Brazil Real, Stocks Sink on Speculation Lula to Become Minister

How to Play the Brazilian Market Now
  • Folha reports Rousseff just waiting on Lula to accept post
  • Currency slumps most two months as stocks extend decline

Brazil’s real dropped the most in two months and stocks retreated after a report that former President Luiz Inacio Lula da Silva might be named a cabinet minister, potentially shielding him from prosecution amid the nation’s largest corruption scandal.

The Ibovespa stock benchmark declined from a seven-month high and the real dropped the most since Dec. 30 after Folha de S.Paulo reported that President Dilma Rousseff is only waiting for Lula to accept the job before making the announcement. The newspaper didn’t say where it got the information. Lula’s foundation declined to comment on the report when contacted by Bloomberg News.

Should Lula become minister, that would bring Rousseff an ally with strong ties in Congress and provide him some protection against corruption investigations, given that only the Supreme Court can authorize a Cabinet member’s imprisonment. Brazilian assets had surged in the past two weeks as traders bet that a sweeping graft investigation was getting closer to Rousseff and her party, creating an opening for new leadership that would focus on pulling the country out of its worst recession in a century.

“Investors are reacting to the fact that this administration is resorting to all kinds of maneuvers to stay in power,” said Ricardo Gomes da Silva, head of currency trading at Correparti Corretora de Cambio in Curitiba, Brazil. “The government is doing all it can to save itself.”

The real fell 2 percent to 3.6597 per dollar in Sao Paulo. The Ibovespa lost 1.6 percent to 48,867.34, extending losses after Folha’s report. State-run Petroleo Brasileiro SA contributed the most to the stock index’s slump, falling 8.5 percent. Vale SA, the world’s largest iron-ore producer, slumped 4.4 percent.

After federal police briefly detained Lula for questioning March 4 and state prosecutors days later charged him with money laundering and hiding assets as part of a separate probe, speculation mounted that he could be named to Rousseff’s cabinet as, under Brazilian law, only the Supreme Court can authorize imprisonment and trial of ministers.

“Naming Lula minister could generate even more protests than already seen and bring Carwash investigations to the middle of the government,” said Marcelo Kfoury, the chief economist in Citigroup Inc. in Brazil. Lula may end up having special judicial treatment if named minister, “but even that might not be enough to sustain this government.”

Brazil’s currency and stocks led world gains in the first two weeks of the month, driven largely by the prospects for a change in Brazil’s government. Now investors are taking a more cautious approach considering the challenges ahead as the economy shrinks. Latin America’s biggest economy unexpectedly contracted in January, the central bank said on Monday, as activity declined 8.1 percent from a year earlier.

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