A BUSY TWO WEEKS FOR LULA'S PARTY: PT READIES FOR CAMPAIGN

UNCLAS SECTION 01 OF 06 SAO PAULO 000505

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E.O. 12958: N/A
TAGS: PGOV PINR ELAB EPET BR
SUBJECT: A BUSY TWO WEEKS FOR LULA'S PARTY: PT READIES FOR CAMPAIGN
AS SCANDAL SHOWS SIGNS OF REVIVAL

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C O R R E C T E D C O P Y (Update Text Paragraph 12)

REF: (A) BRASILIA 888 AND PREVIOUS;(B) SAO PAULO 449;
(C)BRASILIA 727;(D)BRASILIA 640;(E) 05 SAO PAULO 1376;
(F) 05 SAO PAULO 1110; (G) 05 SAO PAULO 1071;
(H) 05 BRASILIA 1979 AND PREVIOUS

SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY.

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SUMMARY
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1. (SBU) The ruling Workers Party (Partido dos Trabalhadores - PT)
held its National Encounter in Sao Paulo, April 28-30, in
preparation for the election campaign. Delegates authorized
President Lula and party leadership to enter into electoral
alliances with any willing partners, excluding only two major
opposition parties and one small left-wing party. The PT continues
to court the centrist Brazilian Democratic Movement Party (PMDB),so
far without success. The party also announced that internal
disciplinary procedures would not be pursued against individuals
implicated in the political corruption scandal until after the
October elections. Though PT members put up a brave front, they
freely admit that while Lula has a strong chance of winning
re-election, the party's prospects overall are poor. To make
matters worse, PT former Secretary-General Silvio Pereira granted
two lengthy interviews to "O Globo" newspaper in which he recounted
his version of the corruption scandal, one that was significantly at
odds with the party line. While Lula took a soft line - "he has the
right to say what he knows" - PT President Ricardo Berzoini publicly
called Pereira a liar and a traitor. Pereira has been subpoenaed to
appear before a Parliamentary Investigative Committee (CPI) to see
if he will repeat his allegations under oath. In the May 7 PT
primary in Sao Paulo state, Senator Aloisio Mercadante defeated Sao
Paulo former Mayor Marta Suplicy to win the party's nomination for
Governor. END SUMMARY.

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NATIONAL ENCOUNTER
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2. (U) President Lula's Workers Party (PT) held its 13th National
Encounter April 28-30 in Sao Paulo. This was the PT's first
Encounter since October 2001, and the first ever held while the
party controlled the federal government. The purpose of National
Encounters - which are less frequent and more important than annual
party congresses - is to gather the faithful to assess the party's
condition and strategize for the future. This year, the delegates
were asked to debate, amend as appropriate, and vote on a document
outlining the party's situation and proposed tactics in this
election year, and another laying out the government's program. The
National Encounter was attended by members of the PT National
Directorate (DN),Ministers, Governors, Mayors, and Members of
Parliament, along with delegations from foreign leftist progressive
parties. ConGen Sao Paulo received an invitation from PT President
Ricardo Berzoini and International Relations Secretary Walter Pomar,
but was subsequently advised that the PT had decided to hold a
closed encounter and was unable to accommodate observers.


3. (U) Poloff met May 5 with PT Senior Advisor for International
Affairs Ana Maria Stuart to obtain a readout of the National
Encounter and an update on the PT's preparations for national and
state elections. Stuart explained that in 2005, the PT had invited

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a wide variety of individuals and institutions to participate in the
celebration of its twenty-fifth anniversary, and had inadvertently
and erroneously used the same mailing list for this year's National
Encounter, resulting in a number of invitations that had to be
rescinded, since the National Encounter was an event "of a different
nature" than the anniversary party.


4. (U) Stuart, who had earlier (see ref E) shared with CG her
concern over the divide between the PT's moderate, pragmatic
majority faction and various leftist tendencies, especially over the
government's conduct of macroeconomic policy, characterized the
National Encounter as a success, noting the active participation of
some 1,200 militants. She described how lengthy internal
negotiations had ensured that the Encounter would be relatively free
of acrimony and conflict. Though delegates ultimately adopted a
resolution calling for an adjustment of economic policy, and
especially a reduction of interest rates, they did so in a
non-confrontational manner. The voices on the left that have
accused Lula of selling out the working class and the poor since
assuming the Presidency in January 2003 were mostly muted. The
leftists, Stuart explained, realized that the PT was in trouble, and
they too face a tough challenge getting re-elected and believe their
best chance is via party unity.


