US embassy cable - 04BRASILIA2860

UNCLAS SECTION 01 OF 02 BRASILIA 002860 
 
SIPDIS 
 
SENSITITVE 
 
NSC FOR RENIGAR, SHANNON 
TREASURY FOR OASIA - DAS LEE AND FPARODI 
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DDEVITO/DANDERSON/EOS LON 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PGOV, EINV, BR, Macroeconomics & Financial 
SUBJECT: BRAZIL NATIONAL DEVELOPMENT BANK HEAD DISMISSED 
 
REF:  A) BRASILIA 2763   B) BRASILIA 2802 
 
This cable is Sensitive but Unclassified, please protect 
accordingly. 
 
1.  (SBU) Summary: President Lula accepted the resignation 
of National Social and Economic Development Bank (BNDES) 
head Carlos Lessa November 18, replacing him with Planning 
and Budget Minister Guido Mantega.  Lessa, a leftist 
economics professor with longstanding ties to Lula and the 
Workers' Party (PT), had been a thorn in the 
administration's side, frequently criticizing administration 
policies, Finance Minister Palocci and Central Bank Chairman 
Meirelles.  While the financial community will celebrate 
Lessa's departure, he leaves BNDES a demoralized and 
diminished institution.  Mantega will face significant 
challenges in rebuilding BNDES, an institution with an 
annual budget of over $12 billion.  Names floated in the 
press to replace Mantega at the Planning Ministry include 
Integration Minister Ciro Gomes and Federal Deputy Paulo 
Bernardo.  The episode highlights the extent to which 
Palocci's policy line has won the day with the GoB.  End 
Summary. 
 
2. (SBU) Lessa's replacement by Mantega is the second 
cabinet change in two weeks (DefMin Viegas was replaced by 
Vice President Alencar on November 8), and it may be 
followed by further cabinet changes in the coming weeks. 
Planning Minister Mantega has been named to replace Lessa at 
BNDES; Mantega's replacement has not yet been named.  A few 
other positions are in play, but depend to great extent on 
the outcome of the PMDB's internal deliberations on whether 
to stay in the governing coalition (ref B). 
 
Tenure a Disaster 
----------------- 
 
3. (SBU) Lessa's tenure at BNDES has been widely described 
as a disaster.  He argued that BNDES should return to its 
roots as a "development" bank, financing industrial projects 
and infrastructure as it had during the heyday of the import- 
substitution industrialization push.  Lessa surprised the 
GoB with the purchase of a major stake in privatized mining 
conglomerate CVRD, later justifying the action on the 
grounds that it was a "strategic" asset over which the state 
should have some control.  To be fair, despite constant talk 
of a nationalist economic agenda, Lessa did on occasion show 
a practical bent and, for example, supported a debt-for- 
equity swap with U.S. energy firm AES that resolved a sore 
spot in the FDI arena.  Nevertheless, Lessa's criticisms of 
administration policy were constant, including last week 
when he called Meirelles' Central Bank chairmanship a 
"nightmare." 
 
4. (SBU) As bad as the insubordination and constant 
criticism was for the Lula administration, Lessa's tenure 
was even worse for BNDES itself.  He shook up the 
institution immediately upon his arrival in early 2003, 
forcing out not only the Bank's senior management but senior 
technical level staff as well.  Many other key staff chose 
to leave, hollowing out the bank's capabilities.  This was 
reflected in BNDES' performance, failing to loan out all of 
the resources it had available.  When reproached by Lula and 
asked to speed up BNDES lending operations, Lessa retorted - 
- publicly, through the press -- that BNDES was "not a 
bakery" to be handing out its product as quickly as 
possible.  Asked about the firing, one Rio-based economist 
asked us rhetorically, "What took them so long?" 
 
Mantega Faces a Challenge 
------------------------- 
 
5. (SBU) Mantega faces a difficult task at BNDES.  The 
bank's best professionals are gone.  Those that remain work, 
according to one contact, in a "cutthroat" atmosphere. 
Mantega does have the advantage that he has built a 
productive relationship with the GoB economic team, in 
particular Palocci, since their ministries work closely on 
budget planning and budget execution.  The move to BNDES 
would nominally be a demotion for Mantega, since the 
position does not carry cabinet rank and reports to Minister 
of Industry, Development and Foreign Commerce Furlan. 
Mantega sidestepped the question when asked by the press 
whether he would be reporting to Furlan. 
 
Comment 
------- 
 
6. (SBU) Lessa's defenestration has been widely interpreted 
as strengthening Palocci's position within the GoB.  And, 
while the episode clearly illustrates Palocci's strength, 
Lessa and his outbursts had ceased long ago to pose any real 
threat to Palocci and the GoB economic team.  Lula 
identified himself publicly with the Palocci/Meirelles 
policy line early on in his administration.  Lula has 
reaffirmed that line at every major economic juncture since. 
Lessa was, by this point, an outlier, one of the few lone 
voices of the old PT left wing left crying in the neo- 
liberal wilderness.  That it took so long to remove him 
speaks more of Lula's loyalty to an old comrade than to 
Palocci's position, which was already well secured. 
 
CHICOLA