Rousseff Loses ‘Point Man’ For Brazil Investors as Scandal Claims Top Aide

Brazilian President Dilma Rousseff suffered the loss of one of her closest advisers when Cabinet chief Antonio Palocci resigned after battling the opposition for weeks against corruption charges that weakened the five-month- old government.

Palocci, 50, stepped down yesterday saying “baseless” accusations that he improperly enriched himself by providing consulting services to companies while serving as Rousseff’s campaign chief last year were hampering his performance in the Cabinet. He will be replaced by Senator Gleisi Hoffmann of the ruling Workers’ Party at 3 p.m. New York time.

Palocci had been a key aide on economic policy, working to ensure allies in Congress approved Rousseff’s plan to increase the minimum wage less than trade union supporters wanted, one of her signature victories after taking office Jan. 1. There is no other adviser on economic policy of equivalent stature in the Cabinet, said Alexandre Barros, the head of Early Warning, a Brasilia-based political risk company.

“He was the government’s main point-man,” said Andre Cesar, founder of Brasilia-based political risk firm CAC Consultoria. “He was the guy who talked with everybody: banks, business leaders, trade unions, the opposition and government members.”

‘Right Track’

Hoffmann, 45, is a senator from the southern city of Curitiba and the wife of Communications Minister Paulo Bernardo. She believes that the government’s economic policy is “on the right track,” according to a statement on her website yesterday, adding that measures to curb credit growth, known as macroprudential measures, are “important instruments to fight inflation,” and that it isn’t necessary to rely solely on higher interest rates.

The yield on the interest rate futures contract maturing in October, the most traded in Sao Paulo, rose 1 basis point, or 0.01 percentage point, to 12.3 percent at 10:40 a.m. New York time. The yield on the contract due in January 2015 fell 3 basis point to 12.39 percent.

The real was little changed at 1.5801 per dollar.

Reserve Requirements

In December, the central bank raised banks’ reserve requirements to slow credit growth, and in April Finance Minister Guido Mantega doubled to 3 percent the so-called IOF tax on consumer credit.

“Controlling and fighting inflation is our priority, but we’re not going to do this by giving up economic development, job generation and improvements in the quality of life of Brazilians,” Hoffmann wrote on her website last week.

Consumer prices rose 6.55 percent in May, the fastest pace since 2005 and above the government’s 2.5 percent to 6.5 percent target range.

Palocci was the first minister to resign since Rousseff, 63, succeeded President Luiz Inacio Lula da Silva. His decision came one day after Chief Federal Prosecutor Roberto Gurgel shelved an investigation against him, citing a lack of evidence.

Rousseff regrets the loss of Palocci, according to a statement from the Presidency yesterday. His departure may trigger other cabinet changes, as Rousseff attempts to regain her political initiative, Cesar said.

Cabinet Changes

The president may replace her Institutional Affairs Minister Luiz Sergio Oliveira as she redistributes he role of her aides, Cesar said. The Institutional Affairs office would have a bigger role in negotiations with Congress with the dismiss of Palocci, he said.

Newspaper Folha de Sao Paulo reported last month that Palocci earned 20 million reais ($12 million) in fees while working on Rousseff’s election campaign last year. In 2006, when Palocci was elected to Congress, he reported assets of 375,000 reais.

“The continuation of the political fight could hurt his work in the government,” Palocci’s press office said in an e- mailed statement announcing his decision. A decision by prosecutors yesterday to drop accusations against him “confirms the legality and rectitude of his professional activities,” the statement said.

Tax Authorities

In a June 3 interview on TV Globo, Palocci said “not a single cent” of his earnings last year was related to work on Rousseff’s campaign. All of his income had been reported to tax authorities and his consulting work ended when he was named Cabinet chief, he said. Palocci said he couldn’t name the 20 to 25 banks, investment funds and other companies he provided consulting services to because the contracts are confidential.

Palocci’s departure is political “noise” that is unlikely to have a broader impact on policy, said Jim O’Neill, chairman of Goldman Sachs Asset Management in London.

Palocci had resurrected his political career under Rousseff after he resigned as Lula’s Finance Minister in 2006, before the Supreme Court belatedly exonerated him of violating bank secrecy laws. As Finance Minister, his insistence on fiscal austerity during Lula’s first term helped net debt fall to 47 percent of gross domestic product by 2006, from 60 percent at the end of 2002.

Political `Fragility'

Palocci’s departure shows the “political fragility” of the government, and could make it more difficult for the government to pass legislation such as tax reform, said Roberto Padovani, chief economist at Banco WestLB do Brasil SA.

“This is a political issue, not an economic one,” Padovani said, speaking by telephone from Sao Paulo. “There’s no political or economic incentive for changing tack on the management of the economy.”

To contact the reporters on this story: Matthew Bristow in Brasilia at mbristow5@bloomberg.net; Andre Soliani in Brasilia at asoliani@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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