5. (SBU) Another reason the leftists didn't try to disrupt the
Encounter over economic policy, Stuart said, is that new Finance
Minister Guido Mantega is much less a lightning rod for leftist
criticism than his predecessor, former Minister Antonio Palocci.
She nonetheless acknowledged that the loss of Palocci, who resigned
under pressure March 27, was damaging to the party and the
government. "It's too bad, what happened to him. He made a
mistake. He thought he could do it within the law, access the
financial information of that boy that was causing him so much
trouble, but he was wrong, and he paid the price." (COMMENT: This
version of events lacks plausibility. See ref D for an account of
the events that brought Palocci down. END COMMENT.)

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PT SEEKS ELECTORAL ALLIANCES WITHOUT REGARD TO IDEOLOGY
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6. (U) The most important decision that emerged from the Encounter,
according to Stuart, was the authorization granted to President Lula
and the PT's National Directorate (DN) to pursue electoral alliances
across the political spectrum. Some wanted to limit any alliances
to the PT's traditional partners on the left, the Communist Party of
Brazil (PCdoB) and the Brazilian Socialist Party (PSB),but the
majority approved an initiative that excluded only three parties as
possible allies: the opposition Brazilian Social Democracy Party
(PSDB); its conservative ally, the Liberal Front Party (PFL); and
the leftist Popular Socialist Party (PPS),whose President (and
likely presidential candidate),Roberto Freire, has been vocal in
calling for Congress to pursue Lula's impeachment over corruption
allegations. Delegates passed a "motion of repudiation" against the
"PPS pro-impeachment movement."


7. (U) Stuart predicted that the PT will continue to court the
large and influential centrist Brazilian Democratic Movement Party
(PMDB). The PT has for some time been reaching out to the PMDB,
offering the Vice-President's spot on the ticket, so far to no
avail. The PMDB is scheduled to hold a national convention May 13,
which may help determine its election strategy. Many of its leaders

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prefer to remain neutral in the presidential election to maintain
flexibility at the state level, where the party is running
gubernatorial candidates in 17 of the 27 states. An alliance with
the PMDB, Stuart suggested, would, in some parts of the country,
enhance the PT's appeal to middle-class voters who supported Lula in
2002 but have since distanced themselves from the party.


8. (U) The PT came into some media criticism for leaving the door
open to alliances with such centrist and rightist parties as the
Brazilian Labor Party (PTB),the Liberal Party (PL),and the
Progressivist Party (PP),all of which form part of the governing
coalition but have leaders and members who were implicated in the
Congressional bribery scandal ("mensalao"). These three parties
will all struggle to achieve the five percent threshold required in
elections for the Chamber of Deputies to retain their privileges and
their viability, and it is unclear whether any will be interested in
an alliance with the PT, which, apart from Lula's prospects, faces
rough sledding in Congressional elections. Stuart agreed with other
insiders (ref B) who predicted that the PT, which in 2002 elected 91
members to the Chamber and currently holds 81 seats, will likely
fall to around 60 seats; many would consider this an optimistic
estimate.

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ACCOUNTABILITY DEFERRED
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9. (SBU) With respect to another critical issue, the PT ducked. The
question arose at the Encounter of what to do about the numerous
members implicated in the "mensalao" and other corruption scandals
that dominated the political scene during the latter half of 2005.
The delegates agreed that these members must be investigated by the
PT's internal disciplinary machinery, but not until 2007, after the
election, to prevent the opposition's taking advantage of the
situation during an election year. This decision also generated
cries of derision from the opposition and the media. The press also
commented acerbically on the presence at the Encounter of Lula's
former Chief of Staff, Jose Dirceu, who continues to advise Lula and
influence PT strategy behind the scenes, and of former PT President
Jose Genoino, who resigned in disgrace last July (ref H). Stuart,
however, defended the decision and the discredited individuals: The
PT, she said, didn't want to commit suicide in an election year; why
give the opposition ammunition? She asserted that many PT Federal
Deputies had "merely made the mistake of doing what the party
Treasurer told them to do," and that when the PT had discovered the
wrongdoing of the Treasurer, Delubio Soares, it had expelled him.
To prevent the problem from recurring, she said, the PT is seeking
to name a campaign Treasurer (separate from the party's Treasurer),
a financial expert, preferably a businessman, with a reputation for
probity.


