Brazil: Views on G20 meetings

UNCLAS SECTION 01 OF 02 BRASILIA 001463 SIPDIS SENSITIVE STATE PASS USTR FOR KDUCKWORTH STATE PASS EXIMBANK STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE DEPT OF TREASURY FOR LTRAN, BONEILL NSC FOR PAUL BROWN E.O. 12958: N/A TAGS: EFIN EINV ECON ETRD BR SUBJECT: Brazil: Views on G20 meetings REF: (A) SAO PAULO 486 (B) SAO PAULO 522 (C) BRASILIA 1299 (D) BRASILIA 1362 (E) BRASILIA 1417 (F) ERATH/WHA-EEB OCT 28 E-MAIL (G) SAO PAULO 593 (H) SAO PAULO 594 SENSITIVE BUT UNCLASSIFIED ¶1. (SBU) SUMMARY: Brazilian officials across GOB welcome the G20 approach to address the global financial crisis. External Relations Ministry, Finance Ministry and Central Bank emphasize the G20 must be seen as a mechanism to develop concrete proposals that take emerging economy input into account. Brazil will resist attempts to empower mechanisms like the Financial Stability Forum or the IMF to develop recommendations or oversight absent an effective voice for emerging economies in these fora. END SUMMARY. MERCOSUL PLUS MEETING TO DISCUSS FINANCIAL CRISIS ¶2. (SBU) The October 27 morning discussion included Brazil, Argentina, Paraguay, Uruguay, and Venezuela, joined in the afternoon by Bolivia, Chile, Colombia, Ecuador, and Peru with participation by ForMins, FinMins and Central Bank officials. According to Ministry of External Relations (MRE) and Finance Ministry sources, the discussion focused on impact of the crisis in each economy and what each is doing domestically, with a view to increasing mutual understanding. Finance contacts emphasize that this meeting was not intended to feed directly into the Nov 8 and Nov 15 meetings. As the first meeting of this particular grouping, concrete proposals did not emerge. Rather, the group agreed in general on the need to reform international organizations like the World Bank and IMF and the need for stronger global regulation. Whether that "global regulation" would be proposed as supranational or each country strengthening its own domestic regulation was not discussed in depth nor was consensus attempted. The group agreed that more trade among themselves would help ameliorate the effects of the crisis, further integration in their banking, capital and insurance markets should be considered, and that a "balanced" Doha conclusion would be welcome. (Communique sent to State Oct 28). Finance contacts noted some participants objected to the G20 formulation as "non-democratic" but that GOB argued the response to the crisis needed to focus on the economies with the most weight. �A; VIEWS ON G20 MEETINGS NOV 8-9 AND NOV 14-15 ¶4. (SBU) MRE and Finance contacts have commented that for Brazil, any idea to strengthen the role of institutions such as the IMF would be linked for Brazil to governance reform to give GOB more voice and vote. Brazil would not support a model where a supranational body had authority to tell Brazil what to do but Brazil does not have enough voice in the entity to influence decisions on the role of the institution. Similarly, Brazil would be very concerned if, for example, a proposal emerged to give the Financial Stability Forum (FSF) more authority to develop standards or judge regulatory decisions in countries, since FSF does not include Brazil or any other emerging economy. Central Bank contacts note that Brazil may propose IMF borrowing in capital markets as IDB and World Bank do. Central Bank would not support proposals for tighter controls over portfolio flows, while Finance contacts indicate the idea has received internal consideration and no final decision. While CB and Finance agree portfolio outflows have been significant, both note that FDI continues to increase notably into Brazil. ¶5. (U) FM Amorim reiterated publicly in a press interview this week Brazil's call to further reform the IMF. Finance Minister Mantega in an op-ed published November 6 called for expansion of the FSF to include emerging economies, arguing why should FSF recommendations be universally adopted if emerging economies that are responsible for a significant part of global growth do not participate in designing these recommended measures (op-ed e-mailed Nov 6 to DOS, Treas, NSC). In seven hours of testimony October 30 before the Senate Economic Committee, Mantega asserted dynamic emerging economies like Brazil are better placed to weather the crisis than "richer countries" due to higher internal growth potential than mature markets and a less exposed banking sector, while Central Bank Governor Meirelles noted Brazil has fared better than other developing countries in part because it is a creditor in dollars and has large reserves. G20 AS FORUM TO ADDRESS CRISIS ¶6. (SBU) Brazil is gratified regarding the decision to hold the November 15 conference