• Recordings allegedly implicate minister; he denies wrongdoing
  • Brazilian markets sell off on concern about Temer government

Brazil’s Acting President Michel Temer is in damage-control mode as his administration faces its first political crisis with a corruption scandal that helped bring down his predecessor encroaching on his inner circle.

Top Temer ally and newly-appointed Budget Minister Romero Juca went before journalists on Monday to deny allegations made earlier in the day that he wanted to obstruct the sweeping corruption probe known as Carwash. Temer will wait to see how Juca’s explanation is received by the press and society before deciding whether to replace him, according to a presidential adviser who asked not to be identified.

Brazil’s real led losses among major currencies and the Sao Paulo stock exchange index fell amid investor concern that the scandal could derail Temer’s efforts to revive the economy. Analyst Lucas de Aragao said the allegations, which come less than two weeks after Temer took over the presidency, are particularly damaging because they’re centered on a pillar of his economic team who is tasked with containing a widening budget deficit that has eroded confidence in the country.

"Temer needs to act fast to contain this," said De Aragao, a partner at political risk consulting company Arko Advice.

Temer met with Juca on Monday morning to discuss the allegations, said one of the acting president’s top advisers, Wellington Moreira Franco, who participated in the talks. Moreira Franco said Temer would wait a day before deciding whether to keep Juca in his cabinet. Temer is scheduled to speak to the press on Tuesday morning about his first measures to shore up the budget, though reporters are likely to press him for a decision.

Carwash Investigation

Folha de S. Paulo newspaper broke the news on Monday morning when it published recordings of conversations that took place in March between then-Senator Juca and a former executive linked to state-run oil company Petrobras. In the discussions, the minister allegedly said Dilma Rousseff’s impeachment would lead to a government that could prevent the Carwash investigation from proceeding.

Juca’s lawyer, Antonio Carlos de Almeida Castro, didn’t deny the conversations took place, but added that he saw no criminal implications in the exchange. The minister said his comments were taken out of context and that he won’t resign.

"I’m not hurting this government; I feel like I’m helping it," he told reporters. "I have nothing to fear."

Political experts disagreed, with Arko’s De Aragao and analysts at consulting firm MCM Consultores Associados saying Temer may need to get rid of Juca to protect his administration. Allegations that Rousseff was soft on corruption and that members of her cabinet were involved in Carwash hurt her approval rating and led to massive anti-government protests ahead of the impeachment vote. She was never accused of graft.

David Fleischer, professor emeritus of politics at the University of Brasilia, said it’s unclear what the acting president will do, considering Juca has strong ties with legislators who will be instrumental in approving government legislation on the economy this year.

"This does not bode well for Temer, and he will have to decide what to do: cut his losses or grin and bear it,” said Fleischer.

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