Don't Hold Your Breath If Betting Brazil Impeachment Is Near

  • Rousseff's removal from office is far from certain -- Eurasia
  • Brazil's succession struggle would be a messy affair -- Spiro

Investors betting that Brazil’s corruption scandal will hasten President Dilma Rousseff’s downfall and usher in a stronger leader to pull Latin America’s largest economy from recession may want to think again.

Rousseff and Lula da Silva in 2014

Photographer: Nelson Almeida/AFP via Getty Images

Brazil’s stock index rose the most among its global peers in the past week and the real touched an almost three-month high as corruption allegations against Rousseff and her mentor, former President Luiz Inacio Lula da Silva, dimmed the prospects of her political survival. The two have repeatedly denied wrongdoing.

Yet the president’s ouster is far from a foregone conclusion given the lack of hard evidence against her. Even if they prove successful, efforts to remove Rousseff from office probably would take months and open up a Pandora’s box of succession possibilities. That wouldn’t create the political stability that investors say is needed for Brazil’s economy to get back on track.

"Is there superficiality in the way investors see a possible Dilma exit? Absolutely," said  Christopher Garman, head of country analysis at political consulting company Eurasia Group. "The odds are this will be a drawn-out process."

Protracted Process

The arrest of Rousseff’s campaign manager, the detention of Lula and allegations the president sought to interfere in the sweeping corruption probe known as Carwash all increased expectations that she will fall. Rousseff is now under pressure from her own party to protect Lula by naming him a cabinet member, which would grant him special legal status, a person with direct knowledge of her thinking said on Wednesday.

Eurasia raised the odds of her ouster to 55 percent from 40 percent. Investors wagered a new administration would be able to garner more support and revive business and consumer confidence that are near record lows.

Yet the two biggest threats to Rousseff’s mandate -- the impeachment process in Congress and the investigation into allegations of illegal campaign financing -- have been stalled since last year, and neither may be resolved quickly. Impeachment in Brazil is a protracted process with multiple rounds of voting, and the administration could appeal an adverse ruling by the electoral court. Both create multiple possibilities for a Rousseff succession.

Many legislators able to win political concessions from the weakened administration will be reluctant to vote for impeachment unless popular pressure mounts or stronger evidence against Rousseff emerges, said Carlos Pio, a political scientist at the University of Brasilia. "I don’t see them overly eager to change the status quo," he said. "She’ll remain in office until there’s a smoking gun, which there isn’t yet."

Opposition lawmakers will amend their impeachment request to include allegations made against Rousseff last week. The original request focused largely on charges that she whitewashed a growing budget deficit. Opposition leaders asked the Supreme Court on Tuesday to settle legal questions about impeachment procedures, so the lower house can get started on voting as soon as possible. The justices are expected to make a decision next week.

Yet even Rousseff’s critics in Congress say that the success of impeachment will depend heavily on public sentiment; as a result, lawmakers are closely watching anti-government protests scheduled for Sunday.

“There is no impeachment without people on streets” said Jose Mendonca Filho of the opposition Democratas party.

Possible Outcomes

Yet the plethora of possible outcomes to the political crisis makes it virtually impossible to forecast who will govern Brazil if Rousseff falls.

For example, the electoral court could ban Vice President Michel Temer from taking the helm because he ran on the same ticket as Rousseff. In that scenario, the head of the lower house, Eduardo Cunha, would temporarily take office.

He would have to either call a general election or ask Congress to elect a new president, depending on the timing of the court’s decision. To further complicate the plot, Cunha himself is facing graft allegations and could end up being ousted. He has denied any wrongdoing.

"There’s such desperate yearning for change that the majority of investors haven’t thought this through," said Nicholas Spiro, a partner at Lauressa Advisory Ltd. and previously a consultant on sovereign-credit risk. "It’s going to be a very messy affair."

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