THE BANCO DO BRASIL LEADERSHIP SHAKEUP

UNCLAS SECTION 01 OF 02 SAO PAULO 000280 SIPDIS SENSITIVE STATE PASS USTR FOR KDUCKWORTH STATE PASS EXIMBANK STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE STATE PASS NSC FOR ROSSELLO DEPT OF TREASURY FOR LINDQUIST E.O. 12958: N/A TAGS: ECON EFIN EINV ETRD BR SUBJECT: THE BANCO DO BRASIL LEADERSHIP SHAKEUP REF: A. Brasilia 522; B. Sao Paulo 0265 SENSITIVE BUT UNCLASSIFIED--PLEASE PROTECT ACCORDINGLY ¶1. (SBU) Summary: President Lula announced last month a leadership change at the Banco do Brasil (BB),replacing independent-minded Francisco de Lima Neto with PT-loyalist Aldemir Bendine. The shakeup is intended to expand credit in an economy where consumers and businesses have long paid high interest rates on loans. Though many fret about the economic implications for the BB, Lula's record suggests that substantive financial changes are likely to be smaller than his rhetoric indicates. End Summary. -------------- Lula Sacks Banco do Brasil President -------------- ¶2. (SBU) On April 8, the GOB announced that Banco do Brasil (BB) Vice President for Credit Cards, Aldemir Bendine, would replace BB President Francisco de Lima Neto. According to press reports, Lima Neto asked Lula to be released from his official duties for personal reasons. However, financial press commentaries have suggested that Lula and Finance Minister Guido Mantega forced him out. Bendine wasted no time in replacing six BB vice-presidents whose appointments would have ended in 2010. The leadership exodus suggests that the GOB forced out Lima Neto in an effort to exert more political control over the 65 percent government-owned bank. ¶3. (SBU) Shortly after Lula announced the leadership change, Mantega declared that Bendine's new job contract will require him to expand credit and lower the spread, i.e., the difference between interest rates and what banks charge for a loan. BB shares tumbled more than eight percent following this announcement (but since recovered since then.) Bendine later clarified that interest rate changes were not part of his contract and that he was receiving no pressure from the Lula administration. ¶4. (SBU) Bendine was a relatively low-profile figure until he assumed his new duties. He has been a BB employee for thirty years and has strong ties to the ruling PT party, according to sources in the banking industry. One Brazilian Central Bank (BCB) employee told EconOff that he believes Bendine's leadership personality does not matter much, because he is widely considered a puppet of Lula's administration. -------------- Private Sector Not Buying It -------------- ¶5. (SBU) Financial analysts in Sao Paulo have told EconOff that Lima Neto's removal was a politically-motivated decision with potentially serious economic implications. Alexandre Marinis, a consultant for Bloomberg News, told EconOff that BB's leadership shakeup could lead to the overexpansion of credit. According to Marinis, the BB could find itself in serious financial trouble if the crisis continues beyond 2009. Former BCB Deputy Governor Luiz Fernando Figueiredo told EconOff that the GOB is risking the BB's solvency by pushing it to issue more credit, a bet that he believes will only pay dividends if the economy begins to recover in quarters three and four. Figueiredo believes that the GOB was appealing to populist elements in the country with the Bendine appointment rather than sound economic considerations. A recent statement by PT Presidential Candidate Dilma Rousseff would appear to support this. In an editorial critical of the leadership shakeup at the BB, the newspaper Estado de Sao Paulo quoted Rousseff as telling union leaders, "We can no longer stand discussions with the presidents of public banks, who think that they are presidents of private banks. The public bank cannot act like a private bank and cannot have a profit margin of 20 to 30 percent per year. If they do so, they lose their reason for existence." -------------- -------------- BB's New Agenda Unlikely to Undermine Monetary Policy -------------- -------------- SAO PAULO 00000280 002 OF 002 ¶6. (SBU) Aldemir Bendine announced on April 28 a plan to expand BB's operations into real estate, with a loan of USD nine million to real estate giant Cyrela for participating in the Government's "My house, My Life," program (Ref A). Bendine also announced that the BB would lower the interest rate charged for consumer credit, though he did not specify by how much. Bendine hopes to keep the spread constant, between 6.8 and 7.2 percent this year, according to newspaper reports. (Note: The BB's spread in 2008 was 7.1 percent. If net losses from rising default rates grow too high, just maintaining the spread at 7.1 percent will be difficult. Credit rating agency Experian released a report in March showing that corporate default rates are up 24 percent compared to February. End Note.) In a separate interview with weekly magazine "Isto E," Bendine indicated that he hopes BB will overtake Itau-Unibanco Bank, to become once again the largest bank in Brazil. ¶7. (SBU) Despite concerns, most Consulate interlocutors do not believe that Bendine's succession marks a new era of government intervention in monetary policy. Joao Ribeiro, an analyst at the consulting firm Tendencias, told EconOff that the specter of inflation remains such a national preoccupation that Lula will remain conservative in his appointment of the next Brazilian Central Bank (BCB) President. Marinis agreed with his assessment, telling EconOff that Lula is generally pragmatic vis-a-vis monetary policy. Analysts expect current BCB President Henrique Meirelles' successor to be from within the bank, most likely current BCB Deputy Governor Alexandre Trombini. (Note: Meirelles is widely speculated to be considering a run for public office in 2010, launching his candidacy for either Governor or Senator of the State of Goias. End note.) ¶8. (SBU) Central Bank contacts have explained that the threat of lawsuits compels central bankers to follow the letter of the law in using inflation as the sole criterion in determining the overnight interest rate charged to banks, known as the SELIC rate. The law requires the BCB to adjust the SELIC only to meet official inflation targets, currently 4.50 percent. Courts actually could hold those on the BCB board of directors civilly liable for their actions if they use a target other than inflation to determine the SELIC rate. (Note: PMDB presidential candidate Jose Serra has publically called for the BCB to include growth as an additional factor in its decision. He also has begun publically attacking the BCB for not lowering interest rates aggressively enough. End note.) ¶9. (SBU) Comment: By expanding its credit offerings, the BB hopes to reduce Brazil's high interest rates. Lula's self-described "obsession" to lower interest rate spreads, however, does not extend to trimming the taxes that banks build into banking spreads. Lula's push to have the BB expand operations into non-traditional areas may not bode well for the bank's long-term financial position, particularly if the Brazilian economy takes a turn for the worse and default rates continue to rise (Ref B). While the BB's credit expansion could spell financial trouble for the bank itself in a worst-case scenario, consensus estimates suggest that the BB's leadership change will not have any lasting effect on the overall economy. The President has consistently proven to be an economic moderate and his rhetoric has been more radical than his actions. End comment. ¶11. (U) This cable was coordinated with and cleared by the Treasury Attache and Embassy Brasilia. WHITE