BRAZIL SCANDAL LIKELY TO GET WORSE BEFORE IT GETS

C O N F I D E N T I A L SECTION 01 OF 02 BRASILIA 001622

SIPDIS

E.O. 12958: DECL: 06/16/2015
TAGS: PGOV KCRM SOCI PREL BR
SUBJECT: BRAZIL SCANDAL LIKELY TO GET WORSE BEFORE IT GETS
BETTER

REF: A. BRASILIA 1494

B. BRASILIA 1544

C. BRASILIA 1602

Classified By: POLOFF RICHARD REITER FOR REASONS 1.4B AND D.


1. (C) SUMMARY. While Brazilian Congressman Roberto
Jefferson, in his testimony before the Congressional Ethics
Committee this week, did not provide proof to support his
charges that senior officials of President Lula's Workers'
Party (PT) were involved in a scheme to buy votes in Congress
from 2003 to 2005, his testimony was seen as credible and
dramatic. If the Lula administration breathed a sigh of
relief on seeing that Jefferson had no hard evidence, it
could be short-lived, as further revelations may follow next
week. Lula is reportedly planning to shuffle his cabinet in
the coming days, with the resignation of powerful Chief of
Staff Jose Dirceu seen as increasingly likely. Congress has
set up a formal investigative committee (CPI) to look into
the related Postal Service scandal and may set up another CPI
for the vote-buying scheme. END SUMMARY.

JEFFERSON'S TESTIMONY: THE DAY AFTER
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2. (C) On June 14, Brazilian congressman and president of the
PTB party Roberto Jefferson testified to the Chamber of
Deputies' Ethics Committee about a scheme in which senior
officials of Lula's Worker's Party (PT) allegedly paid
thousands of dollars per month to secure the congressional
votes of the allied PL and PP parties. While he did not
offer a smoking gun, Jefferson (an experienced trial lawyer
by background) was seen as dramatic and credible in his
televised testimony. He noted that President Lula himself
was not involved in the scheme, but that Lula's Chief of
Staff, Jose Dirceu, was one of the PT members involved. He
also named names of Deputies from the allied PL and PP
parties. Citing exhaustion, Jefferson did not appear for his
second day of testimony on June 15, scheduled to be a
closed-door session. In surprise moves, leaders of
Jefferson's PTB party decided to retain him as party
president and also to maintain the party in the governing
coalition. According to PTB leaders, their initial impulse
to expel Jefferson weakened when polls revealed a positive
reaction to his "convincing" June 14 testimony.

THE WORST MAY BE YET TO COME
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3. (C) But the Lula administration is not out of the woods.
We have heard from high-level sources that in the coming
days, several members of Congress named by Jefferson as
having received payoffs will publicly admit their role in the
scheme and point fingers at PT officials, including Jose
Dirceu. In addition, the payoffs may not have been limited
to the PP and PL parties, but may gone to major media outlets
as well. If true, these revelations could be explosive.

CLEANING HOUSE IN THE CABINET
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4. (C) President Lula is reportedly planning to shuffle his
cabinet and reorganize the fractious coalition. If he
resigns from the cabinet, Dirceu would take up the
Congressional seat he won in the 2002 elections. Others
cited as possibles to resign are Central Bank President
Mereilles and Social Security Minister Juca (both of whom
have separate legal troubles),and possibly Lula's Political
Coordinator Aldo Rebelo (who is not tarred by the scandal but
who has signally failed to coordinate the coalition in
Congress). Parallel to the cabinet shakeup would be a
reorganization of the coalition. Jefferson's PTB, as well as
the PP and PL that he charges with taking bribes, are all
considered "parties for rent", without core beliefs or
discipline. As they have evolved from unreliable allies into
downright liabilities, Lula may choose to push them to arm's
length. If so, he might look to replace their cabinet
representatives (Tourism Minister Walfrido Mares Guia of the
PTB and Transportation Minister Alfredo Nascimento of the
PL),who themselves are performing creditably.

GOVERNMENT IN CONTROL OF POSTAL SERVICE INVESTIGATIONS
-------------- --------------

5. (C) In a move urged personally by Lula, the governing
coalition secured control of the key seats in the joint
congressional inquiry committee (CPI) that will look into
corruption in the Brazilian Postal Service and the Brazilian
Reinsurance Institute. It is alleged that officials at these
agencies who had patronage jobs courtesy of Roberto Jefferson
were involved in skimming funds and taking bribes. In a
tight vote, PT Senator Delcidio Amaral was elected to chair
the CPI. He quickly selected as rapporteur Deputy Osmar
Serraglio (PMDB),an experienced attorney who is close to
Jose Dirceu. The CPI, which has subpoena powers, will begin
work next week and has six months to present its final
report. Separately, Congress may set up another CPI to look
into the vote-buying scheme being revealed by Roberto
Jefferson.

COMMENT
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6. (SBU) While most Brazilian scandals tend to "end in
pizza", i.e., nobody is punished beyond a few days of
negative press, this one feels different. If it is true that
evidence supporting Jefferson's charges will be revealed in
the coming days, then a cabinet shuffle --with Dirceu among
the first to go-- seems nearly inevitable. It is far too
early to gauge the long-term impact on Lula, his agenda, and
his reelection chances, but even without the opposition
stepping in to fan the flames, this crisis could get worse
before it gets any better.
DANILOVICH