in G20 formulation. However, GOB retains sensitivities based on its G8 plus 5 experience. As one MRE contact noted, Brazil would not want, and does not anticipate, the G20 BRASILIA 00001463 002 OF 002 response to the global financial crisis to turn into a "coffee chat at the end" experience, where the G8 really decide what the response will be and the G20 countries are informed at the end of the process and asked to come on board. Central Bank Governor Meirelles told the Ambassador November 6 that the main purpose of the two upcoming G20 meetings should be to make clear an intention to extend to the G20 the same kind of cooperation and coordination the G7/8 does, noting the first action that demonstrated such an intention was the recent Fed swap mechanism with Brazil, Korea, Singapore and Mexico. Finance contacts have recommended highlighting the importance of cooperation with and trust in emerging economies at the November 15 meeting, including underlining the importance of this swap. In his November 6 op-ed, FinMin Mantega urged the G20 become a forum for concrete policy proposals, more directly influence the work of multilateral financial institutions, and reinforce its ability to manage crises. His suggestions included expanding G20 meetings to twice yearly on margins of Bank/Fund meetings, calling extraordinary sessions, and establishing a G20 host-country-chaired virtual "situation room" to exchange information and coordinate responses. ¶7. (SBU) While Mantega explicitly chose not to engage publicly on expanding the G7/8, Meirelles indicated in the November 6 meeting with the Ambassador that perhaps, from Brazil's perspective, a "G-13" would be advantageous, while musing that using an existing mechanism like G20 might be easier politically. In the context of the upcoming Bank of International Settlements (BIS) meetings among G20 Central Bank Governors November 10-11 in Sao Paulo, he noted that the meetings unfortunately will stay general, without tackling concrete substance, due to Argentina's reluctance to agree to anything positive and concrete. INTERNATIONAL TRANSPARENCY ALSO A GOAL ¶8. (SBU) While Brazil likes the idea of G20 as a decision-making grouping, GOB also wants to advocate a transparent global process. Following up President Lula's meeting with UNSG Ban in September, Lula sent a letter in October asking Ban to organize an ECOSOC meeting of Finance Ministers to discuss the crisis. MRE contacts confirm President Lula understands this not as a decision-making meeting or grouping, but rather as a forum where "everybody can have their say and express their views" and receive information regarding the consensus other fora (like the G20) are developing. OTHER NEWS - BRIEF FINANCIAL UPDATES ¶9. (SBU) The Monetary Committee (COPOM) minutes indicate the Central Bank remains disposed toward further rate hikes despite the COPOM decision October 29 to hold the SELIC benchmark at 13.75 percent. Contacts indicate privately that the decision to hold rates steady was difficult, given Central Bank's legal obligation to keep inflation with the target band (4.5 to 6.5 percent, with inflation currently near the top of the band) combined with industry's strong desire to hold rates steady given economic difficulties that are not yet fully reflected in the time-lagged economic data COPOM considers in making its rate decision. ¶10. (U) Meirelles stated publicly this week that the CB has provided USD 47 billion in liquidity since mid-September. Autos sales in October were down 11 percent relative to September, the largest monthly decline since 2003, attributable to the lack of auto finance and the decline in consumer confidence. In agriculture, a 3.3 percent decline in output is forecast for 2009 - the first decline in six years. Factors include low external demand and credit conditions. The Finance Ministry announced an additional R$ 10 billion (approximately USD 4.7 billion) in lending (via BNDES) to large companies and an additional R$ 5 billion (via Banco do Brazil) to SMEs. To help boost working capital, Mantega announced a ten day extension in payment of federal business taxes due now on the 30th vice the 20th of each month). Brazilian industry groups had originally requested a 60 day extension. ¶11. (SBU) COMMENT: GOB is prepared to engage substantively at upcoming G20 meetings in Sao Paulo and Washington and welcomes development of this forum as a way to coordinate solutions to the global financial crisis. Brazil is unlikely to welcome proposals to empower other fora where it is either a non-member or has relatively less weight to develop recommendations or impose solutions. END COMMENT ¶12. (U) This cable was coordinated with Consulate Sao Paulo and the U.S. Treasury Attache in Sao Paulo. SOBEL