UNCLAS SECTION 01 OF 03 BRASILIA 002681

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SENSITIVE

E.O. 12958: N/A
TAGS: PGOV PREL PHUM ETRD ECON BR OVIP ZOELLICK ROBERT US
SUBJECT: DEPUTY SECRETARY'S MEETINGS WITH BRAZILIAN SENATOR
ALOISIO MERCADANTE, OCTOBER 6, 2005

SENSITIVE BUT UNCLASSIFIED - PROTECT ACCORDINGLY.

1.(SBU) Summary: In a cordial, hour-long meeting,
Deputy Secretary Zoellick and Senator Aloisio Mercadante
discussed the Brazilian political and economic situation
and the current crisis, as well as regional issues and the
need for Brazil and the U.S. to work closely together in
partnership with other regional players, such as the OAS
and IDB, to strengthen democratic institutions and
governance in Latin America. End Summary.

2.(U) PARTICIPANTS:

BRAZIL:

Senator Aloisio Mercadante
Economic Advisor Gerson Gomes
Economic Advisor Marcel Zero
MFA North American Desk Officer Paulo Chuc

U.S.

Deputy Secretary Robert Zoellick
Ambassador John Danilovich
DCM Phillip Chicola
NSC Senior Director Tom Shannon
D Senior Advisor Rich Mills
Notetaker
Interpreter


3. (U) The Deputy Secretary began by asking abut the
current situation in Brazil, especially the recent
political turmoil. He was also interested in the Senator's
perspective on the region as a whole. Mercandante, a
member of the ruling Workers' Party (Partido dos
Trabalhadores - PT) from Sao Paulo, provided a
comprehensive picture of the strength of the Brazilian
economy. Both exports and imports are sharply up, as is
foreign direct investment, and foreign debt is greatly
reduced. The Balance of Payments situation is very solid.
The inflows from trade and investment have caused some
e
over-appreciation of the currency, but the greatest
challenge at the moment is management of public finances.
The sustained growth and good macroeconomic performance
have not been hurt by the ongoing political turbulence.
Mercadante expressed gratitude for the U.S. government's
show of trust and support for Brazil as exemplified by
Treasury Secretary Snow's July visit.

4.(SBU) With respect to the scandal, Mercandante
characterized it as essentially a problem of campaign

finance. Electoral campaigns cost too much, and political
parties had taken to seeking dubious sources of funds. The
country needs an overall campaign finance reform, with
transparency in campaign spending and public lists of
contributors. The Senate had passed such rules, but the
lower house had not. Mercadante's party, the PT, had
always had high ethical standards and had demanded such
standards of others, so it is only to be expected that the
revelations of financial abuses would resound so loudly.
Ultimately, the crisis would have a healthy effect on the
body politic, he said. Everything is being investigated.
Most likely some Congressmen will be expelled, but the
worst of the crisis is over. President Lula is no longer
as unbeatable as he previously appeared but should
nonetheless fare well in next year's election, because of
the strength of the economy.

5.(SBU) Turning to international affairs, Mercadante
reiterated Brazil's interest in reform of the UN Security
Council and a permanent seat on the Council. With respect
to Haiti, where Brazil leads the UN stabilization force, he
suggested U.S. could be helpful in ensuring a flow of
resources for that country that would enable the UN to
withdraw its forces once a new, democratically elected,
government was in place. However, the situation remains
fragile and any such withdrawal should be done carefully.

6.(SBU)Concerning the upcoming Summit of the Americas
in Mar del Plata, with its agenda focused on poverty and
d
governance issues, Mercadante said Brazil wants to defend
its interests without at the same time creating undue
frictions or unjustified tensions. President Lula has good
relations with the host government of Argentina and will
try to help. Venezuelan President Chavez has a different
style, but Brazil will seek balance and dialogue.

7.(SBU) With respect to Doha, Mercadante said Brazil is
still expecting a more generous offer from the U.S. Trade
is doing well but could be better. He also believes there
is movement towards a more flexible FTAA.
8.(SBU) Mercadante said Brazil wants to show solidarity
with the U.S., and be more "daring" in our bilateral
relationship. He noted Brazil's concerns about U.S.
relations with Paraguay, but said Brazil shared the U.S.
interest in combating terrorism in the tri-border region.
Bolivia's instability also poses serious concerns, he said.
Bolivia needs to find solid macroeconomic solutions. Lula
and the PT had had a positive effect in the region, he
e
noted, by bringing a leftist party into the political
mainstream and governing responsibly, and it would be
helpful to see if that model could be replicated elsewhere.

