WORST OF BRAZILIAN SCANDAL HAS PASSED

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