Identifier
Created
Classification
Origin
05BRASILIA3008
2005-11-14 12:13:00
SECRET
Embassy Brasilia
Cable title:  

BRAZIL - FINANCE MINISTER PALOCCI UNDER FIRE

Tags:  ECON PGOV PREL EFIN BR CU 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
S E C R E T SECTION 01 OF 04 BRASILIA 003008 

SIPDIS

TREASURY FOR OASIA - U/S ADAMS AND DAS LEE
NSC FOR CRONIN
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D

E.O. 12958: DECL: 11/09/2015
TAGS: ECON PGOV PREL EFIN BR CU
SUBJECT: BRAZIL - FINANCE MINISTER PALOCCI UNDER FIRE

REF: A. BRASILIA 3001

B. BRASILIA 2951

C. BRASILIA 2237

Classified By: Charge d'Affaires Philip Chicola, reason 1.5 (b)
and (d)
.

S E C R E T SECTION 01 OF 04 BRASILIA 003008

SIPDIS

TREASURY FOR OASIA - U/S ADAMS AND DAS LEE
NSC FOR CRONIN
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D

E.O. 12958: DECL: 11/09/2015
TAGS: ECON PGOV PREL EFIN BR CU
SUBJECT: BRAZIL - FINANCE MINISTER PALOCCI UNDER FIRE

REF: A. BRASILIA 3001

B. BRASILIA 2951

C. BRASILIA 2237

Classified By: Charge d'Affaires Philip Chicola, reason 1.5 (b)
and (d)
.


1. (SBU) Summary and comment: Brazil's Finance Minister,
Antonio Palocci, considered by many the anchor of GoB
economic policy, has been coming under increasing fire in
recent days as new allegations have surfaced that he had a
role in illegal fund-raising activities by the ruling PT
party and knew of an alleged multi-million dollar campaign
contribution from the Cuban government (ref B). Once former
presidential Chief of Staff Jose Dirceu is removed from his
congressional seat (now a foregone conclusion) the opposition
and media spotlight will turn ever more towards the
accusations against Palocci. President Lula's Chief of
Staff, Dilma Rousseff, a more leftist member of the PT, piled
on this week, going public with acerbic criticism of a joint
proposal advanced by Palocci and Planning Minister Paulo
Bernardo to cap current expenditures and maintain a primary
surplus well above the GoB's official 4.25% of GDP target.
Palocci has threatened on three occasions to resign if he is
called to testify by one of the Parliamentary Commissions
(CPIs) investigating the scandals but agreed, under pressure,
to appear before the Senate Economic Affairs Committee on
November 22, where he might face some questioning about the
accusations.


2. (SBU) The timing of Rousseff's outburst on fiscal policy
was remarkably poor for Palocci, who already was under attack
for scandal-related reasons. There is increasing speculation
among the political chattering class that Palocci is a goner.
Indeed, we can now imagine a confluence of events, both
scandal and policy-battle related, that would make Palocci's
position untenable. Palocci would likely resign rather than
remain in the job should: 1) events render him ineffective;
2) he be called to testify before one of the CPIs; or, 3)

further damaging revelations surface. We do not believe,
however, that Rousseff's comments indicate a serious effort
on her part to change the basic thrust of the GoB's current
sound economic policy. The debate thus far has been one of
degree, i.e. by how much to over-perform the formal primary
surplus target. It's a debate we can live with. End Summary
and Comment.

Palocci Scandal Links - Cuba this time?
--------------


3. (S) Palocci has been the subject of several sets of
allegations involving kickbacks on municipal contracts let
during his tenure as mayor of the city of Riberao Preto as
well as charges of influence peddling by people close to him.
The kickbacks allegedly financed off-budget PT party slush
funds. In the last week, a new sensational allegation has
been made that in 2002 Palocci, then Lula's presidential
campaign coordinator, knew of and approved a USD 3 million
Cuban Government campaign contribution to the PT party. Veja
magazine (Brazil's leading news weekly) claims that Sergio
Cervantes, a Cuban Intelligence Officer formerly assigned to
the Cuban Embassy in Brazil, gave USD 3 million in cash to
Ralf Barquete and Vladimir Poleto, a claim based in part on
interviews with Poleto and Rogerio Buratti. At the time
Barquete, who died of cancer last year, was a special
assistant to Palocci and the other two individuals were
senior figures in the municipal government of Riberao Preto.
The money reportedly was flown from Brasilia to Sao Paulo on
a private plane belonging a businessman, Roberto Colnaghi,
reputed to be close to Palocci. The pilot of the aircraft
confirmed to the magazine that he had flown Palocci's aide
with three boxes, allegedly containing the cash, on or about
the dates mentioned in the Veja story.


4. (SBU) In testimony before the Congressional Investigatory
Committee (CPI) on Bingos on November 10, Poleto recanted the
Cuba cash story, claiming that he had been drunk when
interviewed by the Veja reporter. Buratti likely will be
called to testify before the CPI as well. No physical or
documentary evidence has yet surfaced publicly to
substantiate the accusations. Palocci has threatened on
multiple occasions to resign should the CPI call him to
testify about his or his brother's activities (see below),a
threat that, if carried out, would force the Congress to deal
with the potential financial market repercussions of his
departure. A compromise was worked out to have Palocci
appear before the Senate Economic Affairs Committee (on
November 22) instead a CPI and to respond to some limited
questioning about the allegations against him. The deal,
however, has not put to rest all opposition calls that
Palocci be called to testify before a CPI or media questions
about the viability of his continued tenure as finance
minister.


