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### Viewing cable 05BRASILIA2145, SECRETARY SNOW'S MEETINGS WITH FINANCE MINISTER

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
05BRASILIA2145 | 2005-08-12 14:31 | 2011-07-11 00:00 | CONFIDENTIAL | Embassy Brasilia

`

    This record is a partial extract of the original cable. The full text of the original cable is not available.

` `

    C O N F I D E N T I A L SECTION 01 OF 03 BRASILIA 002145

    SIPDIS

    PARIS PASS USOECD
    STATE FOR E, WHA, EB, AND EUR
    STATE PASS USTR FOR LEZNY/YANG
    NSC FOR CRONIN
    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/DANDERSON/EOL SON
    TREASURY FOR DAS LEE AND F.PARODI

    E.O. 12958: DECL: 08/11/2015
    TAGS: EFIN ECON
    SUBJECT: SECRETARY SNOW'S MEETINGS WITH FINANCE MINISTER
    PALOCCI AND CENTRAL BANK PRESIDENT MEIRELLES

    Classified By: Charge d'Affaires Patrick Linehan, reason 1.4 (b)
    and (d
    ).

     ¶1. (C) Summary: Secretary Snow met separately with Central
    Bank President Meirelles and Finance Minister Palocci August
    1 in Brasilia for broad discussions of Brazil's current
    economic performance.  Meirelles and Palocci both argued that
    Brazil's stellar economic performance, with a current account
    surplus of 1.9% of GDP anchored by booming exports and a
    strong fiscal stance (5.1% of GDP primary surplus), had
    insulated the economy from current political turbulence.
    Palocci implicitly acknowledged that the microeconomic reform
    agenda was stalled, but hoped that stronger growth in the
    second half of 2005 would allow the GoB to press forward with
    reforms, including a simplification of the tax system as
    applied to small and medium enterprises.  Palocci placed
    significant emphasis on reenergizing trade negotiations as a
    tool to improve productivity in the economy (septel).
    Palocci said Brazil would like to join the OECD and sought
    support for Brazil's position on IMF quota reallocations.
    End Summary.

    ¶2. (U) Background:  Treasury Secretary Snow visited Brazil
    July 31 to August 3, 2005, to participate in the fourth
    session of the bilateral Group for Growth, an outgrowth of
    the 2003 Summit between Presidents Bush and Lula.  Secretary
    Snow held bilateral meetings August 1 in Brasilia with
    Central Bank President Henrique Meirelles (along with the
    majority of the Bank,s Governing Board), Finance Minister
    Palocci and President Lula, in addition to meeting with
    Brazilian venture capitalists.  In Rio de Janeiro on August
    2, the Secretary participated in Group for Growth meetings
    (including a business breakfast), gave a speech sponsored by
    the Brazilian Council on Foreign Relations (CEBRI), and held
    a round-table discussion with representatives of the
    financial services sector.  On August 3, in Vitoria, the
    capital of the Brazilian state of Espirito Santo, the
    Secretary emphasized the themes of private sector

    SIPDIS
    infrastructure investment and the importance of good
    governance in visits to the port of Tubarao and in a working
    lunch with Governor Hartung and local business.  The
    Secretary concluded his stay in Vitoria with a visit to a

    SIPDIS
    favela (poor neighborhood) that benefited from an
    Inter-American Development Bank (IDB)-financed basic services
    project, aimed at providing running water, sewage hook-ups
    and paved streets.  This cable reports on the Secretary's
    meetings with the Central Bank President Meirelles and
    Finance Minister Palocci.  Septel reports on the trade
    aspects of Secretary Snow's discussions.

