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TO RUEHC/SECSTATE WASHDC PRIORITY 4424
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RUEHAC/AMEMBASSY ASUNCION 2381
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RHEHNSC/NSC WASHDC
RHMFISS/CDR USSOUTHCOM MIAMI FL
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 2260

UNCLAS SECTION 01 OF 05 SAO PAULO 000073

SIPDIS

SENSITIVE

SIPDIS

NSC FOR CRONIN
STATE PASS USTR FOR SULLIVAN/LEZNY
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
USDOC FOR 3134/USFCS/OIO/EOLSON/DDEVITO/DANDERSON

E.O. 12958: N/A
TAGS: PGOV PREL ECON ETRD PINR BR
SUBJECT: ELECTION 2006: OPPOSITION PSDB TO DECIDE ON
CANDIDATE BY LATE MARCH


Sensitive but Unclassified -- Protect Accordingly

------------------------
INTRODUCTION AND SUMMARY
------------------------

¶1. (SBU) In a series of meetings in Sao Paulo on January 16-
20, Charge d'Affaires (CDA), Sao Paulo Consul General,
Embassy PolCounselor and SP Poloff discussed the coming
presidential election with the leading PSDB candidates - Sao
Paulo city mayor Jose Serra (who is still undeclared) and
Sao Paulo state governor Gerald Alckmin (who has announced
his candidacy) -- and conveyed to both USG positions on
bilateral relations and regional issues, notably Bolivia.
CDA and Mission Officers also met the Paulo vice mayor and
vice governor, probable state gubernatorial candidates, and
PT party leadership figures. In presenting USG views to
all interlocutors, CDA registered the following points:

--The U.S. has good bilateral relations with Brazil, but not
the strategic partnership we would like to have. We have
productive discussions in a number of areas, even though we
don't always agree, but we don't accomplish as much as we
might like. For example, in FTAA, we don't know what we can
accomplish because we are not truly negotiating.

--On Bolivia (repeating points made by A/S Shannon during
his January 10-11 meetings in Brasilia), the USG respects
the choice of the Bolivian people and is prepared to have a
dialogue with President Morales, but it would be helpful if
he toned down his anti-U.S. rhetoric. Moreover, if Morales
keeps his campaign pledge to legalize all coca cultivation
and cease eradication efforts, Brazil - especially Sao Paulo
and other urban centers -- will see a flood of inexpensive
cocaine.

¶2. (SBU) On presidential politics, Serra told CDA he has not
yet made up his mind concerning a presidential bid; he has
been mayor for just over a year and believes "the people
want me to stay." He said he would decide by the second
half of March. Alckmin fully acknowledges his candidacy and
the influential Sao Paulo business community overwhelmingly
supports him, but he lacks name recognition in the rest of
the country. Mission officers were told the PSDB has no
formal mechanism for choosing between the two candidates,
and no plans to hold a primary or a caucus. Instead, a small
group of party leaders - commanded by former President
Fernando Henrique Cardoso -- will make the decision, with
Cardoso's views having the most weight. The most important
factor clearly will be which candidate is more likely to
defeat Lula. Some in the PSDB are calling for a decision
before the February 25-28 "Carnaval" holiday, but a decision
may wait until mid-March. End introduction/summary.

-----------------------------------
BACKGROUND: THE ELECTORAL LANDSCAPE
-----------------------------------

¶3. (SBU) As Brazil enters its electoral season, a defining
question is who will be the candidate of the opposition
Brazilian Social Democracy Party (PSDB): Sao Paulo Mayor
Jose Serra or Sao Paulo State Governor Geraldo Alckmin. The
elections - for President, 513 Federal Deputies, 27
Senators, 27 Governors, and state legislators - will take
place October 1 (with a second round as needed October 29).
The campaign does not formally kick off until the beginning
of July, but the question of the PSDB candidacy is made
pressing by the legal requirement that executive branch
office-holders must resign six months before the elections
to preserve their eligibility as candidates for public
office. (The only exceptions are Presidents and Governors
seeking re-election.) On January 9, Alckmin announced his
intention to step down by March 31 in order to remain

SAO PAULO 00000073 002 OF 005


eligible to run for President. Alckmin's announcement threw
the PSDB into turmoil, as many party leaders support Serra,
who was the party's presidential candidate in 2002 and who
current polls show could defeat President Lula in a runoff.