5. (U) Other sets of accusations have been made against
Palocci, which we outline briefly below:

Case 1 ) Interbrasil Seguradora ) Interbrasil Seguradora
donated money to the PT campaign in Goias. After the
elections, Interbrasil Seguradora won government contracts
worth R$ 4.6 billion. Andre Marques da Silva, president of
Interbrasil Seguradora had a close relationship with Adhemar
Palocci, brother of FINMIN Antonio Palocci and head of PT
accounting/finance in Goias. Allegedly, Antonio Palocci was
a facilitator in helping Interbrasil Seguradora win public
bids and obtain government contracts.

Case 2 - Leao and Leao ) During his 2nd term as Mayor of
Ribeirao Preto, in 1999, Palocci's municipal administration
awarded government contracts to waste management company Leao
and Leao. The trash company is claimed to have been given
preferential treatment in these public contract bids. Leao
and Leao was one of the major contributors to the PT
campaigns in the State of Sao Paulo. The main actor in this
case is Palocci's municipal planning secretary, Rogerio
Buratti, who has said that he had the approval of Palocci to
work with Leao and Leao. Buratti claims that kickbacks from
Leao and Leao were channeled via the now-deceased Ralf
Barquete to PT party Treasurer Delubio Soares. One of the
CPIs investigating the interlocking scandals has just
recommended that Soares be indicted for illegal fundraising
activities (not involving the Cuba connection).

Case 3 ) Banco Prosper. Raul Barquete and Vladimir Poleto
were both municipal secretaries when Palocci was Mayor of
Ribeirao Preto. Barquete and Poleto allegedly were paid
consultancy fees by private companies for helping them obtain
loans from the National Social and Development Bank (BNDES),
all done using Palocci's political influence.

Other Cases - There are several other cases about which less
information has surfaced or which have an indirect Palocci
nexus: a) Palocci's former aide Rogerio Buratti allegedly
tried to extort money from U.S. company G-Tech in order to
obtain a federal lottery contract renovation; b) The city of
Riberao Preto in 2002 carried out a questionable Reals 1.25
million tender for a particular peas and tomato sauce, made
exclusively by one company, to be included in basic food
baskets for the poor; c) other Riberao Preto city contracts
for social and infrastructure projects are under
investigation by State of Sao Paulo prosecutors for alleged
overbilling and payment of questionable consultancy fees;
and, d) the Brazilian Reinsurance Institute (IRB),which
Palocci supervised as Finance Minister, has been accused of
corruptly awarding bids and jobs.

Rousseff Piles On
--------------


6. (U) In an interview published by major daily Estado de Sao
Paulo on Wednesday November 9, Lula Chief of Staff Rousseff
roundly criticized a proposal advanced jointly by Bernardo
and Palocci to cap current expenditures and maintain a high
primary surplus into the medium term. The proposal was based
on a study by the GoB-linked Institue for Applied Economic
Research (IPEA) that suggested these steps would allow: 1)
increases in public investment; 2) reductions in the GoB
borrowing requirement, thus allowing interest rates to fall;
and, 3) eventual reductions in the tax burden. Rousseff
mocked the proposal as "rudimentary." She said it would not
be debated within the administration and appeared frustrated
with the Finance Ministry's pursuit of ever-higher primary
surpluses. On Friday November 11, Vice President Alencar
seconded Rousseff's criticisms.


7. (SBU) This surplus versus spending debate has been raging
within the administration for a while. Recently, Fazenda
Secretary General Portugal told Emboffs that his Ministry

SIPDIS
unofficially had raised the primary surplus target above
4.25% of GDP, knowing that they would receive political flak
if they attempted to do so formally. Meanwhile, worried
about surging non-discretionary expenditures, influential
opposition figures are flogging proposals for a
constitutional amendment requiring a zero nominal deficit --
i.e., a gimmick to keep spending under control. (Note: the
GoB ran a 4.61% of GDP primary surplus in the first three
quarters of 2005, well above the formal target of 4.25%.
This greater savings made little dent in overall debt levels,
however, because interest expenses were higher due to the
cycle of monetary policy tightening earlier this year. End
Note.)


8. (SBU) Rousseff, while not questioning the necessity for
the 4.25% target, called for the GoB to use revenues in
excess of the target to finance investments. While there was
frequent tension on fiscal policy between Palocci and
Rousseff's predecessor, Jose Dirceu, the GoB always kept
these disagreements in the background. Rousseff's public
criticism reportedly has stung both Palocci and Bernardo and
made Palocci consider resigning unless Rousseff publicly
retracts her comments.

Markets "Serene"
--------------


9. (SBU) In a November 8 conversation, the Chief Economist at
Credit Suisse First Boston (CSFB) told Emboff that the
markets, still focused on Brazil's solid fundamentals,
largely had taken in stride the allegations that Palocci knew
of Cuban campaign contributions and the separate Palocci
threat to resign if called to testify in the Interbrasil
Seguradora case. He emphasized that Congress was treading
carefully with regard to Palocci in order to insulate the
economy from the scandal goings-on. The allegations against
Palocci's brother, the CSFB economist said, have been refuted
by Electronorte, the supposed source of the crooked
contracts. And the markets do seem to be nonplussed by these
events: Standard and Poors changed its rating outlook for
Brazilian debt to positive and the Real is trading at
three-year highs against the dollar, almost reaching 2.17 in
early trading November 10. A JP Morgan economist echoed
these points in a November 10 conversation with Econoff,
arguing that since Palocci's economic policy was Lula's only
success, there was little danger that Lula would let him go.
He surmised that Palocci was in a more secure political
position now than when the first set of accusations against
him (the Leao and Leao allegations) were made on August 19
(ref C).

CHICOLA