BRAZIL: AMBASSADOR'S INTRODUCTORY MEETING WITH CENTRAL

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E.O. 12958: DECL:08/15/26
TAGS: ECON EFIN PGOV ETRD PREL EINV BR
SUBJECT: BRAZIL: AMBASSADOR'S INTRODUCTORY MEETING WITH CENTRAL
BANK PRESIDENT MEIRELLES


Classified by Ambassador Clifford M. Sobel, Reasons 1.4 (b) and
(d).


1. (C) Summary: Central Bank President Henrique Meirelles
highlighted to the Ambassador during their August 9 introductory
meeting the importance he places on achieving formal Central
Bank independence, which he sees as a key part of consolidating
Brazil's current success in fighting inflation. He asked that
that the USG underscore this message, privately and at high
levels, to President Lula and Finance Minister Mantega.
Meirelles offered to be helpful behind the scenes in pressing
for priority regulatory reforms to improve the business climate.
On the economy, Meirelles manifested great confidence in the
balance of payments outlook. He welcomed a prospective visit by
NYSE chairman John Thain. End Summary.

Price Stability and Central Bank Independence
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2. (SBU) The Ambassador made his introductory call on Central
Bank President Henrique Meirelles on August 9. Meirelles told
the Ambassador that his biggest current concern is consolidating
the success the GoB has had in the fight against inflation. The
balance of payments was no longer an issue, as this year Brazil
would run a trade surplus of almost USD45 billion and its fourth
consecutive current account surplus as well. Meirelles argued
that this change was structural given a shift in the culture of
Brazilian business toward valuing external markets. By
contrast, Meirelles did not believe Brazil had solved the price
stability problem. Business, he said, still has an
"inflationary mentality." There continued to be public
criticism of the GoB's inflation-targeting policy, Meirelles
noted, sometimes based on misinterpretation of the U.S. Federal
Reserve's mission to target both price stability and employment.



3. (C) Another key factor in the debate was that the Central
Bank had not yet been granted formal independence to set
monetary policy, even though President Lula repeatedly had
backed its de facto freedom of action, Meirelles explained.
This continued uncertainty added a risk premium to any long term
investments in the country. Brazil, he said, is the only one of
the forty largest economies in the world which does not have an
independent central bank. Meirelles asked that the USG
discreetly use its bilateral engagement with the GoB to argue
the importance of pushing through the congress legislation
granting the Central Bank such autonomy. He argued that
Secretary Paulson in particular would be able credibly to make

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that point to Lula and Finance Minister Mantega. The Ambassador
noted that the bilateral Treasury-Fazenda Group for Growth
meetings perhaps could address this issue, among others.

Investment Climate
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4. (SBU) The Ambassador told Meirelles the USG is eager to be
helpful on efforts such as public-private partnerships (PPPs) in
infrastructure investment. There was much focus on Brazil among
the investment community. NYSE Chairman John Thain was likely
to visit soon, the Ambassador noted, and Russell 20-20 Equity
was planning Brazil-focused events. To take advantage of this
interest, the Ambassador said, Brazil's investment climate must
be welcoming. Meirelles noted that while it is not his direct
responsibility, he is willing to be helpful behind the scenes.
He highlighted regulatory roadblocks as a particular problem,
but said the Central Bank doesn't have the staff expertise or
authority to engage on the issue. Meirelles undertook, were the
USG to provide a detailed study of these roadblocks, to press

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for changes.


5. (C) A second set of difficulties that Meirelles identified
for investors revolved around the lack of governmental
experience among Lula's top advisors. Current chief of staff
Dilma Rousseff, he said, is a much more hands-on manager than
her predecessor. She is very smart and has learned quickly,
Meirelles stated, but she still brings some ideological baggage
to the job. Lula had focused much more on improving public
management in the latter part of his term, he added. Meirelles
affirmed that were the USG to withdraw GSP benefits from Brazil,
it likely would reinforce "negative elements" within the local
business community with respect to the United States.

Mortgage Market
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6. (SBU) Meirelles stated that while the mortgage market was
beginning to grow quickly, it was still nascent. He explained
that this was in large part due to how recently Brazil had
achieved macroeconomic stability. With hyperinflation, there
was no long term financing and the economy was still overcoming
this legacy.


7. (C) Comment: Although he was particularly frank and
forthcoming in this meeting, Meirelles gave no hint whether he
might try to remain on the job if Lula wins a second term. End
Comment.

SOBEL