FORMER FINANCE MINISTER ON BRAZILIAN POLITICS AND RELATIONS

UNCLAS SECTION 01 OF 04 SAO PAULO 000019

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REF A) 07 Sao Paulo 780; B) 07 Sao Paulo 1005; C) Sao Paulo 12; D)
07 Brasilia 2151; E) Brasilia 0006

E.O. 12958: N/A
TAGS: PGOV PREL ECON EINV ETRD BR VE
SUBJECT: FORMER FINANCE MINISTER ON BRAZILIAN POLITICS AND RELATIONS
WITH VENEZUELA

SENSITIVE BUT UNCLASSIFIED; PLEASE PROTECT ACCORDINGLY

Summary
--------------


1. (SBU) During a January 7 meeting with the Ambassador, former
Minister of Finance Antonio Delfim Netto (strictly protect),who is
currently working as a political and business consultant, discussed
the opposition's victory over the government in a major tax battle
and its implications for domestic politics and the 2010 presidential
elections. Delfim also emphasized Brazil's focus on infrastructure
development and said that the country will continue to pursue
large-scale privatization efforts. On the subject of Brazil's
relations with Venezuela, Delfim stated that Lula is concerned about
Chavez's foreign policy agenda, especially his desire to annex one
third of Guyana's territory. End Summary.

CPMF Tax Defeat
--------------


2. (SBU) Delfim labeled the Brazilian Senate's December rejection
of the renewal of the Provisional Financial Transactions Tax (CPMF -
see ref B),as a significant defeat for the government alliance. In
his view, the opposition worked to eliminate the tax, which was
projected to generate 40 billion Reals (about USD 23 billion) in
revenue in 2008, in order to "starve the beast," or attempt to
control what government opponents see as unjustified public
spending. In addition to the lost source of income that expiration
of the CPMF will create, rejection represented a political setback
for the Lula Administration as the President expended significant
political capital in supporting the continuation of this tax. The
opposition is now mounting a legal challenge to the Ministry of
Finance's efforts to compensate for anticipated revenue losses by
raising the Financial Operations Tax (IOF) and Corporate Profits Tax
(CSLL) contributions - which Delfim mentioned are in effect very
small increases - in the Supreme Federal Tribunal (ref C). Delfim
predicted that the court will rule against the government and find
the IOF and CSLL adjustments unconstitutional.

Internal Politics and 2010 Presidential Elections
-------------- --------------


3. (SBU) Delfim rebutted rumors that the CPMF defeat would lead to
internal political fallout and stated that Lula is unlikely to
replace Guido Mantega as Finance Minister because, even though
Mantega is not a strong or independent minister, Lula and his main
advisor, Civil Household Minister (Chief of Staff equivalent) Dilma
Rousseff, would prefer to keep him on board. According to Delfim,
Lula personally likes Mantega; both he and Rousseff believe Mantega
can be easily controlled and is a convenient scapegoat for Lula on
politically unpopular issues, someone that Lula can use "like a pen"
because Mantega, unlike some other ministers, does not question the
president's decisions. Delfim dispelled rumors that Belo Horizonte
Mayor Fernando Pimentel would replace Mantega (ref B) and further
stated that Lula is not grooming Pimentel to become the presidential
candidate of his Workers' Party (PT) in 2010 as some analysts have
suggested. (Note: During a January 7 meeting with FIESP, the
Federation of Industries of Sao Paulo President Paulo Skaf [ref C],
Skaf stated that he believed Pimentel would replace Minister Mantega
this year as a stepping stone to becoming Governor of Minas Gerais.

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End Note.) Delfim said Lula's preferred successor would be
Minister Rousseff or Social Development and Hunger Combat Minister
Patrus Ananias, but noted that neither is actually apt to win the
election. Delfim stated instead that Sao Paulo Governor Jose Serra
of the opposition Social Democracy party (PSDB) is most likely to
become Brazil's next president.

Infrastructure Development and Privatization
--------------


4. (SBU) Delfim acknowledged that the 2010 elections might also
have an impact on infrastructure investment, which will continue to
increase by at least 1.5 percent of GDP in 2008. Governor Serra is
expected to push privatization in Sao Paulo State, especially in the
road and energy sectors, as a means of both boosting economic
growth and enhancing his credentials as a market reformer in the
run-up to the 2010 elections. Besides calling for a large road
construction expansion program, Serra is also working actively with
the Inter-American Development Bank (IDB) to promote private-sector
infrastructure investment. Serra's probable primary opponent in the
national elections of 2010, Minas Gerais Governor Aecio Neves, is
looking to carry out similar policies in his own state to viably
compete with Serra on the economic development front, Delfim said.


