BRAZIL: LULA CONTINUES TO SHUFFLE CABINET AMIDST

UNCLAS SECTION 01 OF 02 BRASILIA 001819

SIPDIS

SENSITIVE

STATE PASS USTR

E.O. 12958: N/A
TAGS: PGOV KCRM SOCI ENRG ECPS PREL BR
SUBJECT: BRAZIL: LULA CONTINUES TO SHUFFLE CABINET AMIDST
CRISIS

REF: A. BRASILIA 1660

B. BRASILIA 1602

C. BRASILIA 1631

D. BRASILIA 1682


1. SUMMARY. On July 6, Brazilian President Lula da Silva
announced a long-waited cabinet shuffle, his third. Lula's
hand was forced by a series of interlocking and expanding
corruption scandals that have engulfed the GoB and paralyzed
Congress since mid-May. The current shuffle started on June
16 with the resignation of Lula's Chief of Staff Jose Dirceu
(ref A) and will continue to unfold in the coming days.
With these moves, Lula seeks to reorganize his Congressional
coalition, expel poor performers from the cabinet, and
clarify the positions of candidates and parties in advance
of the 2006 elections. In an effort to bring the large,
split PMDB party more firmly into his coalition, Lula named
three PMDB members as Ministers: Senator Helio Costa will
replace Communications Minister Eunicio Oliveira (PMDB);
Federal Deputy Saraiva Felipe replaces Health Minister
Humberto Costa (from Lula's PT party); and Silas Rondeau,
former president of Eletrobras, will take up the Ministry of
Mines and Energy, vacant after the former Minister, Dilma
Rousseff, became Lula's Chief of Staff on June 21. In
addition, on July 8 Lula announced that the president of the
Worker's Union Luiz Marinho will replace Labor Minister
Ricardo Berzoini. The cabinet shuffle will not make Lula's
political position any worse as the corruption scandals
batter Brasilia. But taken alone, it will not be enough to
restore the GoB's credibility and momentum. The mere fact
that Lula has been forced to rely on the fractious PMDB
party as a solution to his problems shows just how far the
administration has to go before it returns to political
normalcy. END SUMMARY.

BRINGING THE PMDB BACK IN
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2. On July 6, in an effort to address the corruption
scandals battering his government and to bring the large,
fractious PMDB party back into his coalition, President Lula
announced the appointment of three PMDB party members as his
new cabinet Ministers:

- Senator Helio Costa, 65, one of PMDB's more influential
congressmen, becomes the new Communications Minister. A
former TV reporter who spent 25 years in New York City
reporting tabloid stories for "Globo" network, Costa
currently chairs the congressional inquiry committee
investigating illegal migration to the US. Costa replaces
Eunicio Oliveira (PMDB-Ceara),who will return to his seat
as Federal Deputy and prepare his 2006 campaign for governor
of Ceara state;

- Deputy Saraiva Felipe, 53, a physician and university
professor specialized in public health issues, takes over
the Ministry of Health. Felipe, who hails from the PMDB's
"anti-Lula" wing, has strong links with presidential
aspirant Anthony Garotinho and is pushing for the PMDB to
launching its own presidential candidate against Lula in

2006. Felipe replaces Humberto Costa (PT),who will run for
governor in Pernambuco in 2006;

- Silas Rondeau, the former president of Eletrobras, becomes
Minister of Mines & Energy. Rondeau has a "technical",
rather than political background, but his sponsor is
influential Senator Jose Sarney, leader of the PMDB's "pro-
Lula" wing.

BESEIGED FROM ALL SIDES
--------------


3. Despite its internal divisions, the PMDB expected to get
at least four Ministries with the cabinet shuffle,
maintaining control over Communications and Social Security
while gaining two additional cabinet posts (Mines/Energy and
Health). However, since its leaders were unable to
reconcile the party's opposing wings in support of the
government (19 of the 23 Senator and 52 of the 85 deputies
agreed to join the government's support base, while the
seven PMDB state governors opposed the move outright),
initially President Lula appeared reluctant to award the
party a fourth Ministry. Whether the PMDB ends up achieving
its goal or not will depend upon whether it is able to
retain control of Social Security, currently headed by
Senator Romero Juca. Juca, who was nominated less than 4
months ago, is likely to lose his job and return to his
Senate seat, from where he will try to defend himself from a
set of criminal charges (unrelated to the current scandal)
pending before the Supreme Court.


4. Lula seemed hopeful that an increase in the PMDB's
profile would bring its opposing wings to his support base;
however, soon after the July 6 announcement was made, the
seven PMDB governors and the leadership of the party's
opposition wing threatened to expel the new Ministers, which
may force Lula to keep the Social Security portfolio with
the PMDB. Meanwhile, the Speaker of the House's PP party
made clear that its role in the Lula administration should
be enhanced, perhaps requiring Lula to grant that party
another Ministry.

PRESIDENT OF THE WORKER'S UNION BECOMES LABOR MINISTER
-------------- --------------


5. On July 8, Lula announced the nomination of Worker's
Union (CUT) President Luiz Marinho as his new Labor
Minister. Marinho is close to President Lula and shares a
common background: both were metalworkers, and both gained
national recognition after being elected president of the
worker's union for the Sao Paulo ABC region. Marinho is
supported by the labor movement, and his nomination appeases
sectors of the PT that opposed the appointment of Aldo
Rebelo, the Presidency's Political Coordinator, to the
Ministry of Labor. Marinho replaces Ricardo Berzoini, who
will return to his Congressional seat.

OTHER POSSIBLE CABINET CHANGES
--------------


6. President Lula's two previous cabinet shuffles were long
and public processes, and given the crisis scenario, it was
expected that this round would go more quickly. However,
the PMDB's inability to unite its wings has made the current
process longer and more excruciating. More cabinet moves
are expected in the coming days: cabinet officers tainted by
scandal or who intend to run for office in the 2006 national
elections will likely be asked to step down. Besides Social
Security Minister Juca, those likely to leave include
Central Bank President Meirelles (ref D),Planalto
Communications Secretary Luiz Gushiken, who is gradually
being drawn in to the corruption scandal, and Political
Coordinator Aldo Rebelo, whose role might be reassigned to
Jacques Wagner, the head of the Economic and Social Council.
In addition, Lula might merge the Ministry of Cities and
National Integration in a super-ministry under the control
of Integration Minister Ciro Gomes, and install the Cities
Minister Olivio Dutra as president of the Worker's Party
(PT).

COMMENT: CABINET SHUFFLE NOT ENOUGH TO RESTORE CREDIBILITY
-------------- --------------


7. The cabinet shuffle will not make Lula's political
position any worse as the corruption scandals batter
Brasilia. But taken alone, it will not be enough to restore
the GoB's credibility and momentum. The fact that Lula's
only option is to count on a divided and fractious PMDB
party, has shown that the GoB's (and the PT's) inability to
rise above the current scandal and re-establish its
Congressional support base may compromise the
administration's future agenda, including Lula's reelection.

CHICOLA