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### Viewing cable 06BRASILIA665, BRAZIL - NEW FINANCE MINISTER'S EARLY CHOICES REASSURE

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
06BRASILIA665 | 2006-04-05 18:08 | 2011-07-11 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Brasilia

`

    VZCZCXRO3441
    PP RUEHRG
    DE RUEHBR #0665/01 0951808
    ZNR UUUUU ZZH
    P 051808Z APR 06
    FM AMEMBASSY BRASILIA
    TO RUEHC/SECSTATE WASHDC PRIORITY 5027
    INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
    RUEHRG/AMCONSUL RECIFE 4576
    RUEHSO/AMCONSUL SAO PAULO 6697
    RUEHRI/AMCONSUL RIO DE JANEIRO 1834
    RUEHBU/AMEMBASSY BUENOS AIRES 3931
    RUEHSG/AMEMBASSY SANTIAGO 5434
    RUEHAC/AMEMBASSY ASUNCION 5349
    RUEHMN/AMEMBASSY MONTEVIDEO 6176
    RUEHME/AMEMBASSY MEXICO 1955
    RUEHCV/AMEMBASSY CARACAS 3192
    RUEHBO/AMEMBASSY BOGOTA 3675
    RUEHQT/AMEMBASSY QUITO 1781
    RUEHLP/AMEMBASSY LA PAZ 4489
    RUEHPE/AMEMBASSY LIMA 2928
    RUCPDO/USDOC WASHDC

` `

    UNCLAS SECTION 01 OF 02 BRASILIA 000665

    SIPDIS

    SENSITIVE
    SIPDIS

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

    E.O. 12958: N/A
    TAGS: ECON EFIN PGOV PREL BR
    SUBJECT: BRAZIL - NEW FINANCE MINISTER'S EARLY CHOICES REASSURE
    MARKETS

    REF: A) BRASILIA 609  B) BRASILIA 640

    ¶1. (SBU) Summary.  New Finance Minister Guido Mantega has moved
    cautiously in his early days on the job, reassuring financial
    markets.  His choices for Vice Minister and Treasury Secretary,
    Bernard Appy and Carlos Kawall, respectively, have been well
    received.  On March 31, Mantega supported a measured, 85-basis point
    reduction in the interest rate that his former employer, the
    National Economic and Social Development Bank (BNDES), charges on
    its lending.  Separately, President Lula stated that the Central
    Bank would now report directly to him, instead of the finance
    minister, in a maneuver designed to keep Central Bank President
    Meirelles from leaving.  The carefully calibrated moves appear to
    have mitigated concerns about the direction of economic policy in
    the near term.  Indeed, at an April 4 Sao Paulo lunch, the chief
    economists of several banks told visiting Treasury Assistant
    Secretary for International Affairs, Clay Lowery, that they expected

    SIPDIS
    no changes in macroeconomic policy from Mantega for the remainder of
    Lula's term, or even in a potential second Lula administration.  End
    Summary.

    Reassuring Personnel Choices
    ----------------------------

    ¶2. (SBU) New Finance Minister Guido Mantega on March 30 named
    Bernard Appy, currently the finance ministry's Economic Policy
    Secretary, to be his Vice Minister (or in the Brazilian lexicon,

    SIPDIS
    Executive Secretary), replacing Murilo Portugal, who resigned
    immediately after Antonio Palocci's dismissal from the ministry.
    Appy is a well-regarded technocrat who served as Palocci's Executive
    Secretary for two years, before taking over the economic policy

    SIPDIS
    secretariat after the former incumbent, Marcos Lisboa, departed.

    SIPDIS
    Appy never maintained a high profile in either of his ministry jobs,
    but his orthodox policy credentials are well known to financial
    market participants.  Appy, for instance, was the sounding board of
    first recourse for Palocci, a medical doctor by training, as he
    dealt with more complex economic issues.

