This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 02 BRASILIA 003043
NSC FOR WALLACE TREASURY FOR SSEGAL PLS PASS FED BOARD OF GOVERNORS FOR WILSON, ROBATAILLE USDA FOR FAS/FAA/ITP
E.O. 12958: N/A TAGS: EFIN ECON EIND EINV PGOV BR 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.