BRAZILIAN FINANCE MINISTER'S FATE TO BE DECIDED THIS WEEK

UNCLAS SECTION 01 OF 02 BRASILIA 000604

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SENSITIVE
SIPDIS

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TREASURY FOR OASIA - DAS LEE, FPARODI
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
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E.O. 12958: N/A
TAGS: ECON EFIN PGOV PREL BR
SUBJECT: BRAZILIAN FINANCE MINISTER'S FATE TO BE DECIDED THIS WEEK

REF: A) BRASILIA 546
B) BRASILIA 602
C) BRASILIA 551


1. (SBU) Press speculation about the possible resignation of Finance
Minister Antonio Palocci resignation is at a fever pitch, with
nearly identical story lines stating that Palocci's future as
minister is to be decided March 27, reportedly at an planned meeting
between Lula and Palocci. The opposition has been attacking
relentlessly after the leaking by state-owned bank Caixa Economica
Federal (CEF) of handyman Francenildo da Costa's bank statements in
an apparent effort to undermine his credibility. Costa alleged in
recent testimony before a Congressional Investigative Commission
(CPI) that he saw Palocci on multiple occasions at a Brasilia house
where several former Palocci aides are supposed to have conducted
illicit business (reftels). Costa, however, has provided fairly
credible explanations for the unusually large recent deposits shown
on his leaked bank statements.


2. (SBU) The Federal Police have been forced to open an inquiry into
the leak of the bank statements, which are protected by Brazilian
privacy laws. The next step in that investigation is today's
deposition to the Federal Police by Jorge Mattoso, the head of CEF.
Mattoso's testimony has become politically charged because the
state-owned bank is overseen by the Finance Ministry and the bank's
management is rife with partisans from the ruling Workers Party
(PT). Although Mattoso has stated publicly that he had nothing to
do with the leak and that he had not received any pressure from
Palocci to divulge the handyman's banking statements, any new
information suggesting someone in Palocci's entourage or in PT party
was behind the leak, as the opposition is alleging, would be
seriously damaging.


3. (SBU) Palocci's only public appearance since the handyman's
testimony was on Friday March 24 at the Sao Paulo Amcham.
(Reportedly, he is camping out at the presidency, and not even
bothering to go into the ministry.) Participants in the AmCham
session have said that Palocci admitted that he had "made mistakes,"
but stressed that there would be continuity of economic policy
regardless of who is finance minister. One of Palocci's advisors
told Emboff the morning of March 27 that Lula would be out of town
most of the day and that, contrary to the press reports, Palocci did
not have any scheduled meetings with the President.


4. (SBU) Comment: While the press looks to be getting a bit ahead
of actual events, it is very likely that Lula will make a decision
on Palocci's tenure in the job by the end of the week (March 31),
which is the deadline for executive branch officials to resign so
that they can run for public office in the October elections.
Several of Lula's ministers plan to leave by this deadline anyway,
which offers Lula a (slightly) face-saving option of having Palocci
leave to run for Congress as part of the broader cabinet reshuffle.
While Palocci's departure is by no means a foregone conclusion, Lula
may well decide that his finance minister has become too big a
liability to carry into the election campaign.


5. (SBU) The most frequently mentioned possible replacement for
Palocci, is PT Senator Aloizio Mercadante. While Mercadante is part
of the moderate wing of the PT, he has criticized the degree to
which the finance ministry pursued primary surpluses in excess of
the formal 4.25% of GDP target. A financial market participant told
us March 23 that financial market actors likely would give
Mercadante the benefit of the doubt were his appointment accompanied
by a strong Lula re-statement of the GoB's commitment to sound
policies.


6. (SBU) Other potential successors include finance ministry
Vice-Minister Murilo Portugal (who reportedly does not want the
job),Planning Minister Paulo Bernardo (who has his own, unrelated,
ethics challenges),National Development Bank President Guido
Mantega (a loyal PT stalwart),and Joao Sayad (the GOB's failed
candidate for the presidency of the IDB). According to the press,
all this uncertainty, combined with the expected departure of the
ministry's Treasury Secretary, Joaquim Levy, could mean that the
Brazilian contingent will find itself distracted at the upcoming

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April 3-5 Annual IDB meeting, hosted by the GOB in Belo Horizonte.


LINEHAN