BRAZIL: SUBCABINET LEVEL ECONOMIC TEAM CHANGES

UNCLAS SECTION 01 OF 02 BRASILIA 000661

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR FOR CRONIN
STATE PASS USAID FOR LAC
TREASURY FOR OASIA - J.HOEK
NSC FOR FEARS
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/SHUPKA

E.O. 12958: N/A
TAGS: ECON EFIN PGOV BR
SUBJECT: BRAZIL: SUBCABINET LEVEL ECONOMIC TEAM CHANGES

REF: A) BRASILIA 60
B) BRASILIA 555


1. (SBU) Summary: With the make-up of President Lula's second-term
cabinet now finally finalized (ref B),attention has shifted to some
of the second tier positions in government. The Central Bank
announced on April 11 that it was asking Lula to nominate Mario
Gomes Toros, a former Vice President of the private bank
Santander-Banespa, to the position of Director of Monetary Policy.
Toros would take the place of Rodrigo Azevedo, who cited personal
reasons for returning to the private sector. The appointment of
Toros, an economist with orthodox credentials and extensive
operational experience in financial markets, suggests there will be
continuity of policy and outlook at the Central Bank. The Finance
Ministry, in turn, appears to be making an effort to make amends
with the Central Bank over previous criticisms of the pace of
interest rate cuts. Finance Minister Mantega has been careful in
recent public appearances not to criticize interest rate levels and
recently accepted the resignation of his Secretary for Economic
Policy, Julio Gomes de Almeida, after the latter did publicly
criticize the Bank. Finance Ministry Executive Secretary
(vice-minister equivalent) Bernardo Appy has stepped into the
economic policy job, while former Social Security Minister Nelson
Machado, who was displaced during the cabinet shake-up, has been
named the new Executive Secretary. End Summary.

Central Bank
--------------


2. (SBU) Brazilian Central Bank Monetary Policy Director Rodrigo
Azevedo cited personal reasons for returning to the private sector
in an April 11 Central Bank press release. Azevedo has been a frank
interlocutor with the Mission and well-regarded in the financial
community. His replacement, Mario Toros, has extensive operational
experience in financial markets, including a stint as Vice-President
and Director of Treasury and market operations at Santander-Banespa.
He later operated an investment fund, the Thassos fund. His
treasury experience will be very relevant to his new position, as
Toros will oversee the Central Bank's open market operations. An
advisor to the Central Bank Board told Emboff that he believes Toros
to be amply qualified for the job. The advisor dismissed any
suggestion that the personnel change would have any implications for
monetary policy. Separately, several financial analysts have told
the press the same. It also appears that Central Bank President
Meirelles has opted not to name a director to replace Afonso
Bevilaqua, the director for economic policy, who resigned earlier
this year. Mario Mesquita has taken over Bevilaqua's
responsibilities and Meirelles indicated to the press on April 11
that Mesquita would continue covering both Bevilaqua's and his own
directorate for the foreseeable future.

Finance Ministry
--------------


3. (SBU) Separately, there has been a re-shuffling of senior
personnel at the Finance Ministry. The Secretary for Economic
Policy, Julio Gomes de Almeida, a long-time associate of Minister
Mantega, tendered his resignation on April 4, a day after the press
published an interview in which Almeida was sharply critical of the
Bank's exchange rate stance. Almeida's departure was part of a
shuffle of the senior sub-ministerial positions in the finance
ministry which saw Executive Secretary Bernardo Appy (vice-minister
equivalent) take over as Secretary for Economic Policy (a job he had
already held under former minister Palocci). Meanwhile, former
social security minister Nelson Machado, who lost his ministry to
one of Lula's allies in the PT, became executive secretary in Appy's
place. Lula reportedly was satisfied with Machado's work, but
needed a ministry to give to PT cadres. Machado agreed to take a
less senior job, albeit at a more central ministry. In addition,
Mantega has not yet named a permanent replacement for Treasury
Secretary Carlos Kawall, who quit over disagreements with the

SIPDIS
presidency on the financing of Lula's stimulus package (ref A); the
interim secretary, Tarcisio Godoy, remains on the job.

Making Up

BRASILIA 00000661 002 OF 002


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4. (SBU) The Finance Ministry has been working to reduce public
disagreements over policy with the Central Bank. Over the last
several weeks, not only has Mantega not repeated any of his previous
outbursts about the pace of interest rate reductions, he has made
statements supportive of central bank decisions. In announcing the
Finance Ministry personnel shakeup on April 4, the press quizzed
Mantega about Almeida's criticism of the Central Bank of the
previous day. Mantega disavowed Almeida's criticism in fairly
strong terms, stating that, as Almeida was already on his way out
the door when he made those statements, those comments represented
his private views and in no way represented the ministry's official
position. Mantega then reiterated his support for the Bank, noting
that the economy was growing, inflation was under control and
interest rates were falling. Monetary policy, he said, had been
"correct."


5. (SBU) Comment: Lula wants continuity on economic policy in his
second term, albeit with a slightly lower primary surplus but higher
growth rates. Nothing in the sub-cabinet personnel shuffle suggests
that there would be substantive changes in policy or outlook. While
it is encouraging that Mantega seems to be making a greater effort
to limit criticism of the Central Bank, previous cease-fires have
not held for long.

SOBEL