    ¶3. (SBU) Mantega also named Carlos Kawall to the key position of
    Treasury Secretary, taking the slot vacated by Joaquim Levy, who
    departed to work at the Inter-American Development Bank (IDB).  The
    appointment was closely watched by the markets as the official
    filling that post is charged with doling out funding to the various
    ministries and is thus crucial to fiscal policy execution.  During
    his tenure at the finance ministry, Levy had developed a
    particularly strong reputation as a bulwark against fiscal
    irresponsibility.  Indeed, Levy was the driving force for the GoB's
    over-performance, by large margins, of its primary surplus targets.
    Previously, Kawall worked for Mantega as a director at BNDES.
    Financial market players are familiar with Kawall from his prior
    work as chief economist for Citibank's Brazil operations.  In a
    March 17 conversation with Econoff (prior to the announcement), a
    CSFB economist concluded that Kawall would be a sterling choice.
    Separately, prominent fiscal expert Raul Velloso evaluated Kawall as
    having much the same orthodox policy credentials as Levy.  Revenue
    Secretary Jorge Rachid also will remain on the job.

    SIPDIS

    Cautious Choice on Long-term Interest Rate
    ------------------------------------------

    ¶4. (U) In another closely watched decision, the National Monetary
    Council (CNM), in its first meeting chaired by Mantega, voted
    unanimously to lower the interest rate on BNDES loans (the TJLP) by
    85 basis points, from 9% to 8.15%.  Mantega's recent job change put
    him in the unique position of having to vote on his own proposal,
    made as BNDES President, to reduce the TJLP by 2 percentage points.
    (Note: All proposed changes in the TJLP must by approved by the CMN,
    which consists of the Finance Minister, Planning Minister Paulo

    BRASILIA 00000665  002 OF 002

    Bernardo and Central Bank President Meirelles.)  Given Mantega's
    previous criticisms of administration monetary policy, the markets
    saw the meeting as a bellwether of Mantega's intentions.  In the
    event, the CMN voted unanimously for a measured 85-basis point
    reduction, a drop that does not quite keep pace with recent Central
    Bank reductions in the benchmark overnight interest rate (SELIC).

    Central Bank President Stays
    ----------------------------

    ¶5. (SBU) On March 28, the day after Palocci resigned, President Lula
    organized an effort to keep Central Bank Chairman Meirelles from
    leaving.  A Central Bank staffer assured Econoff that the media was
    exaggerating the extent of previous interest rate policy battles
    between the Central Bank and Mantega dating back to the latter's
    tenure both at BNDES and as planning minister.  Meirelles reportedly
    nevertheless felt it necessary to obtain guarantees from President
    Lula about continued policy independence of the Central Bank.  Lula
    agreed that the Central Bank would now report directly to him,
    instead of the finance ministry.

    Bankers to A/S Lowery: "no change"
    ----------------------------------

    ¶6. (SBU) In an April 4 Sao Paulo luncheon, senior economists from
    several banks told visiting Treasury A/S Clay Lowery that they
    expected Mantega would not change macroeconomic policy prior to the
    elections, or even in a potential second Lula administration.  Bank
    Boston Chief Economist Jose Pena Garcia elaborated that while he did
    not expect Mantega to pursue primary surpluses in excess of the
    formal 4.25% of GDP target, as Palocci's finance ministry had done,
    he believed Mantega would strive to meet the 4.25% target.  Echoing
    this assessment, Alexandre Bassoli of HSBC Bank stated that while
    Lula might make some personnel changes among the directors of the
    Central Bank were he reelected, these moves would not affect the
    Central Bank's "conservative" monetary policy stance.

    ¶7. (SBU) Comment:  The GoB's careful scripting of Mantega's first
    days/week appears to have successfully conveyed the
    policy-continuity message.  The real, after initially dropping 2.7%
    to 2.23 Reais/Dollar in the wake of Palocci's departure, has now
    made up the lost ground and is trading at about 2.13 Reais/Dollar as
    of mid-day April 5.  The fact that the GoB was forced to undertake a
    rear-guard action to ensure Meirelles stayed on, however, reinforces
    the case for formal legislation establishing Central Bank
    independence.  But we do not expect that this or any other
    microeconomic reform legislation will make it through Congress
    during this electoral year.

    CHICOLA

`