BRAZIL: AMBASSADOR'S INTRODUCTORY MEETING WITH CENTRAL

C O N F I D E N T I A L SECTION 01 OF 02 BRASILIA 001725 SIPDIS SIPDIS NSC FOR FEARS TREASURY FOR OASIA - DAS LEE, D.DOUGLASS STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D USDOC FOR 3134/ITA/USCS/OIO/WH/RD/SHUPKA STATE PASS USAID FOR LAC STATE PASS USTR 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 -------------- ¶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 SIPDIS 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 -------------- ¶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 BRASILIA 00001725 002 OF 002 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 -------------- ¶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