¶4. (SBU) This year's elections take place against the
backdrop of the scandals that dominated Brazilian politics
in 2005. President Lula's Workers' Party (Partido dos
Trabalhadores - PT) has been decimated, his government
weakened, and his personal reputation tarnished. Hence one
of the questions in the PSDB's Serra vs. Alckmin debate has
been whether Lula would seek re-election. Some pundits have
suggested he might not run, and Lula has been obtuse on the
question -- he appears already in full campaign mode, but
just last week cryptically told an audience, "I won't be
here in 2007." Should he decide not to run, the electoral
panorama would change. In meetings with CDA, leading PT
personalities stressed that Lula is the one and only
champion for the party. Former Sao Paulo Mayor Marta
Suplicy, a member of the PT's National Directorate, told CDA
that if Lula doesn't run, the PT has no other viable
candidate. PT President Ricardo Berzoini, while confirming
that Lula had told him "he's still thinking and will let us
know at the opportune moment," admitted to CDA that the PT
"has no Plan B." (Comment: Lula appears to be playing for
time, watching for improvement in his poll numbers, or if
further scandal revelations or other factors make his defeat
likely, before taking a decision. But most observers assume
Lula will run. End comment.)

¶5. (SBU) A wild card is a possible Brazilian Democratic
Movement Party (PMDB) candidacy. Populist former Rio de
Janeiro Governor Anthony Garotinho announced last week he
was stepping down from his position as Rio state secretary
to devote full time to his presidential campaign, and Rio
Grande do Sul Governor Germano Rigotto announced he will run
against Garotinho in the PMDB's March primary. Recent polls
show Garotinho, who has considerable support among
evangelicals, in third place with 16 percent of the vote if
Alckmin is the candidate and 12 percent if Serra is the
candidate.

----------
JOSE SERRA
----------

¶6. (SBU) In the competition for the PSDB nomination, Jose
Serra is currently considered the front-runner, in large
part because he is perceived as more likely to defeat Lula,
a perception buttressed by numerous polls. There are other
reasons to prefer Serra. He is older (63) than Alckmin
(53), has more varied experience in government, and is
better known nationally. He has studied abroad in Chile,
France, and the U.S., and earned a doctorate in economics
from Cornell. He was Sao Paulo State Secretary of Economy
and Planning from 1983 to 1987. He served two four-year
terms (1986-94) as federal deputy. Elected to the Senate in
1994, he left to serve as Minister of Planning (1995-96) and
later Minister of Health (1998-2002) in Fernando Henrique
Cardoso's government. As Health Minister, he developed
Brazil's progressive HIV/AIDS treatment program and led the
government's efforts to win WTO recognition of the right to
break patents on HIV/AIDS drugs. As the PSDB's presidential
candidate in 2002, he lost to Lula 46.4 to 23.2 percent in
the first round, and 61.4 to 38.6 in the second round.

¶7. (SBU) Serra was elected mayor of Sao Paulo in 2004,
making a pledge then that he would serve his full four-year
term. This is the major problem he has to overcome if he
wants to run for President. He would be departing after
only 15 months in office, and turning power over to Vice-
Mayor Gilberto Kassab of the Liberal Front Party (PFL), who
is considered by some to be inexperienced and under an

SAO PAULO 00000073 003 OF 005


ethical cloud (he served as Secretary of Planning in the
corrupt 1997-2000 administration of Mayor Celso Pitta).
Another weakness is that some consider Serra a leftist and
the business community is wary of him. As Cardoso's health
minister, Serra demonstrated a tendency at times towards
government intervention, and he recently indicated that, if
elected, he would act as his own finance minister. His
stance on patents and on price controls for HIV/AIDS drugs
earned him the enmity of the pharmaceutical industry and the
suspicion of other business interests, and may account for
the business community's strong preference for Alckmin.
Political observers have also noted that he has high
negative numbers, suggesting that his support may be
constrained by the amount of opposition he arouses.
Finally, many colleagues have found him abrasive, sometimes
stubborn, and difficult to deal with. Despite these
perceptions, he has earned good marks as mayor of this city
of nearly 10.2 million with its highly complex crime,
pollution, and traffic problems. Indeed, he has won all but
one of his legislative initiatives with the city council.

