Cablegate: Brazil: U/S Jeffery - Central Bank and External Relations

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DE RUEHBR #1362/01 2891059
ZNR UUUUU ZZH
R 151059Z OCT 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 2668
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 6758
RUEHSO/AMCONSUL SAO PAULO 2928
RUEHRG/AMCONSUL RECIFE 8593

UNCLAS SECTION 01 OF 02 BRASILIA 001362

SIPDIS
SENSITIVE

STATE FOR WHA/BSC, WHA/EPSC, EEB/CIP, EEB/IFD
STATE ALSO FOR E HASTINGS WHA KELLY WHA MCMULLEN
STATE PASS USTR FOR KDUCKWORTH
STATE PASS EXIMBANK
STATE PASS OPIC FOR DMORONSE NRIVERA CMERVENNE
DEPT OF TREASURY FOR JHOEK BONEILL

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD BR
SUBJECT: Brazil: U/S Jeffery - Central Bank and External Relations
Ministry meetings readout

REFS: A) Sao Paulo 0486, B) Sao Paulo 0522, C) Brasilia 1299, D) Sao
Paulo 0086, E) Sao Paulo 548

1) (SBU) SUMMARY. During his October 3 visit to Brasilia, Under
Secretary for Economic, Energy and Agricultural Affairs Reuben
Jeffery III met with Brazilian Central Bank Deputy Governor
Alexandre Tombini to discuss the current global financial crisis,
its ramifications, and the steps Brazil is taking to minimize the
effects. In a separate meeting with the newly appointed Under
Secretary for Economic Affairs at the Ministry of External
Relations, Pedro Mendonca, the conversation focused on the global
financial crisis but also touched on the GOB interest in
U.S.-Mercosul trade negotiations and the Pathways to Prosperity
initiative. Please see septel readout of the October 3 Biofuels
Steering Group meeting. END SUMMARY

CENTRAL BANK
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2. (SBU) Under Secretary Jeffery's meeting with Brazilian Central
Bank Deputy Governor Alexandre Tombini (taking place just hours
after the House passed the Emergency Economic Stabilization Act)
focused on the global financial crisis. Tombini, widely rumored
eventually to replace Central Bank Governor Meirelles when he steps
down, applauded what he called the USG's quick and correct response
to the crisis. Tombini stated that the Troubled Asset Rescue
Program will likely lessen the crisis' impact on the global economic
downturn and shorten the duration of the crisis. Tombini stressed
the importance of taking future lessons from the crisis and
implementing a regulatory framework with a long-term perspective,
designed to combat downturns, and capable of discouraging reckless
risk taking in the future.

3. (SBU) Tombini cited Brazil's pragmatic fiscal policies, the
growth of the middle class, an increase in agrobusiness investment,
the inherent liquidity of the Brazilian economy, and a strong
domestic market as key economic factors that will help Brazil
weather the current financial crisis. Tombini referenced Brazil's
favorable balance of payments and an annual credit growth of 20%
over the past 5 years as additional factors that will help Brazil
weather the crisis. However, Tombini noted that Brazil's external
credit line sources were severely damaged by the crisis and that
Brazil will need to offset this with other external sources or
through domestic policies. Tombini detailed the Brazilian Central
Bank's recent announcement to lower reserve requirements, as well as
a move to allow larger institutions to exempt forty percent of their
time deposits from reserve requirements when these funds are used
for buying smaller institutions' loans. This measure would funnel
credit to the small and medium size companies that Tombini stressed
were the most vulnerable to the crisis' liquidity crunch. Tombini
mentioned that the Central Bank would intervene to stabilize the
exchange rate by using Brazil's international reserves to sell USD
on the open market. He cautioned that if the economic downturn were
prolonged and commodity prices continued to decline, Brazil's
balance of payments surplus could become negative, requiring that
the gap be financed. Tombini confirmed that Brazil would continue to
buy treasury bonds and that the Central Bank is examining currency
swaps with the Federal Reserve.

MINISTRY OF EXTERNAL RELATIONS (MRE)
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4. (SBU) U/S Jeffery next met with the new MRE Economics Under
Secretary Pedro Luiz Carneiro de Mendonca, who assumed the portfolio
September 23. At the GOB delegation's request, U/S Jeffery
described the US response to the global financial crisis. PDAS
Kelly offered an overview of the Pathways to Prosperity September 24
communique and stressed USG wants the process to be inclusive. MRE
Multilateral trade A/S Carlos Marcio Cozendey indicated GOB does
"not view with trepidation" the initiative and would welcome further
details on how these FTA countries will work together. Cozendey
indicated the GOB is interested in Mercosul-United States trade
negotiations. Returning to the financial crisis, Mendonca noted
"political history" has changed and the world is at a "crossroads"
as countries decide how best to react to a new world. MRE Financial
Affairs DAS Luis Balduino amplified that the world will have to find
a new balance of cooperation and regulation.
5. (SBU) COMMENT: U/S Jeffery's meetings confirm what we have been
hearing from contacts at post. Brazil is focused on the financial
crisis and managing it correctly, but they are not panicked. It was
also refreshing to hear informed contacts expressing appreciation

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for U.S. effort to mitigate the crisis. Notably both meetings
featured calls for learning from this crisis and working
constructively to avoid such problems in the future. END COMMENT

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