BRAZIL: U/S JEFFERY'S MEETING WITH CENTRAL BANK PRESIDENT

UNCLAS SECTION 01 OF 03 SAO PAULO 000731

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SENSITIVE
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STATE FOR WHA/FO, WHA/BSC, E, EEB
STATE PASS USTR FOR KATE DUCKWORTH
STATE PASS FED BOARD OF GOVERNORS FOR ROBITAILLE
NSC FOR TOMASULO
TREASURY FOR JHOEK
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STATE PASS EXIMBANK
STATE PASS OPIC FOR DEMROSE, NRIVERA, CMERVENNE
USAID FOR LAC/AA

E.O. 12958: N/A
TAGS: EFIN ECON PGOV BR
SUBJECT: BRAZIL: U/S JEFFERY'S MEETING WITH CENTRAL BANK PRESIDENT
MEIRELLES, AUGUST 21, 2007, SAO PAULO

SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY

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SUMMARY
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1. (SBU) Under Secretary for Economic, Energy, and Agricultural
Affairs Reuben Jeffery III met August 21 in Sao Paulo with Henrique
Meirelles, President of Brazil's Central Bank. Meirelles commented
on the recent global market turbulence and used the relatively mild
reaction by Brazilian markets to illustrate the soundness of the
economic fundamentals of the Brazilian economy. While noting the
resilience of the Brazilian economy, he stated that infrastructure
remains an area of present and future concern, and he expressed
interest in learning from the U.S. experience in attracting private
investment for large infrastructure projects. End Summary.


2. (U) Participants:

U.S.

Under Secretary Jeffery
Consul General (CG) Thomas J. White
Lisa Kusbiske, WHA/EPSC
William McIlhenny, S/P
James Story, ECONPOL Chief Sao Paulo
Thomas Pierce, E
Peter Higgins, POL Sao Paulo (notetaker)

Brazil

Central Bank President Henrique Meirelles
Paulo Vieira da Cunha, Director, International Affairs
Mario Toros, Director, Monetary Policy
Alexandre Tombini, Director of Norms and Organization of Financial
Systems


3. (SBU) Central Bank President Meirelles began the meeting by
noting that global and Brazilian financial markets, struck by
turbulence the week of August 13, were operating much better and had
recovered some of their initial losses. (Note: Subsequent to this
meeting, the stock exchange, Bovespa, turned in a strong performance
and by August 27 had recovered all the losses it had suffered during
the crisis. End Note.) Meirelles said the measures announced
August 17 by the U.S. Federal Reserve had helped restore stability,
and that while the situation was still unfolding, financial markets
were improving. He further opined that it remained to be seen
whether everything worked as expected; in other words if the losses
would be shared by industrial concerns and not shouldered entirely
by financial enterprises and institutions. U/S Jeffery noted that
excessively low risk premiums in the sub-prime mortgage market may
have contributed to the reverses, but re-pricing is taking place.

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BRAZIL'S ECONOMIC IMPROVEMENT
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4. (SBU) Under Secretary Jeffery noted Brazil's sound fundamentals,
which should help the country's markets weather the turbulence.
Referring to his meetings in Brasilia with Finance Ministry
officials, he noted that the country had seen "breathtaking"
economic improvement in recent years, especially in achieving price
stability. Meirelles recalled that Brazil suffered extremely high
inflation between 1980 and 1994, with lower inflation thereafter
punctuated by periodic spikes. Recent years have seen very low
levels of inflation, including a remarkable 3.1% for 2006. The
target for 2007 is 4.5 percent, and current inflation is well within
this target, running below 3.7 percent. Other economic factors

SAO PAULO 00000731 002.2 OF 003


Meirelles offered as proof of the sound economy include a current
account balance that is 1.3 percent of GDP, a modest (given the 1.3
trillion dollar economy) external debt of 30 billion dollars, and
160 billion dollars in exchange reserves held in Treasury bonds.
Brazil is the world's fifth largest holder of U.S. Treasury bonds,
and these reserves potentially offer the Brazilian government a
mechanism by which to moderate any severe exchange rate
fluctuations. Meirelles concluded that given these conditions, the
Brazilian economy is better positioned than ever to ride out any
market turbulence.

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CHALLENGES AHEAD
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5. (SBU) Brazil's economy is nonetheless facing a number of
challenges, Meirelles acknowledged. He cited infrastructure -
especially in the aviation sector - as an example and noted that
Brazil also needed to improve roads, highways, railroads, and energy
infrastructure in order to continue to expand economic growth.


6. (SBU) The Under Secretary expressed interest in the GoB's Growth
Acceleration Program (PAC) and asked how much of it would be
financed by private investment. Meirelles replied that of the PAC's
three components - public direct investment, state-owned company
investment, and private investment - the private-sector component
hadn't taken off yet. There were a number of regulations and
requirements imposed by the Government Accounting Board (TCU) that
inhibited full private-sector participation, he said.

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FINANCING INFRASTRUCTURE INVESTMENT
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7. (SBU) In response to the Under Secretary's questions on how the
United States could help Brazil with its investment climate issues
and help make U.S. private investors aware of the opportunities
available in Brazil, Meirelles said he was interested in learning
from the U.S. experience with attracting private investment in
infrastructure projects. "Besides the availability of capital, how
does the U.S foster growth in such investment?" Meirelles asked. CG
White mentioned OPIC financing and TDA assistance with feasibility
studies as examples of USG programs that help the U.S. private
sector engage with countries.


8. (SBU) Under Secretary Jeffery promised to share with Meirelles
studies that have been done on this subject. He noted that the
United States has been fortunate in the growth of development
capital markets over the past five years, and in the increasing
involvement of state and local government in assessing their
important infrastructure deficiencies and bringing in private
capital to help address those shortcomings. Private capital had
been especially involved in toll roads and, to a lesser extent,
airports. In Brazil, Meirelles stated, concerns remain about
capitalization and the need for the government to set a minimum
price, which is sometimes not accepted by the private sector. It is
possible, he suggested, that the rules in Brazil are not open enough
for international companies.


9. (SBU) In the U.S., U/S Jeffery explained, the rules were often
transaction-specific. Even so, a specific process could be
politically charged, and caution was necessary to ensure a fair,
competitive, responsible process. CG White noted that a group of
U.S. institutional investors would be visiting Brazil in early
September, representing both private and public sector investment
funds. Meirelles reiterated Brazil's interest in fostering
cooperation so that Brazil could have access to American know-how
and benefit from the transfer of U.S. technology. One way Meirelles

SAO PAULO 00000731 003 OF 003


could help Brazil learn from other countries' experiences, U/S
Jeffery suggested, would be to consult his colleagues in the world
of central banking, such as Bank of Italy Governor Mario Draghi.

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BIOFUELS
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10. (U) International Affairs Director Paulo Vieira da Cunha noted
that Brazil would host the G-20 meetings next year and was planning
to organize a seminar on clean energy for Central Bank Governors and
Finance Ministers. U/S Jeffery briefly outlined U.S.-Brazil
cooperation under the bilateral biofuels cooperation MOU in the
areas of creating standards, making biofuels into commodities, and
financing new and expensive technologies.

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COMMENT
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11. (SBU) Meirelles and his senior advisors appeared to be fully
engaged and on top of Brazil's macroeconomic situation. Most
important, Meirelles was frank about Brazil's weaknesses and
vulnerabilities and eager to learn from the U.S and other countries
to help Brazil's economy and financial sector. End Comment.


12. (U) This cable was cleared by Embassy Brasilia and by U/S
Jeffery's delegation.

WHITE