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### Viewing cable 04BRASILIA572, WORST OF BRAZILIAN SCANDAL HAS PASSED

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
04BRASILIA572 | 2004-03-10 20:20 | 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 000572

    SIPDIS

    DEPT FOR WHA/BSC

    E.O. 12958: DECL: 03/10/2014
    TAGS: PGOV ECON SOCI KCRM BR
    SUBJECT: WORST OF BRAZILIAN SCANDAL HAS PASSED

    REF: A. BRASILIA 402

         ¶B. BRASILIA 458
         ¶C. BRASILIA 564
         ¶D. SAO PAULO 378

    Classified By: POLOFF RICHARD REITER, FOR REASONS 1.5 B AND D.

    ¶1. (C) SUMMARY.  On March 4, Brazil's Workers' Party (PT)
    quashed efforts to set up a congressional inquiry (CPI) into
    the gaming sector and the "Waldomiro Diniz" scandal (refs
    A,B).  This, coupled with the fact that no new allegations
    pointing to wrongdoing by PT leaders have emerged in recent
    days, suggests that the worst of the scandal has passed.
    Lula's Chief of Staff, Jose Dirceu, was emboldened to give a
    defiant press interview in VEJA magazine.  The post-mortem
    shows that the winners include PMDB Senator Jose Sarney, who
    gave key support to the administration in quashing the CPI.
    Losers, aside from Dirceu, include PT Senator Aloizio
    Mercadante and PL Senator Magno Malta.  Other big losers are
    the nation's more than 120,000 bingo parlor employees put out
    of work when Lula closed the parlors February 20.

    ¶2. (C) And of course the Workers' Party has lost political
    capital.  It is too early to say whether the scandal will
    hurt the PT in October's municipal elections, but it is
    likely to slow the legislative agenda in an already
    compressed congressional year.  The PT may also emerge more
    dependant on its coalition partners (who will extract maximum
    benefits in return), particularly the PMDB, which was
    instrumental in saving the PT from worse disgrace.  The PT's
    poor response to the crisis is in part due to its
    inexperience with ethics scandals, but the party is likely to
    discover that learning these lessons is politically
    expensive.  END SUMMARY.

    CONGRESSIONAL INQUIRY GETS PUT IN A DRAWER
    ------------------------------------------
    ¶3. (SBU) On March 4, three weeks after the "Waldomiro Diniz"
    scandal broke --in which a senior advisor on President Lula's
    staff was caught soliciting bribes from a numbers racketeer--
    the Workers' Party used a parliamentary tactic to quash
    efforts to establish a congressional inquiry (CPI).  The CPI
    was sponsored by Senator Magno Malta, of the coalition's
    Liberal Party.  On March 4, Malta filed his petition with the
    Senate leadership, but the fix was already in.  Senate
    President Jose Sarney, a leader of the coalition's PMDB
    party, went ahead and authorized the CPI, but then neither
    the PT nor the PMDB nominated their members to the committee.
     Without a quorum, the committee could not be established
    and, in the lexicon, was "put in a drawer".  Investigations
    by the Federal Police, the Federal Prosecutor, and the Rio
    state assembly still continue.  With the CPI threat gone, and
    the fact that no new allegations against PT leaders have
    emerged in recent days, the worst of the scandal appears to
    have blown over.

    JOSE DIRCEU FINALLY GOES PUBLIC
    -------------------------------
    ¶4. (U)  In fact, Lula's embattled Chief of Staff Jose Dirceu,
    for whom Waldomiro Diniz worked, felt emboldened enough to
    make his first public statement when he gave a long interview
    for the March 10 issue of VEJA magazine.  Defiant, Dirceu
    wondered why the opposition politicians who now say they have
    known about Diniz's malfeasance for over a year did not raise
    the issue earlier.  Saying that he made a mistake in trusting
    Diniz but committed no crime, Dirceu confirmed that Lula
    refused his offer to resign.  He insisted that the scandal is
    not an "institutional crisis" and that the Workers' Party
    maintains its "standard of ethical behavior and transparency".

    LEGISLATIVE AGENDA A TOUGH SELL
    -------------------------------
    ¶5. (C)  The Lula administration and the PT have not emerged
    unscathed.  Lula's personal approval remains at a teflon 60%,
    but his government's popularity has slipped to 38% (ref C).
    Even PT politicians tell us that the administration will have
    to work harder to sell its bills in Congress and may have to
    offer more pork to coalition allies.  Congress is now turning
    to its legislative agenda (one PT Federal Deputy told us that
    when the PT caucus in the lower house held its weekly meeting
    on March 9, crisis management was not even on the agenda),
    which in the coming weeks will include the Energy Model,
    Public-Private Partnerships, a Bankruptcy Law, follow-on
    legislation for last year's tax and pension reforms and
    possibly judicial reforms.  (A bill to reform campaign
    financing, which got an early boost from the scandal, has
    once again been put on the back burner.)  The legislative
    plate is full of tough bills, and with municipal elections
    set for October, Congress will essentially stop working when
    it goes into recess on June 30.