    Economy, Interest Rates and Directed Credit
    -------------------------------------------

    ¶3. (SBU) Meirelles outlined Brazil's excellent economic
    performance over recent months and described its current
    policy stance.  He argued that Brazil's pursuit of its three
    main macroeconomic policy pillars (fiscal adjustment,
    inflation targeting monetary policy and a flexible exchange
    rate) were producing outstanding results.  While growth
    registered a small adjustment in the first quarter, he
    expected it would pick up in the remaining quarters, with the
    economy posting annual growth of about 3.4%.  He added that
    the fiscal performance (5.1% of GDP primary surplus in the 12
    months through June) had been solid and the external accounts
    outstanding (1.9% of GDP current account surplus in the 12
    months through June).

    ¶4. (SBU) Meirelles declared that the Central Bank has been
    able to establish credibility with the market, despite its
    lack of formal legal autonomy.  Still, he emphasized, the
    Bank,s lack of formal independence meant that investors were
    demanding a small inflation premium -- which would only
    disappear once formal autonomy was granted.  Economic Policy
    director Bevilaqua added that inflation expectations for the
    year, after spiking in the first and second quarters, were
    nevertheless declining faster than expected in response to
    the current monetary policy adjustment.

    ¶5. (SBU) Meirelles noted that one of the reasons for Brazil's
    infamously high lending spreads is the country,s system of
    directed credit.  Although bank lending has been growing, he
    noted, only 34.5% of overall credit was freely allocated by
    banks -- the rest is directed primarily to low-cost
    agricultural credits or by the national development bank
    (BNDES).  Meirelles argued that, while this system created
    credit market distortions, it reflected a set of widely-held
    societal priorities.  However, he agreed with the
    Secretary,s observation that this societal consensus might

    SIPDIS
    change over time.  Meirelles further pointed out that these
    subsidized credits meant that the average lending rate was
    lower than the headline interest rates.

    Vulnerability has Declined
    ---------------------------

    ¶6. (C) Citing similar factors, Palocci and Meirelles both
    argued (separately) that Brazil's vulnerability to shocks had
    decreased markedly.  The GoB's debt burden was down (52% of
    GDP) and its external profile had improved.  Dollar-linked
    domestic debt had fallen from 40% to less than 4% of total
    domestic debt while the GoB had increased substantially the
    amount of fixed interest rate debt.  The current account
    surplus and the country's strong fiscal performance, they
    stated, were insulating the economy from the current
    political turbulence.  Palocci affirmed that the return of
    GDP growth expected in the second half of the year may allow
    the GoB to retake the microeconomic reform agenda adding that
    he would like to see the economy open up faster.  He stated
    that the GoB hopes to pass in the second half of 2005
    legislation to simplify the tax system applicable to small
    and medium enterprises, and is now implementing the
    recently-enacted bankruptcy law.  The goal is to maintain the
    strong fiscal stance and press forward with microeconomic
    reforms so as to create space for a monetary easing.  The
    Secretary welcomed the focus on the microeconomic agenda,

    SIPDIS
    noting that the markets' benign reaction to date to the
    current political scandal was a tribute to the policies the
    GoB had pursued.

    Palocci - OECD, IMF and Venture K
    ---------------------------------

    ¶7. (C) Palocci stated that given its ongoing extensive
    cooperation with the Organization for Economic Cooperation
    and Development (OECD), Brazil would like to pursue
    membership in that organization.  The GOB,s goal is to forge
    with OECD interlocutors a common vision governing Brazil's
    accession process. The Secretary undertook to raise Brazil's
    request in Washington.

    ¶8. (C) Palocci thanked the Secretary for USG support of
    Brazil's position in the current review of IMF quotas.  He
    asked for continued support as the process advanced.

    ¶9. (C) The Secretary briefed Palocci on his meeting with a
    group of local venture capitalists.  Bringing together ideas
    and financing was a critical function of the financial
    system, the Secretary said, and it was encouraging to see
    this nascent sector in Brazil helping new companies get
    started.  Palocci agreed, stating that he believes the
    sector, while new, has significant potential.  He singled out
    the important contribution that venture capitalists make to
    the governance of small firms.

    ¶10. (U) This cable was cleared by Treasury.

    LINEHAN

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