US embassy cable - 05BRASILIA3043

UNCLAS SECTION 01 OF 02 BRASILIA 003043 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR OASIA - DAS LEE AND FPARODI 
NSC FOR CRONIN 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DDEVITO/DANDERSON/EOL SON 
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE 
 
E.O. 12958: N/A 
TAGS: ECON, PGOV, EFIN, PREL, BR, CU, Macroeconomics & Financial 
SUBJECT: BRAZIL - FINANCE MINISTER PALOCCI'S 11/16 
CONGRESSIONAL TESTIMONY 
 
REF: A) Brasilia 3008  B) Brasilia 2758 
 
1. (SBU) Summary: Finance Minister Antonio Palocci 
categorically denied accusations of corruption during his 
tenure as mayor of the city of Riberao Preto and of illegal 
financing of President Lula's 2002 presidential campaign 
(including an alleged $3 million contribution from the 
Government of Cuba), in testimony before the Senate Economic 
Affairs Committee on November 16.  Palocci also responded to 
criticism of GoB economic policy from Lula's Chief of Staff, 
Dilma Rousseff, arguing that she was wrong about the 
importance of proposals for fiscal balance in the longer 
term.  He faced more criticism on GoB economic policy from 
his own PT party than from the opposition and garnered some 
praise for his performance from the opposition PSDB. 
Palocci's creditable performance was well received by the 
markets, but does not settle the question of his political 
survival as finance minister.  In a public appearance the 
same day, Lula defended the GoB economic policy line without 
specifically mentioning Palocci, a move that reflects Lula's 
continued distancing of himself from his troubled minister. 
Moreover, the opposition is insisting on calling Palocci to 
testify before the Congressional Investigatory Commission 
(CPI) on bingos.  End Summary. 
 
Palocci Denies Allegations, Justifies Economic Policy 
--------------------------------------------- -------- 
 
2. (U) In a marathon nine-hour session before the Senate 
Economic Affairs committee, Finance Minister Antonio Palocci 
categorically denied accusations leveled at him over 
corruption during his tenure as mayor of Riberao Preto and 
of irregular financing of Lula's 2002 presidential campaign, 
of which Palocci was coordinator.  Originally expected to 
take place on November 22, the GoB moved up Palocci's 
testimony as a tactic to reduce the political uncertainty 
around Palocci and limit potential volatility in the 
markets.  In a detailed opening statement, Palocci:  1) 
denied that Lula's 2002 campaign had taken money from the 
Cuban government, the FARC or Angola; 2) reiterated that a 
major waste-management contract for which there allegedly 
were kickbacks paid was not signed or renewed during his 
tenure as mayor; 3) claimed that the other city tenders had 
been audited with no irregularities found; and, 4) denied he 
had flown on a private jet belonging to businessman Roberto 
Colnaghi, stating that the Brazilian Air Force had flown him 
to Riberao Preto on the date in question.  The senators 
limited their questioning to economic policy issues. 
Palocci, in a reversal of course, said he was willing to 
appear before any congressional body (i.e. including the 
CPIs) to answer questions about the accusations. 
 
3. (U) Palocci took the opportunity to firmly, if politely, 
rebut recent criticism by Lula Chief of Staff Dilma Rousseff 
of a proposal advanced by Palocci and Planning Minister 
Paulo Bernardo for sustaining high primary surpluses into 
the medium term.  Palocci argued that the GoB would not be 
able to maintain public investment and social spending if it 
does not pursue a sustainable fiscal policy in the long 
term.  In outlining the GoB's economic achievements, Palocci 
stressed the continuity of policies over several 
administrations and was careful to give credit to previous 
governments for initiatives such as the Fiscal 
Responsibility Law.  This policy continuity, Palocci argued, 
does not depend on any single person.  Palocci's defense of 
GoB policy was met with more criticism from senators of his 
own ruling PT party than from the opposition, some of whom 
specifically praised Palocci's own performance.  Lula 
seconded Palocci's defense of GoB economic policies in a 
public appearance November 16, but did not mention Palocci's 
name during his remarks. 
 
4. (U) Markets appear to have been reassured by Palocci's 
performance -- the Real appreciated against the dollar (from 
about 2.2 to 2.185 Reais per dollar) in trading on November 
17 while the Sao Paulo stock exchange was up almost 2% for 
the day. 
 
Comment 
------- 
 
5. (SBU) Palocci's strong performance appears to have won 
him some time but it has not settled the question of his 
ultimate political survival.  The opposition, perhaps caught 
off guard by the GoB's maneuver to move ahead the date of 
the hearing, did not probe Palocci on the accusations of 
wrongdoing in the November 16 session.  They are now calling 
for Palocci to appear before the CPI on bingos to answer the 
accusations against him.  Regardless, it clear that the 
opposition plans to keep the Palocci allegations in the 
media spotlight.  They may be aided by the fact that Palocci 
was more categorical than strictly necessary in denying the 
allegations.  On the Cuba campaign contribution allegation, 
for example, Palocci not only denied personal knowledge of 
any such contributions, but affirmed that as campaign 
coordinator he would have known if the campaign received 
Cuban cash and that it did not happen.  This exposes him to 
greater damage should new evidence come to light.  Palocci 
also was careful to stress that he believed the GoB's 
orthodox economic policy stance was institutionalized, had 
shown remarkable continuity from administration to 
administration over the last 14 years and did not depend on 
any single person.  Given Lula's apparent effort to put some 
distance between himself and Palocci, it is possible that 
Palocci's thesis will be put to the test. 
 
CHICOLA