10. (SBU) Asked about the lingering impact of the corruption
scandal, Stuart predicted that the opposition would continue to
raise it. Sounding much like Lula himself, she complained that "the
people who have been running this country for five hundred years
will never be able to get over having a worker as President.
They're unable to spare him any criticism or give him credit for
anything." But the public, she continued, was tired of the constant
reporting of the scandal, and wouldn't pay attention. Besides,
there were newer, fresher scandals to exploit. She pointed to the
fact that none of the 46 individuals - including two former Deputies
and more than ten current and former Congressional staffers -

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C O R R E C T E D C O P Y (Updated Text Paragraph 12)

arrested the previous day by Federal Police in "Operation
Bloodsucker" -- a scheme to defraud the public in the purchase of
ambulances for municipalities -- was affiliated in any way with the
PT.


11. (SBU) COMMENT: Per press reports, the PT is having trouble
finding a campaign Treasurer who meets the requirements and is
willing to take on the task. Stuart's explanation of the bribery
scandal lacks plausibility, but no more than that of many PT leaders
- former Sao Paulo Mayor Marta Suplicy comes to mind, but she is
far from alone - who continue to assert, in the face of the final
report (ref D) of the Parliamentary Investigative Committee on the
Postal Service ("CPI dos Correios") and the accusations of the
Attorney General (ref C),that the existence of the "mensalao"
(payoffs to Deputies of the governing coalition in return for votes
on government-sponsored legislation) has never been established and
that the PT was at worst guilty only of use of "Caixa 2," the
solicitation and use of unreported and unaccounted campaign funds.
END COMMENT.


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VOICES FROM THE LEFT
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12. (U) Stuart noted that despite the general unity and amity at
the Encounter, one tiny faction on the farthest left wing of the
party, the Trotskyite group O Trabalho ("Work"),had garnered some
attention with its motions. A proposal to undo the privatization of
the Rio Doce Valley Company (CVRD),the world's largest mining
company, was defeated by the surprisingly slim margin of 358-305.
This may have been the PT's way of criticizing privatizations
carried out during the PSDB administration of Fernando Henrique
Cardoso; their efforts to convoke a CPI to investigate these
privatizations have come to naught. Another resolution, much more
easily defeated, called for nationalization of troubled air carrier
Varig, a bizarre notion that would probably have required the State
to assume the company's large debts. Stuart also noted that O
Trabalho had called for Brazil's withdrawal from Mercosul on the
grounds that the trade bloc was an instrument of multinational
corporations; this motion also did not prosper. She predicted that
many of the social movements that comprise the PT's core
constituencies, such as the Landless Rural Workers' Movement (MST),
would continue to criticize the Lula government's economic and
social policies while at the same time working for Lula's
re-election.

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SILVIO PEREIRA SPEAKS OUT
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12. (U) The PT's post-Encounter peace was disturbed May 7 when "O
Globo" published two lengthy interviews with Silvio Pereira, the
party's former Secretary-General. Pereira resigned last July amid
allegations that he had controlled the "mensalao" scheme. He became
for a time a poster-boy for corruption when it was revealed he had
accepted the gift of a Land Rover from a company that did a lot of
business with Petrobras, the partially privatized state petroleum
company. Pereira told journalists that:

-- Businessman Marcos Valerio Fernandes de Souza had planned to
raise the sum of one billion reals (approximately USD 400 million at

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C O R R E C T E D C O P Y (Updated Text Paragraph 12)

that time) via state-owned enterprises or companies with extensive
ties to the State or lucrative government contracts. He listed
three banks - Banco Economico, Banco Mercantil de Pernambuco, and
Banco Opportunity - and indicated that Valerio was involved in shady
livestock deals as well.

-- Valerio's plan was to establish and maintain a pool of companies
dependent on government contracts to draw on for funds to pay off
2002 campaign debts and 2004 municipal campaign expenses.

-- Valerio, a former Central bank employee, provided ordinary and
entirely legitimate services to the PT in the 2002 elections, but
later grew so powerful that he was unaccountable and uncontrollable.
For example, PT ex-Treasurer and designated scapegoat Delubio
Soares knew nothing about the withdrawals of funds from Banco Rural
that were among the most concrete criminal acts of the scandal.
Delubio "is not corrupt. He isn't."

-- Four individuals - President Lula, then-Chief of Staff Dirceu,
then-PT President Genoino, and Senator Aloisio Mercadante (see
paragraph 15) - were in charge of the PT, but Lula wasn't
responsible for any criminal activity. Dirceu also kept his
distance from Valerio and his activities.

-- Valerio's schemes involved numerous political parties and
politicians, and were par for the course in Brazilian politics.
"Behind Marcos Valerio, there must be a hundred Marcos Valerios.
It's a mechanism, and now it's continuing in the country." When the
scandal broke, Valerio threatened to "give over everything and bring
down the Republic," but settled in the end for telling only about
half of what he knew.

