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03BRASILIA3043 2003-09-19 16:47:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Brasilia
Cable title:  

Brazil: Build-Up to Possible Follow-On IMF Agreement

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E.O. 12958: N/A
SUBJECT: Brazil: Build-Up to Possible Follow-On IMF Agreement

1. (SBU) IMF ResRep Zandamela told us September 16 that the
crux of any follow-on IMF program for Brazil after its
current one expires this December will be whether the two
sides can devise a mutually satisfactory formula stipulating
that the GoB may only use its IMF funds with the IMF's
explicit approval. Whether to commence negotiations towards
such an agreement will be decided jointly at the GoB/IMF
meetings during the imminent World Bank/IMF annual meeting in
Doha. Actual negotiations would start in October.

2. (SBU) Zandamela drew attention to the hypothetical option
of Brazil's resorting to an IMF Contingency Credit Line
(CCL). The relatively new CCL facility offers lower interest
rates than the Supplemental Reserve Facility used in Brazil's
current IMF agreement, but is also of more restricted use.
It presupposes that the beneficiary country does not/not face
major structural balance-of-payments problems or external-
account risks, and is meant exclusively to insure against
contagion from new international shocks.

3. (SBU) We asked whether it was not politically key from the
GoB's angle that any IMF facility/agreement be seen to offer
fresh features taking into account Brazil's current economic
circumstances -- e.g., exemption of other infrastructure
investment from primary-budget computations as is already
allowed with Petrobras investments; inclusion of social or
growth targets, etc. The ResRep, surprisingly to us,
dismissed such considerations as neither likely nor relevant.

4. (U) Meanwhile the GoB is preparing Brazil's political
ground for measured, matter-of-fact treatment of potential
IMF negotiations. A fortnight ago, Finance Minister Palocci
declared, on the occasion of drawing the latest tranche under
Brazil's current agreement, that Brazil is almost (but by
implication not quite) at the stage of being able to do
without an IMF program. Last week, President Lula sounded
publicly equable about a new program but stressed that it
would be negotiated, if at all, "without a rope around our
neck." Former Central Bank Chairman Fraga earned front-page
headlines the next day by saying Brazil would now be better
off without an IMF program, since it could thereby prove that
its responsible economic policies are due to GoB choice, not
IFI conditionality.

5. (U) Abroad, IMF Director-General Kohler has been quoted as
apparently also opining that Brazil could do without a new
IMF agreement. Brazilian commentators' expectations are that
any IMF program would be for no more than a year in length
and ten billion dollars in size, more than half of which
would simply compensate for GoB repayments due on IMF money
already received. Some go on to speculate that the IMF's own
institutional interest is tied to the ongoing success of its
Brazil relationship, as a favorable contrast to its history
with Argentina, and suggest that this alleged factor will
strengthen the GoB's bargaining stance.

6. (U) Brazil's net reserves have slowly risen by a couple of
billion dollars since 2002 but as of July 2003 were still
under 18 billion dollars, discounting the 30-plus billion
Brazil also holds in IMF loans. (By the IMF's own, different
methodology, net reserves are actually below 15 billion
dollars.) This net figure would probably be too small to
deal with an event of the order of the near-panic of 2002 --
let alone of Brazil's 1998-99 crisis, when dozens of billions
of dollars drained in capital flight, admittedly under a
fixed exchange-rate regime to which the nation is no longer
hostage. Brazil's scheduled foreign-debt payments for 2004
are heavier than in 2003, and no prudent debt-manager can
rule out foreign shock.

7. (SBU) COMMENT. Though Brazil may not absolutely need a
follow-on IMF agreement, few doubt it would be desirable.
Even so, we tentatively suspect that Lula's GoB will press,
harder than the IMF ResRep may expect, for the agreement to
contain some feature that it can point to as at least a
symbolically significant gesture towards the ongoing strains
in Brazil's `real economy.' Does Brazil have enough
negotiating leverage with the IMF to make any such deviation
from orthodoxy thinkable? The IMF ResRep may just have been
suggesting that the IMF and GoB will seek a formula to put
off any hard bargaining over conditionality until the point
where Brazil actually asks to draw down. That way, Brazil
would have the ostensible insurance of an agreement without
having to make unpalatable new commitments.