¶8. (SBU) Assistant Mayor for Central Sao Paulo Andrea
Matarazzo, a key Serra advisor, told CDA that a Serra
victory would lead to a qualitative step forward for Brazil.
Matarazzo, a businessman who served as Secretary of Social
Communications and Ambassador to Italy under President
Cardoso, said Serra is not as far to the left as some think.
He stressed Brazil's need to grow economically and maintain
low inflation while bringing interest rates down. Under the
current government, Brazil is growing less than the rest of
the world. Lula's ministers are ill-prepared for their
tasks, the third-world-oriented foreign policy is counter-
productive, and the scandal has hurt Brazil's international
image.

¶9. (SBU) There is no formal party decision-making process,
Matarazzo said. Fernando Henrique Cardoso will hear from
party leaders and make a decision by late February or mid-
March. Serra, Matarazzo continued, is the party's favorite
in all states except Sao Paulo. The gubernatorial and
congressional candidates want to be on a ticket with someone
who can win in a first round, and Serra looks stronger based
on current polls. Alckmin announced his candidacy because he
was trailing in the polls and lacked support among party
leaders, and decided to force the issue with a dramatic
gesture. He would have been a fine candidate for the PSDB
when Lula looked like a shoo-in, but now that Lula can be
beaten, Serra is the one to do it, Matarazzo opined.
Matarazzo said he will be working in the strategic area of
Serra's campaign but will remain as Assistant Mayor in order
to provide continuity in the municipal government.

¶10. (SBU) In his January 19 meeting with the CDA, Serra
indicated that the party's inclination was for him to be the
candidate, and it was generally believed he would have
better coattails than Alckmin. He said he "has not taken
yet a decision on running,"and was still studying the
matter, as he took his seriously his responsibilities to Sao
Paulo city. Serra described some of his accomplishments as
mayor: Cleaning up an inherited "disastrous" financial
situation (Serra implied financial irregularities in bidding
and contracting under his PT predecessor, Marta Suplicy),
resurfacing streets, delivering food and health services to
the poor, combating drugs, piracy, and crime. (NOTE: Sao
Paulo police, working with state and federal authorities,
conducted a series of raids in December on notorious centers
for the distribution of pirated merchandise. END NOTE.) He
noted that there were 200,000 Bolivians in Sao Paulo,
working in the informal economy, using city services,
competing with Brazilians for jobs. On foreign policy
issues, Serra called the Lula government's bid for a
permanent seat on the UN Security Council a "joke." On
trade, he considered Mercosul a "mistake" and criticized

SAO PAULO 00000073 004 OF 005


Lula for doing nothing to reform it. He said Brazil and the
U.S. should negotiate FTAA, or even a bilateral free trade
agreement. Brazil needs to develop its domestic economy
more, needs to import more and to attract more foreign
investment, he said.

---------------
GERALDO ALCKMIN
---------------

¶11. (SBU) Alckmin has announced his candidacy and, though at
this point he must be considered the underdog within the
PSDB, he presents some advantages. Term limits preclude his
running for re-election as Governor, and his PSDB supporters
insist this gives a "naturalness" to his bid for the
presidency. He is less known nationally than Serra, but
conversely he may be seen as a fresh face who lacks Serra's
negatives. There may be less of a ceiling to his support,
and while he does not have Serra's breadth of experience, he
has an impressive record as an administrator. Alckmin began
his political career at age 19 while still in medical
school, serving as a city councilman from his home town of
Pindamonhangaba (Sao Paulo State), where he later served has
Mayor. He was elected to the state legislative assembly in
1982 and to the federal Chamber of Deputies in 1986. At
that time he was a member of the Brazilian Democratic
Movement, the legal opposition to the military dictatorship,
but in 1988, he was one of the founding members of the PSDB
and later served as Sao Paulo state party president. Re-
elected to the Chamber in 1990, he was elected Lieutenant
Governor of Sao Paulo State in 1994 and re-elected in 1998.
He became Governor upon the death of Mario Covas in 2001 and
was re-elected in 2002, garnering 58 percent in the second
round against PT candidate Jose Genoino.

