US embassy cable - 03BRASILIA3043

UNCLAS SECTION 01 OF 02 BRASILIA 003043 
 
SIPDIS 
 
NSC FOR WALLACE 
TREASURY FOR SSEGAL 
PLS PASS FED BOARD OF GOVERNORS FOR WILSON, ROBATAILLE 
USDA FOR FAS/FAA/ITP 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, EIND, EINV, PGOV, BR 
SUBJECT: Brazil: Build-Up to Possible Follow-On IMF Agreement 
 
 
1. (SBU) IMF ResRep Zandamela told us September 16 that the 
crux of any follow-on IMF program for Brazil after its 
current one expires this December will be whether the two 
sides can devise a mutually satisfactory formula stipulating 
that the GoB may only use its IMF funds with the IMF's 
explicit approval.  Whether to commence negotiations towards 
such an agreement will be decided jointly at the GoB/IMF 
meetings during the imminent World Bank/IMF annual meeting in 
Doha.  Actual negotiations would start in October. 
 
2. (SBU) Zandamela drew attention to the hypothetical option 
of Brazil's resorting to an IMF Contingency Credit Line 
(CCL).  The relatively new CCL facility offers lower interest 
rates than the Supplemental Reserve Facility used in Brazil's 
current IMF agreement, but is also of more restricted use. 
It presupposes that the beneficiary country does not/not face 
major structural balance-of-payments problems or external- 
account risks, and is meant exclusively to insure against 
contagion from new international shocks. 
 
3. (SBU) We asked whether it was not politically key from the 
GoB's angle that any IMF facility/agreement be seen to offer 
fresh features taking into account Brazil's current economic 
circumstances -- e.g., exemption of other infrastructure 
investment from primary-budget computations as is already 
allowed with Petrobras investments; inclusion of social or 
growth targets, etc.  The ResRep, surprisingly to us, 
dismissed such considerations as neither likely nor relevant. 
 
4. (U) Meanwhile the GoB is preparing Brazil's political 
ground for measured, matter-of-fact treatment of potential 
IMF negotiations.  A fortnight ago, Finance Minister Palocci 
declared, on the occasion of drawing the latest tranche under 
Brazil's current agreement, that Brazil is almost (but by 
implication not quite) at the stage of being able to do 
without an IMF program.  Last week, President Lula sounded 
publicly equable about a new program but stressed that it 
would be negotiated, if at all, "without a rope around our 
neck."  Former Central Bank Chairman Fraga earned front-page 
headlines the next day by saying Brazil would now be better 
off without an IMF program, since it could thereby prove that 
its responsible economic policies are due to GoB choice, not 
IFI conditionality. 
 
5. (U) Abroad, IMF Director-General Kohler has been quoted as 
apparently also opining that Brazil could do without a new 
IMF agreement.  Brazilian commentators' expectations are that 
any IMF program would be for no more than a year in length 
and ten billion dollars in size, more than half of which 
would simply compensate for GoB repayments due on IMF money 
already received.  Some go on to speculate that the IMF's own 
institutional interest is tied to the ongoing success of its 
Brazil relationship, as a favorable contrast to its history 
with Argentina, and suggest that this alleged factor will 
strengthen the GoB's bargaining stance. 
 
6. (U) Brazil's net reserves have slowly risen by a couple of 
billion dollars since 2002 but as of July 2003 were still 
under 18 billion dollars, discounting the 30-plus billion 
Brazil also holds in IMF loans.  (By the IMF's own, different 
methodology, net reserves are actually below 15 billion 
dollars.)  This net figure would probably be too small to 
deal with an event of the order of the near-panic of 2002 -- 
let alone of Brazil's 1998-99 crisis, when dozens of billions 
of dollars drained in capital flight, admittedly under a 
fixed exchange-rate regime to which the nation is no longer 
hostage.  Brazil's scheduled foreign-debt payments for 2004 
are heavier than in 2003, and no prudent debt-manager can 
rule out foreign shock. 
 
7. (SBU) COMMENT. Though Brazil may not absolutely need a 
follow-on IMF agreement, few doubt it would be desirable. 
Even so, we tentatively suspect that Lula's GoB will press, 
harder than the IMF ResRep may expect, for the agreement to 
contain some feature that it can point to as at least a 
symbolically significant gesture towards the ongoing strains 
in Brazil's `real economy.'  Does Brazil have enough 
negotiating leverage with the IMF to make any such deviation 
from orthodoxy thinkable?  The IMF ResRep may just have been 
suggesting that the IMF and GoB will seek a formula to put 
off any hard bargaining over conditionality until the point 
where Brazil actually asks to draw down.  That way, Brazil 
would have the ostensible insurance of an agreement without 
having to make unpalatable new commitments. 
 
VIRDEN