5. (SBU) Minister Rousseff is a key player in further driving
infrastructure development, Delfim said. Rousseff has become a
stronger supporter of private sector investment in the aftermath of
Brazil's successful road concessions in October 2007. Her present
position is a significant change because Rousseff, an erstwhile
leftist militant described by Delfim as the "most important person
in Brazil's government" after the president, has an overwhelming
amount of influence on Brazil's national agenda. Although Rousseff
continues to harbor suspicions about the private sector - Delfim
stated that Rousseff believes Brazilian business is run like a
"cartel and always has tricks up its sleeve" - she now sees the
benefits of non-government investment. Spanish firms, with active
support from Spain's government which, according to Delfim,
practices an "aggressive industrial policy," are likely to be the
largest foreign investors in Brazilian infrastructure. With respect
to Brazil's ongoing civil aviation crisis, Delfim predicted that
Rousseff will support privatizing some of the country's airports, a
move which could be the beginning of a larger privatization process
encompassing such areas as railroads and ports.

Further Economic Views
--------------


6. (SBU) Delfim stated that Minister Mantega's proposal to
establish a Brazilian sovereign wealth fund is a "terrible idea" and
is unlikely to materialize because Brazilian foreign reserves are
inadequate and will not grow by a sufficient amount over the next
year due to a decline in Brazil's terms-of-trade. Delfim added that
Brazil's exchange rate (approximately 1.75 Reals per U.S. Dollar) is
currently overvalued which has a significant impact on the current
account balance. Turning to WTO Doha Round negotiations, Delfim
remarked that the talks will not succeed because all countries
negotiating trade agreements want self-sufficiency in food
production and he does not expect the United States to make adequate
concessions in the agricultural sector to conclude a Doha agreement.


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Venezuela's Relations with its Neighbors
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7. (SBU) Brazil's relations with Venezuela are tense and
deteriorating, but Lula is seeking to avoid an open confrontation
that could cause a serious rupture in bilateral relations and have
an impact on the continent as a whole, Delfim said. He stated that
Lula's presidency represents an "important inflection point" for
Brazil because Lula is the first Brazilian president "to put poverty
on Brazil's economic agenda in a serious way." Having come from a
poor background himself, Lula understands the implications of
growing up among a vastly neglected part of society. Delfim
characterized Lula as someone who "believes deeply in South American
unity" and thinks Latin American poverty brings the region's people
together, enabling them to resolve conflicts through negotiation.
Delfim, who stated his opposition to Venezuela's entry in Mercosul,
said that Hugo Chavez is a "psychopath" (while Evo Morales is just a
"poor man") but that Lula does not want to alienate the Venezuelan
leader. Lula is worried about Venezuela's "serious" border problems
with its neighbors, particularly Colombia and Guyana. Chavez has
his sights on "one third" of Guyana's territory, and if Venezuela
were to invade Guyana, Caracas would likely militarize all of
Venezuela's south, antagonizing the indigenous populations there.
(Comment: Former President and sitting Senator Jose Sarney has
expressed similar concerns with regard to Chavez's designs on
Guyana, per reftels D and E. End comment.) Delfim said this will
have an impact on Brazil because the territories of at least one
tribe, the Yanomami Indians spills over the Venezuela-Brazil border.
Delfim believes that, should Venezuela invade Guyana, the Yanomamis
will declare independence, forcing Brazil to get involved in a
Venezuela-Guyana war.

Comment
--------------


8. (SBU) Considered by analysts to be one of Brazil's most
influential economic commentators, Delfim supported Lula's
re-election bid and is said to meet with him regularly to provide
informal economic advice. At the beginning of Lula's second term,
he was expected to be appointed to a Cabinet position or as head of
the Brazilian Development Bank (BNDES). While some of his views
come across as exaggerated, unorthodox, or idiosyncratic, his long
experience and knowledge of the players afford him unique insight
into machinations and conflicts involving the government and
opposition. End Comment.

Biographical Information
--------------


9. (U) Born on May 1, 1928, Delfim is a University of Sao Paulo
(USP) professor emeritus of macroeconomics and a Brazilian
politician. In 1966-1967, Delfim was Sao Paulo State Finance
Secretary and subsequently national Minister of Finance, a post he

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held until 1974. During his tenure under the military dictatorship,
Brazil underwent what many analysts call an "economic miracle" with
seven successive years of over 10 percent growth. He was Ambassador
to France (1975-1978) and served as Minister of Agriculture (1979)
and Planning (1979-1985). Delfim was elected Federal Deputy in 1986
and was re-elected five times before being defeated in 2006. He was

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instrumental in creating financial regulations that increased the
role of the federal government and centralized more power in
Brasilia at the expense of states and municipalities. Delfim is a
regular columnist on economic issues for Carta Capital Magazine
mass-circulation daily Folha de Sao Paulo, as well as a political
and business consultant.


10. (U) This message was cleared through the U.S. Treasury Attache
in Sao Paulo and Embassy Brasilia.


11. (U) Minimize considered.

WHITE