9.(U) Mercadante expressed strong approval of the
developing agenda for the POTUS visit, mentioning
environment, democracy, race relations, and science and
technology cooperation.

10.(SBU) In reply to a question from the Deputy
Secretary on recent legislative accomplishments in Brazil,

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Mercadante noted that the lower house had passed through
six very difficult months. Recently ousted lower house
President Severino Cavalcanti wasn't experienced enough to
lead the body, and the political process had a severe
negative impact on the legislative process. To make
matters even more difficult, the government lacks a
majority in the Senate. Nevertheless, the Congress just
adopted a provisional tax measure. Other recent successes
included a measure on biosafety, a bill to boost the
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government's role in stimulating private investment, and a
judicial reform bill. Mercadante also pointed to the
government's recent success in reducing the rate of
deforestation in the Amazon. Nevertheless, much more
remains to be done. The performance of regulatory agencies
needs to be improved. Though Congress reformed the Social
Security system, some things, like labor reform, will
likely have to wait for a new government, because they are
too hard to do in an election year. But the government
remains strong despite the crisis. Lula is still popular
and charismatic, and the PT is recovering from the scandal.

11.(SBU) Deputy Secretary Zoellick observed that Brazil
is fortunate in having strong democratic institutions that
will enable it to emerge from the crisis in good shape, and
perhaps even stronger. Many countries in Latin America
have democratic elections but suffer from weak democratic
institutions. The U.S. and Brazil, as the two largest and
most populous countries in the region, have a common
interest in strengthening those institutions. He noted
that both the OAS and the IDB are now under new leadership.
He had suggested earlier to Lula's foreign affairs advisor,
Marco Aurelio Garcia, that both countries should think
about how to work together with OAS SecGen Insulza and IDB
President Moreno on strengthening democratic institutions
and creating more economic and social opportunity
throughout the region.

12.(SBU) The Deputy Secretary offered several examples.
Brazil has large stakes in Bolivia. There is a need for
many observers for the upcoming elections in Bolivia so
that all parties can accept the result as the outcome of a
fair process, so as to avoid more disintegration.
Similarly, Ecuador suffers from high presidential turnover,
congressional paralysis, and a dysfunctional judicial
system. Brazil could send judges to help improve the
system. The OAS could help in a variety of ways in
situations like these. Nicaragua, where he just came from,
is another example. Ortega and Aleman have entered into a
corrupt pact to undermine the legitimate government,
placing constitutional democracy in peril. Brazil,
together with the U.S., the OAS, and others, should make
clear its opposition to those who want to undermine
democracy. It is good that Garcia is planning to travel to
Nicaragua soon. In sharp contrast to Ortega, Lula is a man
of the left who stayed with democracy, even after losing
elections, and now he presides over a democratic Brazil.
This could serve as an example to Nicaragua, which needs a
democratic party of the center-left. Again, the U.S. and
Brazil should encourage the OAS and IDB to outline ways in
which they might be helpful in situations where democratic
institutions are challenged. The OAS could match existing
resources with needs, develop networks to operate in the
political area. The IDB, with its convening power, could
call sessions on topics of interest and perhaps draw up
lists of best practices to serve as examples.

13.(SBU) Mercadante strongly agreed with the Deputy
Secretary on the need for Brazil to help. He suggested

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exchange programs involving Brazilian legislators and
judges. They could travel to places like Bolivia and
Ecuador and, in a non-interventionist way, help improve
democratic institutions and practices. Brazilian
legislators could travel to Nicaragua, interact and debate
with Nicaraguan parliamentarians. Mercadante would go
himself, but he is a prisoner of his role as his party's
leader in the Senate. Nevertheless, he would like to
participate in the program, and hoped to visit the Deputy
Secretary in the U.S. and learn from the U.S. experience in

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democracy. Brazil has a Presidential system but one
effectively mixed with a "Parliament" with 18 parties,
making governing extremely difficult. There are 513
Congressman with an abundance of parochial interests, and
no party fidelity. In particular, Brazil would benefit
from learning more from the U.S. experience about the role
of the legislative branch in the budgetary process.

14.(U) In bringing the meeting to a close, the Deputy
Secretary observed that Mercadante has gained invaluable

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experience in his work in the Senate which will serve him
well in the future, because it is critically important to
know how to get things done in a democratic system. He
looked forward to seeing Mercadante again and said he would
advise the OAS and IDB of Mercadante's support for the
approach he had outlined.

15.(U) This message was cleared with the Deputy
Secretary's party.

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Danilovich
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