    WINNERS...
    -----------
    ¶6. (SBU) The post-mortem on the scandal is still being
    written, but there are some clear winners and losers.  Among
    the winners are Senate President Jose Sarney (PMDB) who
    provided sound advice and procedural support in helping the
    administration quash the CPI.  Rumors that Sarney will be
    rewarded by getting to name the next head of Electrobras have
    resurfaced, and it is rumored that the PT will support
    Sarney's bid to amend the constitution to allow him to remain
    as Senate President through 2006.  Similarly, leading PMDB
    Senator Renan Calheiros and Chamber Speaker Joao Paulo Cunha
    (PT) worked hard on the administration's behalf and will
    expect recognition.  Meanwhile, former-Rio Governor Anthony
    Garotinho, who came in third in the 2002 presidential
    elections, is positioning himself for another presidential
    run in 2006.  Though Garotinho heads Rio's PMDB branch --and
    the PMDB is part of Lula's coalition-- he did not miss the
    opportunity to slam the administration over the Diniz
    scandal.

    ...AND LOSERS
    -------------
    ¶7. (C) The list of losers from the Diniz scandal must start
    with Chief of Staff Jose Dirceu.  He appears to have dodged
    the bullet, in that there is no evidence that he was
    personally involved in corrupt activities.  But Diniz worked
    for him, and there are still unanswered questions about
    Dirceu's role in both the Diniz and Celso Daniel (ref D)
    cases.  Dirceu is convinced that another member of Lula's
    inner circle, Communications Secretary Luiz Gushiken, tried
    to undermine him with tactical leaks over the past weeks, and
    Lula reportedly had to mediate their dispute.  In a March 2
    poll (ref C), two-thirds of Brazilians said Dirceu should
    step down, either temporarily or permanently, from his post.

    ¶8. (SBU) Leading PT Senator Aloizio Mercadante also came out
    badly.  It was he who gave disastrous tactical guidance to
    the PT caucus in the Senate that nearly resulted in the CPI
    being established.  (There is some speculation that
    Mercadante may be replaced by Calheiros as the coalition's
    floor leader in the Senate.)  Liberal Party Senator Magno
    Malta, leader of the PL's Senate caucus, was badly damaged by
    his insistence on requesting the CPI, despite the fact that
    the administration and PL leadership were opposed.  (The PL
    is a coalition member and the party of Vice President
    Alencar.) Malta gave a tearful mea culpa on the Senate floor
    on March 9, but he may be forced out of his leadership
    position, if not out of the party altogether.

    BINGO PARLORS OUT OF LUCK
    -------------------------
    ¶9. (C) Bingo parlors are losers, and an estimated 120,000 or
    more gaming employees are out of work.  On February 20, Lula
    issued a decree closing all bingo games and slot machines in
    Brazil.  Bingo was originally legalized in 1993 to allow
    gaming houses to affiliate with sports clubs and donate 7% of
    their revenues to the clubs' upkeep.  However, many clubs
    complain that they never received the promised bingo
    revenues.  PT Federal Deputy Jose Eduardo Cardozo told us the
    system is "a fraud", and the bingo parlors are simply money
    laundering operations.  PT floor leader Arlindo Chinaglia
    assured us that Congress will support Lula's decree (which
    must be approved by Congress to remain in force), and no
    thought is being given to reopening the parlors anytime soon.

    WORKERS' PARTY IMAGE TARNISHED
    ------------------------------
    ¶10. (C)  And of course the Workers' Party has lost political
    capital.  It is too early to say whether the scandal will
    have an impact on October's municipal elections, and there
    are still seven months for the party to recover, but the
    declining popularity of the PT-led administration indicates
    that the party has suffered a black eye.  The PT's code of
    ethics is more than just image (of 76 members of Congress who
    are currently defendants in criminal or electoral cases, none
    is a PT member), but the spate of bad press is damaging, and
    PT candidates will be hard-pressed to point fingers at their
    opponents' misdeeds in the election run-up.
    ¶11. (C) The PT showed itself inexperienced in crisis
    management, precisely because it is rarely faced with ethical
    crises.  The fact that it was saved by behind-the-scenes
    support from figures like Senators Jose Sarney and Antonio
    Carlos Magalhaes, both widely perceived as
    ethically-challenged, but who have therefore developed superb
    crisis management skills, is surely not lost on the public or
    the Workers' Party rank-and-file.  The PT learned some tough
    lessons that it hoped never to need, and finds itself
    diminished as a result.

    COMMENT - PT NOW A HOSTAGE?
    ---------------------------
    ¶12. (C) Pundits here wonder whether, and to what extent, the
    PT now finds itself held hostage by its coalition allies.
    The large PMDB party, in particular, is never shy about
    demanding pork, the right to fill federal job vacancies,
    compromises on controversial legislation, and now deals on
    local-level coalitions in the upcoming elections.  One PT
    Deputy told us with a sigh that campaign finance reform and
    labor reform will not pass this year because the PT will have
    to limit its exposure on controversial bills.  There still
    may be time and political capital to pass important
    legislation, but the expectations have been sharply reduced
    by the scandal.  This is surely not how Lula and the PT
    wanted to begin their second year.
    VIRDEN

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