BRAZIL: INTERNAL POLITICAL UPDATE, WEEK OF 23-27

UNCLAS SECTION 01 OF 02 BRASILIA 000209

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: PGOV PREL ECON BR
SUBJECT: BRAZIL: INTERNAL POLITICAL UPDATE, WEEK OF 23-27
JANUARY 2006



1. INTRODUCTION. Henceforth, post's regular series
reporting on the political scandals affecting Brazilian
politics will be expanded to include coverage of key
developments in the 2006 election campaign, which is
getting under way. In addition to updates on the
corruption scandals and investigations, the cable will
incorporate information on electoral legislation, emerging
party alliances, poll results, and other factors in the
2006 national elections. The standing subject line, per
above, will reflect the expanded content. This week's
cable will provide background information on the coming
races, electoral legislation and party negotiations to
define coalitions and alliances, as well as report on
Finance Minister Palocci's appearance before a
congressional committee investigating corruption. END
INTRODUCTION.

BRAZILIAN ELECTION PRIMER
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2. (U) The 2006 Brazilian electoral cycle will begin
formally on April 1, when prospective candidates that are
not running for reelection have to resign (e.g., the case
of Sao Paulo Mayor Jose Serra and Sao Paulo Governor
Geraldo Alckmin, both from the PSDB). However, parties are
already negotiating alliances and coalitions, and a cabinet
shuffle is expected in either February or March, since many
ministers intend to run for office. The following offices
will be elected in 2006: president and vice-president; one-
third of the federal senators; all federal deputies; all
state governors and vice-governors; all deputies to state
legislatures. Elections for mayors and city councilmen
will only take place in 2008. In the executive races
(president and governor),there is a possibility of a
second-round runoff three weeks after the first round if no
candidate receives more than 50 percent of the valid votes.
The legislative races are proportional and will be decided
on October 1.

NO MORE "VERTICALIZATION"
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3. (U) Brazilian law establishes that elections are
regulated by the legislation in force one year before the
election day. However, on January 25, the Brazilian
Chamber of Deputies approved a constitutional amendment
that struck down a Superior Electoral Court (TSE) rule that
established that party alliances in the states should
follow those at the federal level (a rule known as
"verticalization"). In practice, the rule required that if
two parties were allied in the presidential race, they
would also have to be allied in the governor and federal
deputy races. The amendment to strike down the rule
(approved by the Senate in earlier votes) received 343
votes in favor, 146 against, and one abstention. The
minimum required for a constitutional amendment to pass is
308, but it still must go to a second vote in the Chamber.
After the vote, some legislators and lawyers stated that
the new rule does not apply to this year's election, since
it was established only nine months before the race.
Brazil's association of attorneys have challenged the
legality of the amendment's taking effect this year, and
the Supreme Court (STF) may be called to decide the matter.


4. (U) If the Supreme Court ratifies the Chamber's
decision, all parties -- more than 30 currently registered
in the TSE -- will be fre to follow their local and
regional directories' interests, which tend to be more
parochial and less ideologically-led then their national
counterparts. The four large parties were split during the
vote: the Brazilian Democratic Movement Party (PMDB) and
the Liberal Front Party (PFL) were the most favored by the
new rule. The PMDB will be allowed to launch an independent
presidential candidate (either former Rio de Janeiro
governor Garotinho or Rio Grande do Sul governor Germano
Rigotto),while the PFL, although allied with the PSDB at
the federal level, will be free to ally itself with
different parties in state races. The Brazilian Social-
Democratic Party (PSDB) and the Worker's Party (PT) had
less to gain. PT allies (PSB, PCdoB, PTB, PP, and PL) will
probably abandon the alliance at the state level,
diminishing the chances for party victories regionally. At
the federal level, however, President Lula da Silva
reportedly favored the amendment, seeing it as a means for

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drawing more parties to his federal coalition.

ELECTION POLL: LULA LEADS AGAIN AFTER FIVE MONTHS
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5. (U) On January 19, IBOPE released its latest poll on
the presidential election. For the first time in five
months, Lula rose to first place, giving signs that he may
be recovering somewhat from the damage caused by the
corruption scandals. According to the poll, Lla would
beat Sao Paulo mayor Jose Serra by a 35 to 31 percent vote
margin. The previous IBOPE poll, released in December,
showed that Serra had 37 percent support, while Lula had 31
percent. IBOPE stated it did not ask how respondents would
vote in a second-round run-off. However, the weekly news
magazine Veja reported that IBOPE did, in fact, ask
respondents how they would vote in a second-round, and
figures published by Veja show Serra leading with 45
percent support, vice Lula with 42 percent. Although
neither Lula nor Serra have publicly announced whether they
will run for office, the poll suggests it is early to make
any predictions on the election results.

THIS WEEK IN CONGRESS: PALOCCI TESTIFIES BEFORE CPI
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6. (U) After months of negotiations and threats from the
opposition, Finance Minister Antonio Palocci testified
before the CPI on Corruption in Bingos and Municipalities
on January 26. Palocci appeared as an invited guest, thus
avoiding a CPI subpoena. Federal Deputies bombarded
Palocci with questions regarding a range of allegations
against him, including of intervention in favor of U.S.
company Gtech in a lottery contract with state-owned Caixa
Economica Federal, corruption in bid letting in city
government while he was mayor of Riberao Preto, and illegal
transfer of funds from Cuba for use in the PT 2002
presidential campaign. Palocci denied all the allegations
categorically, adding that he will not run for any office
in this year's elections. In his testimony, Palocci, who
was Lula's 2002 campaign coordinator, stated that the Lula
campaign did not use off-the-books financing (although the
PT party's ex-Treasurer, the discredited Delubio Soares has
admitted to another CPI that it did),declared that the PT
did not receive any campaign money from Cuba, and claimed
that the allegations against him were fanciful.


7. (U) Palocci denied the accusation that he had intervened
in the contract renewal negotiations between GTech and
Caixa Economica Federal (i.e., the Federal Savings Bank) in

2003. Palocci tried to distance himself from the
accusation by saying that it was not his job to interfere
in the bank's day to day management. Nevertheless, the
cloud over him remains. According to a finding in the
partial report of the CPI, Ademirson Ariovaldo da Silva,
Palocci's former chief of staff, along with current Caixa
Economica President Jorge Matoso and two former presidents
of the institution, Sergio Cutolo and Emilio Carazzai,
violated their statutory responsibilities and failed to
comply with the applicable laws governing public
procurement with respect to the GTech contract. Palocci's
testimony was a non-event for the financial markets, which
appear no longer to be concerned about a pre-election
economic policy shift; the Real appreciated, the Sao Paulo
stock exchange (BOVESPA) was up and measures of country
risk were down.

CHICOLA