Exclusive: Brazil’s Meirelles asked U.S. to lobby Lula: cable

By Kristina Cooke, Walter Brandimarte and Ana da Costa

NEW YORK/BRASILIA, March 25 – With an election looming in 2006, Brazilian central bank chief Henrique Meirelles asked the United States to lobby his own government to provide the institution with greater independence, according to an unpublished U.S. State Department cable.

During an August 9, 2006, conversation with U.S. diplomats, Meirelles promised to press behind the scenes for regulatory changes that would create a more welcoming investment climate for U.S. business in Brazil.

The cable, obtained by WikiLeaks and passed to Reuters by a third party, could become an embarrassment for Meirelles as he prepares to take on a new, high-profile role in Brazil’s government. It could also refocus debate on how susceptible Brazil’s central bank remains to political interference.

“Meirelles asked that the (U.S. government) discreetly use its bilateral engagement with (Brazil) to argue the importance of pushing through the Congress legislation granting the Central Bank such autonomy,” U.S. embassy staffers wrote in the cable, which detailed an introductory meeting between then U.S. Ambassador Clifford Sobel and Meirelles.

“He argued that (Treasury) Secretary (Henry) Paulson in particular would be able credibly to make that point” to Brazilian President Luiz Inacio Lula da Silva and Finance Minister Guido Mantega.

The cable suggests Meirelles, the longest-serving central bank chief in Brazilian history, thought Washington might be able to persuade Lula of something that he himself could not.

Meirelles never got formal independence for the central bank, but Lula gave him relatively free rein to set monetary policy during his eight-year tenure, which ended late last year before Alexandre Tombini took over along with the new government.

The lack of legal autonomy gave way to tensions at times between Meirelles and Mantega over the level of interest rates, fueling fears that monetary policy could become vulnerable to political pressures.

Mantega’s office said he never heard from the United States on the issue of central bank independence and Meirelles refuted the content of the U.S. document.

“The quotes attributed to me do not properly reflect the subject of any conversation I have had,” Meirelles told Reuters via e-mail.

Former U.S. Ambassador Sobel declined to comment.

For Meirelles, who is waiting to be confirmed as head of a new government agency overseeing Brazil’s preparations to host the 2016 Olympic Games, the release of the cable comes at an inopportune time. Meirelles’ political ambitions are well-documented and he has stayed in the public eye since leaving the central bank four months ago.

Analysts say it could hurt his professional aspirations by putting an international spotlight on what some consider a major Brazilian institutional weakness, at a time when the government is trying to assert itself on the world stage. It could also be embarrassing for a Brazilian public servant to turn to a foreign power for help with domestic matters.

The release of the document follows U.S. President Barack Obama’s visit to Brazil over the weekend, when he sought to improve relations that were strained in the last two years by trade disputes and other issues, such as Brazil’s ties with Iran.

THE AMERICAN DREAM

Meirelles has long had a close affinity with the United States, having spent most of his career working for a U.S. bank. He joined BankBoston in Brazil in 1974, and a decade later became its regional president in Brazil.

In 1984, Meirelles went to Harvard Business School and in 1996 he moved to Boston to become the president of BankBoston, before relocating to New York in 2000.

At Lula’s request, Meirelles put his political aspirations on hold in 2003, foregoing an elected position in Congress to head the central bank.

Meirelles “knew the U.S. well, so had a good understanding of how we take decisions and what motivates us,” said Donna Hrinak, U.S. Ambassador to Brazil from 2002 to 2004 and now a vice president at PepsiCo in Purchase, New York.

“Some who have that type of understanding use it skillfully to find areas of mutual interest. Meirelles was one of those.”

Hrinak said the type of exchange Meirelles and Sobel had was “a normal part of diplomatic discourse.”

The United States had “openly talked about central bank independence before so our position on that was clear, and it would be quite natural for someone who shared our view to ask that we promote it more actively,” she said.

Meirelles was promised informal autonomy to set monetary policy in 2003, but tensions quickly arose when Lula appointed Mantega, a vocal critic of high interest rates, to the post of finance minister three years later.

A long-time member of the ruling Workers’ Party, Mantega took office in March 2006. As the August meeting with Ambassador Sobel suggests, Meirelles was getting nervous about government interference in monetary policy ahead of presidential elections in October of that year.

In fact, Meirelles spent much of the meeting discussing the importance of the institution’s independence to pursue policies to keep inflation under control.

Over the years, Lula found himself buffering reports of clashes between Meirelles and Mantega. In April 2006, a month after Mantega took over, Lula said any disagreements between the two “should be taken to the president.”

Such tensions lasted well into the 2008 financial crisis, when Meirelles came under fire for taking too long to reduce rates while central banks elsewhere were lowering them.

“There have been a couple of moments of acute tension within the administration on the central bank,” said Christopher Garman, chief Latin America analyst at the Eurasia Group consultancy in Washington. There was a moment when Lula had considered substituting Meirelles, he said.

“He never pulled the trigger because at the end of the day I think Lula has a very acute sensibility over the need and requisite for keeping low inflation.”

Meirelles told the ambassador in 2006 he did not believe Brazil had completely turned the page on its long history of runaway inflation. Business, Meirelles said according to the cable, still had an “inflationary mentality” and his inflation-targeting policy continued to face criticism.

EXCHANGING FAVORS

The document could rekindle a debate about central bank independence at a time when some worry the finance ministry is influencing policy-making at the bank. In recent months Brazilian policy makers have taken a variety of so-called macroprudential measures — such as restricting banks’ ability to lend money — aimed at reducing the need for future interest rate hikes.

It could also subject Meirelles to fresh criticism within the new government of President Dilma Rousseff, a former leftist militant who was Lula’s chief of staff at the time.

According to the cable, Meirelles identified “the lack of governmental experience among Lula’s top advisors” as “a second set of difficulties” for investors.

He then praised Rousseff for being a quick learner and “very smart” but said “she still brings some ideological baggage to the job.”

An analyst at a U.S. bank in New York, who asked not to be named because of the sensitivity of the matter, said: “The administration is going to be saying: avoid this guy. Because it definitely embarrasses them. It is once again raising an issue that has not been resolved. And it’s a very relevant issue today.”

“It is precisely because there is no legal independence of the central bank that market participants wonder and worry: is the mix between macroprudential measures and interest rate measures, is it being influenced by the finance ministry?”

At a time when both the United States and Brazil are working toward better relations, the cable also provides insight into longstanding U.S. concerns about doing business in Latin America’s largest economy.

Meirelles offered “to be helpful behind the scenes in pressing for priority regulatory reforms to improve the business climate,” according to the document.

The New York Stock Exchange’s chairman at the time, John Thain, was planning a visit to Brazil and Ambassador Sobel stressed that “Brazil’s investment climate must be welcoming” to take advantage of this interest.

Business leaders have long seen Brazil’s cumbersome tax and labor laws as an obstacle to sustainable, long-term economic growth. Double-digit interest rates — among the world’s highest — are also seen as a hurdle to Brazil’s aspirations to join the ranks of developed nations.

Meirelles, in the cable, highlighted regulatory roadblocks as a particular problem, without specifying what those were, and said he was willing to be helpful in the background.

“Meirelles undertook, were the (U.S. government) to provide a detailed study of these roadblocks, to press for changes,” U.S. embassy staff wrote.

(Editing by Todd Benson and Claudia Parsons)

Exclusive: Brazil’s Meirelles asked U.S. to lobby Lula: cable