Lula, Bond-Market Favorite, Now Threatens to Deepen Brazil Woes

Updated on

Former President Luiz Inacio Lula da Silva, who became a bond-market darling by orchestrating Brazil’s rise to investment grade, is now threatening to compound its woes.

Local-currency government bonds tumbled Thursday, part of a selloff in the nation’s financial markets after a newspaper reported that a legal measure had been filed to prevent Lula from being arrested amid the biggest bribery probe in the country’s history. A spokesman for Lula, 69, said the former president hasn’t taken any such legal action.

Prosecutors also said Lula isn’t a target of their probe into state-controlled oil producer Petrobras, yet any whiff of speculation linking Lula to the corruption scandal would be a blow to a country that’s trying to restore its standing among investors. During his eight-year tenure that ended in 2010, Brazil won over a dozen rating increases as Latin America’s biggest economy posted its fastest growth in a quarter century.

“The depth of the Petrobras scandal is so dramatic that it continues to be a significant drag on the market,” said Geoffrey Dennis, the head of emerging-market strategy at UBS AG. “If it pulls in more senior politicians, it’s going to be seen as an ongoing negative.”

According to a document on its website, a court in Parana state received the so-called habeas corpus request filed on behalf of Lula. The request, which allows detainees to seek relief from unlawful imprisonment, was made by Mauricio Ramos Thomaz, who isn’t representing Lula, according to a court press spokeswoman.

Yields Jump

Lula told lawyers to ask the court to disregard the request, according to an e-mailed statement from his institute. Federal Judge Joao Pedro Gebran Neto from the southern-district court denied Ramos Thomaz’ request.

The slump in Brazil’s real-denominated notes due in 2025 pushed yields up 0.17 percentage point Thursday to 12.74 percent. The nation’s bonds have now lost 11 percent in dollars this year, more than twice the average slump in emerging markets, according to JPMorgan Chase & Co. The real dropped 0.9 percent Thursday, leaving it down 15 percent this year. It rose less than 0.1 percent Friday as of 2:33 p.m. in New York.

“If Lula gets implicated, this represents a deepening of the scandal,” Marco Santamaria, a money manager at AllianceBernstein LP, which oversees $500 billion, said by e-mail. “It is this uncertainty that is keeping markets on edge.”

Scandal Fallout

Just last week Marcelo Odebrecht, the chief executive officer of conglomerate Odebrecht SA, was detained by police investigating allegations that construction companies paid bribes to the state-run oil producer in return for contracts. The company said Friday it will appeal Odebrecht’s arrest, lawyer Dora Cavalcanti told journalists in Sao Paulo.

The Petrobras probe, which also prompted Moody’s Investors Service to cut the oil producer to junk in February, has already implicated more than 20 companies and pushed three major builders to seek bankruptcy protection for some of their units.

The bribery case has eroded confidence in President Dilma Rousseff, Lula’s handpicked successor, at a time when she’s struggling to revive the economy and bolster the nation’s finances to avoid a credit-rating downgrade.

“Should Lula come under formal investigation and face criminal lawsuits, the repercussions could be disastrous for Rousseff,” Christopher Garman, an analyst at Eurasia Group, said in an e-mailed note. “It validates our long-standing view that Lula’s indictment in the corruption probe, and the economic contagion risks that flow from the investigation more broadly, is the single largest threat to undermining both fiscal management and governability.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE