This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 SAO PAULO 001376 
 
SIPDIS 
 
SENSITIVE 
 
NSC FOR CRONIN 
STATE PASS USTR FOR SULLIVAN/LEZNY 
 
E.O. 12958: N/A 
TAGS: PGOV ECON PINR ELAB BR
SUBJECT: PT Criticism Creates Dilemma for President Lula 

REF: (A) Sao Paulo 1110; (B) Sao Paulo 1071 

¶1. Sensitive But Unclassified. Protect Accordingly. 

¶2. (SBU) Summary: A senior PT advisor told CG that the party leadership made a mistake in issuing a recent resolution publicly criticizing President Lula's economic policies. The advisor attributed this political blunder to long- standing internal divisions in the party and the demise of pragmatic leaders who were able to keep the PT's militant factions in check. With the PT's new left-leaning leadership taking public potshots at his economic policies, Lula faces a serious dilemma of how to craft a coherent campaign strategy in the face of an increasingly united opposition. End Summary. 

-------------------------------- New PT Directorate Flexes Muscle -------------------------------- 

¶3. (U) On December 10, the National Directorate (DN) of President Lula's Workers' Party (Partido dos Trabalhadores - PT) issued a resolution expressing strong criticism of the Lula government's economic policies. The resolution was issued following the first meeting of the new National Directorate (DN) elected in September (reftels). It contained a list of the government's accomplishments, a defense of the party in the face of political scandal, attacks on the opposition, and a call for Lula's re- election. But what generated the most attention was its criticism of the primary surplus and high interest rates, and its call for stronger growth, more public investment and social spending, and better distribution of wealth. 

¶4. (SBU) For Lula's own party to criticize his government so directly and publicly caught many observers by surprise, and caused unease among more moderate elements of the PT who fear that this could play into the hands of the opposition. This incident adds fuel to existing tensions created by the public sniping between Finance Minister Palocci and Presidential Chief of Staff Dilma Rousseff over the direction of economic policy. 

---------------------------- PT Advisor Bemoans Divisions ---------------------------- 

¶5. (SBU) The PT's Senior Advisor for International Affairs, Ana Maria Stuart, told CG during a December 12 meeting that she thought the party leadership had made a mistake in publishing this resolution. Noting that the resolution passed by a single vote, Stuart attributed this political blunder to PT internal contradictions that have plagued the party since its founding in 1980. Stuart, a protge of Lula's international affairs advisor, Marco Aurelio Garcia, described how the PT evolved over time from a collection of disparate autonomous social and labor organizations, some of them quite militant. These groups still jealously guard their independence and do not accept the notion that they must follow the party line in order to support Lula and his PT-led government. They have been particularly critical of the PT's alliances with centrist parties. Many of these leftist groupings within the PT structure stridently oppose FTAA, and some explicitly want to establish a socialist society. A few leftist dissidents defected after the Sepember elections, but most have remained, trying to change the party from within. 

¶6. (SBU) Stuartpointed out that the Lula government came into ofice committed to the idea of redistributing wealth and helping the poor - as evidenced by programs like Fome e Zero and Bolsa Familia - but it must govern a wide spectrum of social sectors, not just the workers and marginalized groups that are championed by the PT's militant base organizations. Stuart underscored that while Lula won 54 percent of the vote, the PT has only about 18 percent of the votes in Congress, so the government has to negotiate with other parties in order to pass legislation. She added that the debt burden and the ghost of inflation have required Lula and Finance Minister Palocci to follow an orthodox macroeconomic policy, placing the government at odds with the PT's leftist base. 

¶7. (SBU) According to Stuart, these tensions play out in the party's National Directorate, where all factions are represented proportionally based on the vote in the party internal elections held in September. The Campo Majoritario, tarnished by the political scandal, garnered slightly more than 40 percent of that vote and has lost the grip that it once held over the party leadership. Several major pro-government leaders, like former party presidents Jose Genoino and Jose Dirceu, have been disgraced. Lacking a majority, the moderates now must seek compromises with the leftist elements. Stuart observed that Lula's supporters in the party were disadvantaged by the recently released disappointing economic growth figures, which gave the party's leftists and militants more ammunition. 

¶8. (SBU) Stuart acknowledged that it is problematic for Lula to enter an electoral campaign with his party so divided. She said the media's constant criticism of the government created an additional problem, making it much more difficult for Lula to regain the middle-class support he enjoyed in the 2002 election, and which he will need again. In this context, she expressed the view that Sao Paulo Mayor Jose Serra would be a more competitive opponent for Lula than Sao Paulo State Governor Geraldo Alckmin. Stuart added that the PSDB/PFL alliance would pose a formidable challenge to Lula. 

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

¶9. (SBU) The controversial PT resolution demonstrates that the party's moderate "Campo Majoritario" (CM) faction, which forged the successful strategy for Lula's election campaign in 2002, is no longer able to control the party's fractious ideological groups. The PT has always been an eclectic collection of leftist intellectuals, trade unionists, social movements, and some hard-core radicals. However, until the September party elections, these fractious groups were kept in check by the moderate-based Campo Majoritario. With the demise of Jose Dirceu and his pragmatic leadership group, the PT's inherent divisions have resurfaced. This new reality requires Lula to walk a very fine line. While he needs the organizing skills of the leftist social movements to mobilize his election campaign, these groups do not have sufficient strength to get him re-elected. The populist policies advocated by the PT's left wing, if adopted by Lula (which appears unlikely), would make the markets nervous and thus alienate the centrist voters he needs to attract. In the face of public bickering between his ministers, Lula has tried to appease supporters on both sides of the debate, creating concerns about his own credibility. With the PT's new left-leaning leadership now taking public potshots at his economic policies, Lula faces a serious dilemma of how to craft a coherent campaign strategy in the face of an increasingly united opposition. End comment. 

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

McMullen