Brazil Markets Slide as Corruption Probe Ensnares BTG's Esteves

Brazil Billionaire Esteves Arrested in Probe
  • Andre Esteves, Delcidio Amaral detained as graft probe widens
  • Itau, Petrobras contribute most to equity gauge's slide

Brazilian stocks and the real led world losses after a widening graft scandal ensnared a billionaire banker and a high-profile politician, worsening the crisis that put Latin America’s largest economy on track for the longest recession since the 1930s.

QuickTake Corruption

Traders pushed down the value of Brazilian assets after Andre Esteves, who transformed Grupo BTG Pactual into the largest independent investment bank in the region, and Delcidio Amaral, the leader of the government coalition in the Senate, were detained. Shares of the lender plunged a record 21 percent. State-controlled companies Petroleo Brasileiro SA and Banco do Brasil SA tumbled. Lender Itau Unibanco Holding SA contributed the most to the slide in the stock gauge. Brazil’s $4.3 billion in bonds due 2025 fell the most in almost three weeks.

The market selloff followed a period of momentary calm as calls for President Dilma Rousseff’s impeachment abated, lessening concern over heightened political chaos in Brazil. Many traders now say the optimism is overdone and the relative tranquility hasn’t changed a longer-term outlook that includes a another credit-rating downgrade and a deeper recession.

“The recent improvement in sentiment was extremely fragile to begin with,” said Nicholas Spiro, managing director at Spiro Sovereign Strategy, in London. “There are many factors influencing sentiment toward Brazil, but the corruption scandal is the most significant and troubling one.”

Halting Rally

The Ibovespa halted a six-day rally that sent its valuation to the highest in a month, dropping 2.9 percent to 46,866.63 at the close in Sao Paulo. Itau, Latin America’s largest bank by market value trimmed its first monthly rally since April. Petrobras retreated from the highest since Oct. 9. The real lost 1.3 percent to 3.7456 per dollar. Its 90-day implied volatility, reflecting projected shifts in the exchange rate, was the biggest in the world.

Brazil’s equity market has lost about a third of its value since March 2014, when a widening probe into a pay-to-play scheme between an alleged cartel of builders and state-run oil producer Petrobras left Rousseff fighting for political survival. The lack of Congress support had the government struggling to approve measures that could shore up the nation’s finances, pulling Brazil out of the group of investment-grade countries in September.

Deepening Crisis

The arrests are “meaningful” and validate prospects that the corruption probe will deepen Brazil’s political crisis into 2016, Joao Augusto de Castro Neves, a director for Latin America at Eurasia Group, wrote in a note Wednesday. The New York-based political research firm says the potential for investigations leading into former President Luiz Inacio Lula da Silva is a key risk for Rousseff and bolsters the view that she has a 40 percent chance of not finishing her term in office.

“The more the police dig into the mud, the more wrongdoings they find,” Alvaro Bandeira, an economist at Banco Modal, said from Rio de Janeiro. “From now on, we can expect anything.”

That perception dragged down shares of state-controlled companies more than other stock in the Ibovespa. Banco do Brasil and Petrobras each tumbled at least 6.4 percent. The iShares MSCI Brazil Capped exchange-traded fund slid 4.4 percent to $24.12 at 3:50 p.m. in New York, the most since Oct. 13.

Yields on BTG’s $1 billion in bonds due 2020,, its most liquid dollar-denominated notes, surged 5.63 percentage points to 1233 percent, the highest since the notes were issued in January 2013, after news of the arrest. The notes slumped 15.35 cents to 76.18 cents on the dollar, a record low. BTG’s $1.3 billion in perpetual subordinated notes, callable in 2019, dropped 22 cents to 70 cents on the dollar, with yields jumping to 12.48 percent, the highest since they were first sold in 2014.

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