BANCO DEL SUR BECOMES A BRAZILIAN "PEEVE"

C O N F I D E N T I A L BRASILIA 000751 SIPDIS SIPDIS TREASURY FOR OASIA USDOC FOR 4322/ITA/MAC/WH/OLCA/JANDERSEN/ADRISCOLL/MWAR D USDOC FOR 3134/ITA/USCS/OIO/WH/RD/SHUPKA C O R R E C T E D COPY - ADDED CLASSIFIED BY and REASONS statement. E.O. 12958: DECL:04/25/2017 TAGS: ENRG EFIN PGOV PREL BR XM SUBJECT: BANCO DEL SUR BECOMES A BRAZILIAN "PEEVE" REF: A) BRASILIA 708 B) BUENOS AIRES 808 Classified by Charge d'affaires Philip T. Chicola, reasons 1.4 (b) and (d). ¶1. (C) Summary: The abrasive and high-handed manner in which Venezuelan President Chavez has sought to advance his "Banco del Sur" project has pushed Brazil to the point of seriously considering not joining the Venezuelan's latest flight of fancy. The Brazilians, according to both the IMF resrep and public accounts, were absolute livid at Chavez and Kirchner's surprise announcement that they would be creating the bank -- and others were welcome to join if they wanted. Initially willing to overlook the slight, the Lula Administration then had all but decided not to join after having been effectively excluded from initial planning sessions, Finance Ministry International Secretary Luiz Eduardo Melin told Emboff April 24. Ecuadoran SIPDIS President Correa apparently convinced Lula to postpone a final decision and obtained a commitment of Brazilian attendance at a planning ministerial to be held in Quito (date unknown). Finance Minister Mantega, however, used the Mercosul Energy Summit in Isla Margarita to lay down some clear public markers for Brazilian participation, including full Brazilian involvement in planning and guarantees that there will be appropriate governance and a practical agenda. Melin told Emboff that absent these, Brazil probably would not join. End Summary. Banco del Sur: "My Pet Peeve" -------------- ¶2. (C) In an April 24 meeting, Finance Ministry International Secretary Luis Eduardo Melin told Emboff and visiting Treasury SIPDIS OCC reps that Banco del Sur had become his "pet peeve." Brazil, he said, wants to be at the forefront of the creation of regional financial mechanisms that will foster regional integration. During President Lula's first term, he championed the creation of the South American Community (CASA),one of the working groups in which was considering financial integration. According to Melin, Brazil had put several practical, low-cost ideas on the table for consideration. Some of these involved greater access to Brazilian financial markets or possible lending via Brazil's National Social and Economic Development Bank (BNDES). Melin stated that during Lula's first term, Brazil had not been in a position to back up its ideas with new money, and this had led to some dissatisfaction. ¶3. (C) Melin stated that the Venezuelan President (he never used Chavez's name) had become impatient with the pace of discussion in the CASA, and unbeknownst to Brazil had begun bilateral discussions with Argentina on creating a Banco del Sur. Venezuela's approach, Melin stated, had replaced a useful multilateral process with a broad focus with a narrowly focused bilateral scheme. Venezuela and Argentina then presented the outlines of the Banco del Sur as a done deal. Melin said that initially, despite having been omitted from the planning process, Brazil had been willing to consider joining the Venezuelan-Argentine project. Melin affirmed that he had convinced Minister Mantega to travel to Buenos Aires and participate in the Bank's roll-out. Despite this gesture, Argentina and Venezuela failed to invite Brazil to the first working group meeting that was held two weeks later. When finally informed of the meeting the day before it was to take place, Brazil's only option was to have an officer from its Embassy in Buenos Aires represent it. ¶4. (C) Given this treatment, Brazil had decided to announce that it would not participate in Banco del Sur, Melin continued. That changed when visiting Ecuadoran President Correa raised the issue with Lula. Correa reportedly convinced Lula to have Brazil participate in a finance ministers meeting in Quito to consider whether the project could be given practical, useful focus. Melin stated that Brazil would probably not join a project that did not have a sound basis for governance and feasible goals. The bank must start small and build, he said. Venezuela's all or nothing approach would not work, he argued. Taking a shot at Argentina, he noted that they chaired the CASA working group on financial integration, but since the emergence of Banco del Sur, have refused to call a working group meeting. Brazil's proposals in that forum are still on the table, Melin noted. Moreover, Brazil is prepared to back its CASA proposals with money. The Banco del Sur episode, Melin said, "has not been our finest hour as a region." "Absolutely Livid" -------------- ¶5. (C) The IMF resrep told us recently that the Finance Ministry was absolutely livid at both the Venezuelans and Argentines for going behind their backs bilaterally and then publicly presenting them with a fait accompli. Separately, a senior advisor to the Central Bank board of directors told Emboff April 17 that the Brazilian Central Bank has opposed the idea of joining the Banco del Sur in internal GoB councils. According to this advisor, the Central Bank sees no value to the Venezuelan-Argentine proposal beyond what the IMF, IDB and World Bank already provide to the financial system. The Central Bank does not have a lead role in the decision, the advisor noted, although it would continue to oppose firmly the idea of using any Brazilian Central Bank reserves to finance Banco del Sur. ¶6. (C) Comment: As noted reftel, many in the Brazilian political and foreign policy establishment have begun to feel their leadership role in the region is being challenged by Chavez. The surprise unveiling of the Chavez-Kirchner Banco del Sur project and the highhanded manner in which Brazil was treated, therefore, hit a nerve in a way such an action might not have in the past. Despite this, were Chavez and Kirchner to modify their proposal to include safeguards for institutional governance, a regional infrastructure-focused lending plan and some more practical ideas for financing the bank, the Lula administration would have a hard time not joining. Nevertheless, Chavez and Kirchner have done themselves no favors with the Brazilians on this issue. CHICOLA