US embassy cable - 03BRASILIA1804

C O N F I D E N T I A L SECTION 01 OF 02 BRASILIA 001804 
 
SIPDIS 
 
DEPARTMENT FOR WHA/BSC 
NSC FOR JOANNA WALLACE 
TREASURY FOR SEGAL, CRUZ 
FEDERAL RESERVE FOR ROBATAILLE 
 
E.O. 12958: DECL: 06/10/2013 
TAGS: EFIN, ECON, BR 
SUBJECT: IMF QUESTIONS NEED FOR NEW IMF PROGRAM IN 2004 
 
 
Classified By: Acting EconCouns David Edwards.  Reasons: 
1.5 B and D 
 
1.  (C) Summary.  Rogerio Zandamela, IMF Resident 
Representative in Brazil, told econoff that Anne Krueger, the 
IMF's Deputy Managing Director, is not interested in renewing 
the IMF stand-by arrangement when it expires at the end of 
the year.  Instead, she prefers to declare victory with the 
current successful program and wait in reserve in case needed 
again.  Zandamela added that he has his doubts about how a 
follow-on program would be structured.  He said the next key 
steps for restoring confidence are structural reform, and he 
believes that an IMF program with significant structural 
reform commitments would generate political opposition and be 
counter-productive.  End summary. 
 
2.  (SBU) In a June 3 meeting with IMF Resident 
Representative Rogerio Zandamela, econoff asked whether 
Brazil's IMF program would be renewed when it expires at the 
end of the year.  (Note:  When an IMF mission visited Brazil 
in early May for the third review, a local paper carried a 
story that the GOB had already decided not to renew the 
program, which was quickly denied by the Ministry of Finance. 
 Later, when Anne Krueger, the IMF's First Deputy Managing 
Director, visited Brazil on May 19-20, she told the media 
that the question of renewing the agreement had not been 
discussed with the GOB.) 
 
3.  (C) Zandamela said the there had been internal IMF 
discussions about a follow-on program during the May 19-20 
visit.  Anoop Singh, Director of the IMF's Western Hemisphere 
Department, had accompanied Krueger and had been interested 
in exploring another IMF program.  However, according to 
Zandamela, Krueger's initial reaction was negative.  Krueger 
evidently said that the IMF should declare its current 
program a success and when it is over, step to the side and 
be available to help when and if necessary. 
 
4.  (C) Econoff asked if the GOB had the resources to repay 
its current IMF obligations without a new IMF agreement, and 
how the market would react if there were no IMF program. 
Zandamela said that gross reserves are high enough that 
Brazil could repay its obligations and still have a cushion, 
particularly if the GOB continues to issue bonds in the 
international market.  (Note:  Gross reserves were $43.3 
billion as of June 6, while net reserves (minus IMF funding) 
are approximately $17.0 billion.) 
 
5.  (C) Regarding the private sector reaction, Zandamela said 
that he is not concerned.  He continued that the key next 
step for the government is implementing its reform program 
(notably tax and pension reform, but also Central Bank 
autonomy and bankruptcy law reform).  Featuring structural 
reform in an IMF program would be difficult and maybe 
counter-productive, he said.  The administration cannot 
guarantee that congress will act on its reform proposals, and 
an IMF program conditioned on congressional action would 
probably generate political resistance in congress. 
(Typically, in Brazil's IMF programs, the administration 
commits to present legislation to congress but is silent on 
the question of approval.)  Therefore Zandamela has his 
doubts as to what a notional next IMF program should look 
like. 
 
6.  (C) Econoff asked whether the IMF would consider a 
monitoring program in the absence of a formal stand-by 
arrangement.  Zandamela said that he doubts the GOB would 
submit itself to a special review regime without the 
financial support of a regular program, given that the IMF 
missions are very time-consuming for the GOB.  He added, 
though, that even without an IMF program, the Fund would 
undertake twice-yearly reviews, compared to four times a year 
under a stand-by program. 
 
7.  (C) Zandamela cautioned that it is too soon to talk about 
a "virtuous circle."  However, he added that by the end of 
the year the government's economic policies, combined with 
falling inflation, may open the way for a cycle of growing 
confidence, falling inflation, lower interest rates, 
accelerating economic growth, and reasonable capital inflows. 
 
8.  (C) Comment.  It's a bit early to make any judgment on 
whether Brazil should renew its IMF program at the end of the 
year, but Krueger's and Zandamela's comments provide a useful 
perspective on why a program may not be necessary.  In 
general, Zandamela is on target in his assessment that 
Brazil's economic success depends far more on GOB action 
rather than an IMF program.  However, we are less sanguine 
than Zandamela about market confidence in the absence of an 
IMF program, since a program would provide a buffer against 
balance of payment pressure as well as valuable benchmarks to 
measure the government's macroeconomic effort. 
 
Hrinak