VZCZCXRO4505
PP RUEHRG
DE RUEHSO #0907/01 2301324
ZNR UUUUU ZZH
P 181324Z AUG 06
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC PRIORITY 5643
INFO RUEHBR/AMEMBASSY BRASILIA 6717
RUEHAC/AMEMBASSY ASUNCION 2730
RUEHBU/AMEMBASSY BUENOS AIRES 2411
RUEHMN/AMEMBASSY MONTEVIDEO 2120
RUEHSG/AMEMBASSY SANTIAGO 1842
RUEHLP/AMEMBASSY LA PAZ 2974
RUEHRI/AMCONSUL RIO DE JANEIRO 7369
RUEHRG/AMCONSUL RECIFE 3090
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 2543
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/CDR USSOUTHCOM MIAMI FL

UNCLAS SECTION 01 OF 03 SAO PAULO 000907 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR MSULLIVAN 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR MORONESE, RIVERA, MERVENNE 
NSC FOR FEARS 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/USFCS/OIO/WH/SHUPKA 
TREASURY FOR OASIA, DAS LEE AND DDOUGLASS DOL FOR ILAB MMITTELHAUSER SOUTHCOM ALSO FOR POLAD USAID/W FOR LAC/AA 
E.O. 12958: N/A 
TAGS: PGOV PINR ECON BR

SUBJECT: PMDB LEADER PREDICTS NARROW LULA VICTORY, AND A GROWTH-BASED ECONOMIC POLICY IN THE SECOND TERM 
REF: (A) 05 SAO PAULO 1372 

SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY 

------- SUMMARY ------- 

¶1. (SBU) Federal Deputy Delfim Netto predicted President Lula will win a "fairly close" election in the second round if he can avoid committing too many more gaffes. Lula's Workers Party (PT), however, will take a serious hit because of corruption scandals and will end up with fewer than 50 Federal Deputies. However, the centrist Brazilian Democratic Movement Party (PMDB), of which Netto is a recent member, will hold a bloc of about 80 seats and will ally with Lula's administration to get jobs and other favors. Lula will be able to patch together enough support from smaller parties to get legislation passed. In fact, Netto said, Lula was perhaps the only one who could push critical legislation like social security reform and labor reform through the Congress. Leftist forces would accept such reforms if sponsored by Lula, but would oppose and ultimately defeat them if PSDB candidate Geraldo Alckmin won the presidency and tried to pursue such reforms. For this reason, Netto himself plans to vote for Lula. In a second administration, Netto predicted, Lula will continue his macro-economic orthodoxy but with more flexibility, leaving in place Central Bank President Henrique Meirelles while appointing other officials who will likely push down interest rates and promote pro-growth policies. In Sao Paulo state, Netto predicted that former Mayor Jose Serra will win the governorship in the first round, though scenarios could yet arise that might undermine his chances. END SUMMARY. 

--------------------------------------------- - LULA EXPECTED TO WIN A "FAIRLY CLOSE" ELECTION --------------------------------------------- - 

¶2. (SBU) In a recent meeting with Poloff and Political Assistant, Antonio Delfim Netto (reftel), an elder statesman of Brazil's political class, shared his predictions for the electoral campaign. Netto expects that opposition candidate Geraldo Alckmin will narrow the gap separating him from President Lula and force the election into a second round. Lula is probably at his ceiling right now, whereas Alckmin has plenty of room to grow. Third-party candidate Heloisa Helena will also rise above her current 10 percent, Netto predicted, because her brand of radical socialism mixed with Christianity appeals to many voters on the fringes. However, faced with the prospect of an Alckmin victory, many such voters will opt for Lula in the second round, and he should win a narrow victory. Lula's greatest challenge between now and the election, in Netto's view, will be to avoid saying things that may alienate voters (e.g., recent gaffe of his was interpreted by many as denigrating the intelligence of the elderly). 

¶3. (SBU) Netto noted that in 2002, Lula had carried his Workers Party (PT) to power, not the other way around. The 2002 elections represented a vote against Fernando Henrique Cardoso's (FHC) Social Democracy Party of Brazil (PSDB) due to the economic problems he bequeathed. In issuing his "Letter to the Brazilian People," pledging responsibility in economic management, Lula broke with many PT economists and has never paid much attention to them since. He has managed to retain his own popularity even while his party has been seriously damaged by the political corruption scandals. The PT may win as few as 45 seats in elections for the Chamber of Deputies, Netto predicted. 

¶4. (SBU) In the race for Sao Paulo Governor, Netto thought former Mayor Jose Serra was on track for a first-round victory. This could 

SAO PAULO 00000907 002 OF 003 

change, however, if PMDB candidate Orestes Quercia overtakes PT Senator Aloysio Mercadante. (NOTE: The most recent polls showed Serra with 49 percent, Mercadante with 17 percent, and Quercia with 10 percent. END NOTE.) In that case, the well-organized PMDB could arouse the enthusiasm of its base and run an aggressive campaign against Serra, focusing on his somewhat controversial record, and forcing him into a second round. 

------------------------ A SECOND LULA GOVERNMENT ------------------------ 

¶5. (SBU) Netto believes, as do many political observers, that many of Lula's social programs were designed to garner votes. But he also said that Lula has genuine empathy for the poor and, if re-elected, will devote his energies to trying to create more jobs. He is also likely, in Netto's opinion, to keep on Central Bank President Henrique Meirelles and to continue his orthodox macro-economic policies, but will exercise more flexibility and will appoint other officials more open to lowering interest rates. 6. (SBU) Netto was somewhat cynical about the Congressional elections, noting that many deputies implicated in the "mensalao" scandal were running for re-elections and predicting that "the ones who stole will be re-elected." He noted that with the entry into force of the "Barrier Clause," some four to six parties will disappear after failing to get five percent of the vote. But many of the members of these dying parties will join the government coalition, as will the PMDB, which will again elect around 80 deputies. 

------------------- THE NEED FOR REFORM ------------------- 

¶7. (SBU) For the duration of the campaign, Netto predicted, neither Lula nor Alckmin will make much in the way of concrete proposals on what programs they would undertake. Doing so would gain them no voters and would likely cost them some. Rather, they will campaign on generalities and platitudes, and will also expend some energy trying to "deconstruct" one another. But whoever is in office in January will face certain hard realities, Netto pointed out. A Social Security reform is urgently needed; without it, he said, Brazil will soon face a fiscal crisis. Labor reform is also critical. However, Netto believed it would be difficult for a President Alckmin to push such reforms through Congress, since the PT and other leftist parties would vociferously oppose them. However, if President Lula, coming off re-election, were to put them forward, he could likely win leftist support (or, if not support, acquiescence) for the measures, and even the opposition PSDB and Liberal Front Party (PFL) would have to vote for some of the reforms on their merits. For this reason, Netto said he himself will vote for Lula, because he believes Lula is in a better position to have a successful government. 

------- COMMENT ------- 

¶8. (SBU) Netto's stated reason for preferring Lula over Alckmin is novel and interesting (and likely self-serving), but begs the question of whether a re-elected President Lula would in fact decide to take on social security and labor reform, and other much-needed initiatives. For many observers, Lula's first term has lacked focus and vision, which does not augur well for a serious reform agenda in the second term, since such an agenda would require Lula's direct and sustained attention and involvement in order to get it through 

SAO PAULO 00000907 003 OF 003 

an inherently fractious Congress. END COMMENT. 

¶9. (U) This cable was coordinated with Embassy Brasilia. 

MCMULLEN