Brazilian Real, Equities Decline as Political Optimism Fades

  • Itau, Bradesco among top contributors to Ibovespa’s losses
  • Temer was accused of receiving illegal campaign donations

Brazil’s real and most of the stocks in the benchmark Ibovespa index declined after reports that Acting President Michel Temer was linked to illegal donations.

The real fell 0.2 percent to 3.1728 per dollar at the close of trading in Sao Paulo, after earlier rising as much as 0.2 percent. The Ibovespa fell less than 0.1 percent to 57,635.43 as 38 of its 59 stocks slipped. Lenders Banco Bradesco SA and Itau Unibanco Holding SA were among the biggest contributors to the equity index’s drop.

Some investors saw reason to be concerned after a magazine report said Temer was accused of receiving illegal campaign donations, tarnishing the image of a new government that investors had bet would pull the nation out of economic and political crisis. Marcelo Odebrecht, former chief executive officer of Brazil’s largest construction company who was jailed on allegations of bribery, linked Temer to a 10 million-real ($3.2 million) illegal campaign donation in 2014, Veja reported Saturday, citing part of the executive’s plea-bargain deal with prosecutors.

"Depending on how the plea bargains develop, this could hurt foreign investors who are now just starting to cheer up about Brazil," said Leonardo Monoli, a partner at Jive Asset in Sao Paulo.

The new administration has fueled a rally in Brazilian assets this year. The real has appreciated 25 percent and the Ibovespa is up 33 percent. Buying the real with borrowed dollars in a so-called carry trade has returned 34 percent this year, the most in the world.

Odebrecht alleged that Temer requested the financial support when he was vice president, the magazine said, adding that the contribution was made in cash and was accounted for in a non-traditional manner. A press official for Temer, who has repeatedly denied any wrongdoing, said the politician met Odebrecht in 2014 to discuss campaign donations to his PMDB party in accordance with the electoral rules and that the donation was registered. The construction company, Odebrecht SA, declined to comment in an e-mailed statement.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest rates, advanced 0.03 percentage point to 12.74 percent.

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