¶12. (SBU) Arnaldo Madeira, Governor Alckmin's Chief of
Staff, told the CDA that the PSDB is engaged in internal
conversations aimed at reaching a consensus on the
candidate, ideally by about March 10. Private sector
representatives have input into these conversations but do
not have a decisive role in the decision, which belongs to
the major party leaders and other office-holders. In the
end, Fernando Henrique Cardoso's view will be decisive. He
could get the nomination himself if he wanted it, though
Madeira believes he doesn't. According to Madeira, the late
Governor Covas was the natural candidate in 1994 but
deferred to Cardoso; accordingly, Cardoso now owes Covas's
protege, Alckmin. The PSDB is assuming Lula will be the PT
candidate, since the party has no other strong names.

¶13. (SBU) Madeira said the PSDB is still formulating its
electoral program in consultation with economists, but that
it will focus on the historic loss of opportunity for
economic growth under the current government, along with its
third-world-oriented foreign policy and mismanagement of
social programs. He stated that Lula would have a difficult
time getting re-elected and that the PSDB's prospects look
good. Madeira himself will be departing at the same time as
Alckmin to re-assume his Congressional
Seat and run for re-election to the Chamber. In all, he
said, seven members of the Alckmin administration will
resign to seek office. Lieutenant Governor Claudio Lembo
(PFL) will assume the Governorship, but only for nine
months.

¶14. (SBU) In his meeting with the CDA on January 20,
Governor Alckmin spoke of the important partnership between
Sao Paulo state and the U.S. He also said Brazil needs to be
better integrated into the international economy. Trade is
growing and Brazil needs more markets. Mercosul is fine,
but Brazil also needs to negotiate FTAA on a reciprocal
basis.


SAO PAULO 00000073 005 OF 005


¶15. (SBU) Alckmin acknowledged the internal PSDB problem,
which he hoped would soon be resolved. He was planning to
meet imminently with his "good partner" Minas Gerais
Governor Aecio Neves, and then travel to the northeastern
states of Sergipe and Pernambuco (clearly an attempt to gain
exposure outside his home region). Alckmin thought the
campaign was moving forward well and that his record in
creating jobs and generating exports stood him in good
stead. He spoke of the challenges state governors face in
Brazil, including problems with a dysfunctional judicial
system, which sometimes issues "absurd" rulings. (In
example, he noted that labor courts had recently ordered the
rehiring of 1750 dismissed state employees, including 1250
who had already been indemnified.) Asked about his
priorities for governing Brazil, he said the first priority
is economic development. He also stressed the need for tax
reform, especially simplification of the tax code;
completing social security reform and eliminating the
system's high deficit; and passing labor reform and
political reform. He said he would strive to cut the cost
of government and invest the savings in national
infrastructure development.

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

¶16. (SBU) Serra and Alckmin both appear highly qualified to
be President of Brazil, and either should be able to mount a
strong campaign against Lula. Both of them clearly want the
job, though Serra still faces the challenge of finding a
graceful way out of his commitment to remain as Mayor.
Neither candidate is particularly charismatic, but both have
strong track records as administrators and reputations for
personal integrity. Both men appear favorably disposed
toward the United States and supportive of FTAA. Lula is
reported to prefer Serra as an opponent, perhaps because he
defeated him four years ago and knows what to expect from
him, whereas Alckmin could present surprises. However, that
may be misdirection, especially in light of the polls that
show Serra so much stronger against Lula. PT President
Berzoini expressed the view that Alckmin comes across well
on TV, calmly and soberly explaining his positions, whereas
Serra has gotten a reputation as possibly an adventurer in a
financial sense, which, if true, would be worrisome to
business people and investors.

¶17. (SBU) Alckmin is right when he claims that the polls
offer only a snapshot and that the numbers are subject to
change drastically once the campaign is under way. But the
polls nevertheless offer one of the few concrete indicators
to guide the preferences of the politicians who must decide
between the two, and on that level, Serra appears to have
the edge within the PSDB at this time.

¶18. (SBU) So far, the rivalry does not appear to have
damaged the PSDB, despite some sniping back and forth
between the two camps. Most observers expect the PSDB to
close ranks behind the eventual nominee and to wage a strong
campaign against a vulnerable Lula. But if the issue is not
resolved in the near term (by the end of March), or if the
loser does not gracefully accept the party's decision, there
could be negative consequences for the PSDB. End comment.

¶19. (U) This cable was cleared/coordinated with Embassy
Brasilia.

McMullen