BRAZIL: FINANCE MINISTRY REACHES OUT TO G-8 EMBASSIES

UNCLAS SECTION 01 OF 02 BRASILIA 000281

SIPDIS


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TREASURY FOR OASIA - DAS LEE AND FPARODI
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
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SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON PGOV EFIN BR
SUBJECT: BRAZIL: FINANCE MINISTRY REACHES OUT TO G-8 EMBASSIES


1. Action Request - paragraph 6.


2. (SBU) Summary. On February 2, the Ministry of Finance's
Assistant Secretary for International Affairs, Luiz Pereira, called
in Emboffs from the German, French, Italian, Canadian, Japanese,
British, Canadian, and U.S. Embassies to brief on the themes that
FinMin Palocci has discussed during recent G-8 and G-20 sessions.
Key among the Minister's concerns were perennial GOB hobby horses
such as the creation of a new IMF facility for moderate income, low
risk countries such as Brazil and the establishment of international
tax to fight hunger. During the course of the February 2 session,
Pereira proposed that the group meet informally every three months
or so (prior to upcoming G-8 sessions) to discuss pending macro and
micro issues related to both the Brazilian and the world economy.
While Pereira characterized the proposed meetings as an informal
discussion group involving G-8 countries, our guess is that part of
the motivation for the idea is simply to reduce the number of
bilateral meetings with key embassies by meeting with them en masse.
We suspect that at any future sessions, as was the case at the
first, the GOB will do most of the talking. End Summary.


3. (SBU) Pereira began by noting that in Finance Minister
Palocci's remarks at both recent G-8 and G-20 meetings, the latter
has emphasized five general themes: a) risk scenarios for the
worldwide economy, b) the potential for a soft landing in the wake
of necessary adjustments, c) the need to reform the international
financial architecture (i.e., create a new IMF line of credit for
countries such as Brazil),d) rethink the structure of international
assistance, and e) the ongoing WTO Doha Round talks.

-- Risk Scenarios. On this point, Pereira chiefly noted the
current prevailing high energy prices and the inability of producing
countries to increase supply in the short-term, adding that any
increase in worldwide refining capacity would be welcome as well.
The degree to which Chinese demand would keep markets tight, he
declared, was an open question.

-- Soft Landing. Pereira worried that strong growth in the new
emerging markets (like Brazil),coupled with the United States's
twin budget and trade deficits, might spark an abrupt - and painful
- correction. Although he felt that the elements of the problem
could be dealt with, he acknowledged that there were a range of
varying opinions on this issue - many of which had differing views
on the pattern of international savings.

-- International Financial Architecture. Here Pereira lamented the
fact that the IMF had no facility aimed at middle-income countries
who desired a ready line of credit as insurance against possible
external shock. What was needed, he concluded, was a serious
rethink of the focus of the Fund's activities.

-- International Assistance. While Pereira acknowledged the recent
HIPC initiative, he stated that more needed to be done to help out
the poor. He then launched into a spirited argument in support of
President Lula's 2004 UNGA hunger initiative, calling for
international tax mechanisms to increase ODA.

-- WTO. On this issue, Pereira merely noted the greater level of
insertion of the newly-emerging countries into the world economy -
and underscored the importance to Brazil of the Doha Round talks on
agriculture.


4. (SBU) Moving to the domestic economy, Pereira stated that in
2006 GDP would expand briskly regardless of who was elected
president in the October elections. Interest rates would fall
gradually during the course of year and, given the overall societal
consensus on sound macro policies, the upcoming election would not
lead to any significant appreciation of Brazil's EMBI country risk.
That said, he did not foresee any significant micro reforms being
enacted prior to the election, although perennial favorites such as
tax reform, increased infrastructure investment, and incentives for
export would remain on the agenda. In the longer term, he thought
that the country's possible rise to investment grade status in 2007
would help to lower debt levels, while exports would remain stable,
notwithstanding the strength of the Brazilian real, because of the

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diverse mix of products and destinations. Finally, Pereira opined
that the "right fiscal/monetary policy mix" (read: the passage of a
budget-cutting mechanism after the election) would give the
government the necessary space to cut interest rates even further.


5. (SBU) Pereira proposed that the group meet informally every
three months to continue discussions. We suspect that at any future
sessions, as was the case at the first, the GOB will do most of the
talking.


6. (SBU) Post requests guidance on the appropriateness of
participating in the series of informal meetings the GOB has
proposed.

Chicola