BRAZIL - FINANCE MINISTER PALOCCI'S 11/16

UNCLAS SECTION 01 OF 02 BRASILIA 003043

SIPDIS

SENSITIVE

TREASURY FOR OASIA - DAS LEE AND FPARODI
NSC FOR CRONIN
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DDEVITO/DANDERSON/EOL SON
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE

E.O. 12958: N/A
TAGS: ECON PGOV EFIN PREL BR CU
SUBJECT: BRAZIL - FINANCE MINISTER PALOCCI'S 11/16
CONGRESSIONAL TESTIMONY

REF: A) Brasilia 3008 B) Brasilia 2758


1. (SBU) Summary: Finance Minister Antonio Palocci
categorically denied accusations of corruption during his
tenure as mayor of the city of Riberao Preto and of illegal
financing of President Lula's 2002 presidential campaign
(including an alleged $3 million contribution from the
Government of Cuba),in testimony before the Senate Economic
Affairs Committee on November 16. Palocci also responded to
criticism of GoB economic policy from Lula's Chief of Staff,
Dilma Rousseff, arguing that she was wrong about the
importance of proposals for fiscal balance in the longer
term. He faced more criticism on GoB economic policy from
his own PT party than from the opposition and garnered some
praise for his performance from the opposition PSDB.
Palocci's creditable performance was well received by the
markets, but does not settle the question of his political
survival as finance minister. In a public appearance the
same day, Lula defended the GoB economic policy line without
specifically mentioning Palocci, a move that reflects Lula's
continued distancing of himself from his troubled minister.
Moreover, the opposition is insisting on calling Palocci to
testify before the Congressional Investigatory Commission
(CPI) on bingos. End Summary.

Palocci Denies Allegations, Justifies Economic Policy
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2. (U) In a marathon nine-hour session before the Senate
Economic Affairs committee, Finance Minister Antonio Palocci
categorically denied accusations leveled at him over
corruption during his tenure as mayor of Riberao Preto and
of irregular financing of Lula's 2002 presidential campaign,
of which Palocci was coordinator. Originally expected to
take place on November 22, the GoB moved up Palocci's
testimony as a tactic to reduce the political uncertainty
around Palocci and limit potential volatility in the
markets. In a detailed opening statement, Palocci: 1)
denied that Lula's 2002 campaign had taken money from the
Cuban government, the FARC or Angola; 2) reiterated that a
major waste-management contract for which there allegedly
were kickbacks paid was not signed or renewed during his
tenure as mayor; 3) claimed that the other city tenders had
been audited with no irregularities found; and, 4) denied he
had flown on a private jet belonging to businessman Roberto
Colnaghi, stating that the Brazilian Air Force had flown him
to Riberao Preto on the date in question. The senators
limited their questioning to economic policy issues.
Palocci, in a reversal of course, said he was willing to
appear before any congressional body (i.e. including the
CPIs) to answer questions about the accusations.


3. (U) Palocci took the opportunity to firmly, if politely,
rebut recent criticism by Lula Chief of Staff Dilma Rousseff
of a proposal advanced by Palocci and Planning Minister
Paulo Bernardo for sustaining high primary surpluses into
the medium term. Palocci argued that the GoB would not be
able to maintain public investment and social spending if it
does not pursue a sustainable fiscal policy in the long
term. In outlining the GoB's economic achievements, Palocci
stressed the continuity of policies over several
administrations and was careful to give credit to previous
governments for initiatives such as the Fiscal
Responsibility Law. This policy continuity, Palocci argued,
does not depend on any single person. Palocci's defense of
GoB policy was met with more criticism from senators of his
own ruling PT party than from the opposition, some of whom
specifically praised Palocci's own performance. Lula
seconded Palocci's defense of GoB economic policies in a
public appearance November 16, but did not mention Palocci's
name during his remarks.


4. (U) Markets appear to have been reassured by Palocci's
performance -- the Real appreciated against the dollar (from
about 2.2 to 2.185 Reais per dollar) in trading on November
17 while the Sao Paulo stock exchange was up almost 2% for
the day.

Comment
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5. (SBU) Palocci's strong performance appears to have won
him some time but it has not settled the question of his
ultimate political survival. The opposition, perhaps caught
off guard by the GoB's maneuver to move ahead the date of
the hearing, did not probe Palocci on the accusations of
wrongdoing in the November 16 session. They are now calling
for Palocci to appear before the CPI on bingos to answer the
accusations against him. Regardless, it clear that the
opposition plans to keep the Palocci allegations in the
media spotlight. They may be aided by the fact that Palocci
was more categorical than strictly necessary in denying the
allegations. On the Cuba campaign contribution allegation,
for example, Palocci not only denied personal knowledge of
any such contributions, but affirmed that as campaign
coordinator he would have known if the campaign received
Cuban cash and that it did not happen. This exposes him to
greater damage should new evidence come to light. Palocci
also was careful to stress that he believed the GoB's
orthodox economic policy stance was institutionalized, had
shown remarkable continuity from administration to
administration over the last 14 years and did not depend on
any single person. Given Lula's apparent effort to put some
distance between himself and Palocci, it is possible that
Palocci's thesis will be put to the test.

CHICOLA