega's
congressional testimony only the day before the measure was
announced, in which he indicated that the steps provided for under
the measure were not under consideration by the government.
Brazil's congress, led by Senators Francisco Dornelles and Tasso
Jerreissati, is considering legislative steps to limit the scope of
MP 443, perhaps requiring a timeline for reselling any shares
purchased under 443 authority or excluding some private bank shares
from being purchased by either BdB or Caixa, or perhaps even
challenging its constitutionality. Brazil's construction industry
issued a statement criticizing MP 443, stating the industry needs
liquidity but does not welcome ownership by public sector banks
which could slow the industry's recovery since BdB and Caixa are
prohibited by MP 443 from any lending to firms in which they hold an
equity position of 10 percent or more.
4. (SBU) Ambassador Sobel met with Daniel Goldberg, Morgan
Stanley's Head of Mergers and Acquisitions and Country Manager for
Brazil, on the day MP443 was announced. According to Goldberg, BB
and Caixa were being "forced" by the Central Bank to buy the loan
portfolios of the struggling small and middle market banks to
reassure the marketplace and provide liquidity. Contrary to GOB
claims that no Brazilian banks are currently at risk, Goldberg
BRASILIA 00001417 002 OF 002
stated that Morgan Stanley had received three calls in the past week
for "emergency" sell-side mandates for mid-sized banks. He also
stated that all banks in Brazil were being asked to disclose their
on and off-shore derivatives exposure to regulatory authorities.
(Comment: Prior to joining Morgan Stanley, Goldberg was the head of
the Secretariat of Economic Law within the Ministry of Justice and
reviewed transactions to ensure compliance with Brazilian anti-trust
laws. He maintains high- level contacts within the Brazilian
Government and, specifically, with Henrique Meirelles (strictly
protect). Goldberg stated that when he received the calls for the
sell-side mandates, he immediately called the BCB to alert them to
the growing problem. End Comment.)
5. (U) The elimination of the IOF on certain international
transactions in Brazil represents an effort by the GOB not only to
stimulate foreign investment in Brazil, but also to head off the
recent capital flight that contributed to the depreciation of the
Brazilian currency. The depreciation of over 60 percent against the
dollar over the past three months has made imports more expensive
and has dampened Brazilian domestic growth. The BCB has several
mechanisms available to manipulate the exchange rate, ranging from
buying and selling USD, to temporarily buying and selling USD
through loans with fixed sell/buy back dates, to offering
derivatives. The BCB had been buying USD to build up foreign
reserves and recently disclosed that it currently has USD 50 billion
available for derivatives. This intervention coupled with the
elimination of the IOF, is an effort to stabilize the exchange rate
and to stimulate domestic growth. Market analysts warn that the
elimination of the IOF will result in lower federal revenues and
could be a factor in the shifting economic fortunes of Brazil that
could possibly force the GOB to alter its spending priorities for
2009.
6. (SBU) President Lula has publicly acknowledged that if federal
tax collections drop, as forecasted by many local economists, the
GOB would need to trim the 2009 budget and re-examine federal
spending priorities. Previous public statements by Lula and
prominent administration members, such as Chief of Staff Dilma
Rouseff, have affirmed continued commitment to Growth Acceleration
Program (PAC) infrastructure spending and to social programs. On
October 3 in Brasilia, Luiz Melin, Chief of Staff to Minister
Mantega, told State Department U/S William Burns that Brazil would
not repeat past mistakes in cutting infrastructure investment as it
seeks financial discipline, a past approach which, according to
Melin, has put Brazil at a disadvantage in terms of global trade
competitiveness and domestic economic growth potential.
7. (U) The GOB convened a meeting of regional finance and foreign
ministers in Brasilia on October 27 to discuss the financial crisis
and options for developing a "coordinated regional response." The
morning discussion included Brazil, Argentina, Paraguay, Uruguay,
and Venezuela, joined in the afternoon by Bolivia, Chile, Colombia,
Ecuador, and Peru. While the group agreed further integration was
key in addressing global stability and pressed for a transparent
international approach, GOB was unable to gain consensus on a joint
statement explicitly rejecting protectionism (see septel -
communiqu e-mailed to WHA/EPSC and EEB/OMA).
8. (SBU) COMMENT: In enacting these measures, Brazil continues to
illustrate a pragmatic approach in addressing the global economic
crisis, albeit with a sense of concern, but not panic. Although
described as a preventive measure, Provisional Measure 443 is a
departure from the non-interventionist language used by the GOB
until only very recently. Coupled with other measures to pacify
regional anxiety and to stimulate domestic spending and foreign
investment, the GOB appears to be reassessing the potential impact
of the crisis and recalibrating its message accordingly. END
COMMENT.
9. (U) This cable was coordinated with Consulate Sao Paulo and the
U.S. Treasury Attache in Sao Paulo.
SOBEL