-- Pereira himself had the difficult task of finding jobs in the
federal government for all the PT loyalists and allies who wanted
them. "These people aren't easy; they tried everything...My job was
to convince PT Ministers to free up jobs for allies. When the PMDB
came on board in April [2003] and the government was already filled,
I was stuck with the hot potato." He claims that neither he nor the
PT Ministers did anything unethical, but rather ran a legitimate
process, despite the claims of ex-Deputy Roberto Jefferson (PTB-RJ).



13. (SBU) Many of Pereira's allegations are not new, though this may
represent the first time a PT insider has spoken this explicitly,
and many seem self-serving. He was reportedly nervous throughout
the interviews and later regretted having granted them. He even
went so far as to ask "Globo" not to publish them, claiming he was
under intense pressure to maintain silence and could be killed for
having spoken. President's Lula's reaction to the publication was
calm, perhaps reflecting Pereira's assertions that he was not
involved in any wrongdoing. "He's free to tell what he knows," Lula
said. Other party officials were not so forgiving. PT President
and former Labor Minister Ricardo Berzoini expressed surprise at the
revelations, noting that Pereira "had every opportunity to say that
to the CPI, the Federal Police, and the Public Ministry
[prosecutor's office." He went on to accuse Pereira of telling lies
and betraying the party. One immediate result of the interviews was
that he was immediately subpoenaed to appear before the "Bingos
CPI." His attorneys immediately sought a dispensation, but the
Supreme Court denied it, and he is scheduled to testify May 10. His
attorney claims Pereira is emotionally over-wrought and is taking
anti-depressants.

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MERCADANTE WINS SAO PAULO PRIMARY
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14. (SBU) Also on May 7, nearly 70,000 PT members went to the polls
in Sao Paulo state to choose the party's gubernatorial candidate.
Senator Aloisio Mercadante defeated Marta Suplicy by 3,757 votes,
52.8 percent to 47.2 percent. Prior to the primary, each candidate
had pledged to support and work for the other, and for the entire
party ticket, in the event of defeat. By all accounts, Mercadante -
the government's leader in the Senate who has coordinated every Lula
campaign since 1982 and was Lula's running mate in his unsuccessful
1994 presidential campaign - was clearly Lula's preferred candidate.
As predicted, Suplicy outpolled Mercadante almost 2-1 in Sao Paulo
city, but Mercadante defeated her by about 2,000 votes on the city's
periphery and trounced her by 10,000 votes in the state's interior.
Per ref B, Mercadante benefited significantly from the support of
Federal Deputy Joao Paulo Cunha of Osasco (western suburbs),who is
influential throughout the periphery and had himself originally
planned to run for Governor. One of the most notorious of the
"mensaleiros" (politicians implicated in the mensalao scandal, Cunha
was recently acquitted of wrongdoing by the full Chamber of Deputies
amidst vocal public reprobation, though he still faces federal
charges (ref C). Even though Mercadante is not expected to defeat
PSDB nominee and Sao Paulo ex-Mayor Jose Serra, who polls still show
as likely to prevail in the first round, the PT is counting on his
high national profile to enable him to give Serra a run for the
money and to garner votes for Lula in critical and populous Sao
Paulo state. In 2002, Mercadante received 10 million votes for
Senator in the "red wave" that swept into office not only him and
Lula but many PT Senators and Deputies.

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COMMENT
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15. (SBU) Silvio Pereira's comments certainly don't help the PT
cause, but it's too early to tell whether or not they will do
lasting damage to Lula's re-election campaign. It is similarly
difficult to predict the fallout from Bolivia's May 1
nationalization of Petrobras facilities in that country (ref A).
Most observers say there will be none, because Brazilians don't pay
attention to foreign policy and don't base their votes on it,
although significant increases in the price of gasoline, cooking
gas, or electricity, should such occur, could get their attention.
Lula's soft response may also generate opposition; many Brazilians
do not enjoy or appreciate the optics of Brazil and Petrobras
seemingly getting kicked around by lowly Bolivia. On the domestic
front, the PT continues to face a challenge in securing an alliance
with the PMDB; the opposition PSDB is also avidly courting the PMDB,
and these two parties are in some ways more compatible. The PMDB is
holding a national convention May 13 at which, literally, anything
can happen. We also are continually being reminded that this is
Brazil, and that life does not begin until after July 9, the day the
World Cup championship ends. END COMMENT.


16. (U) This cable was coordinated/cleared with Embassy Brasilia.

MCMULLEN