Brazil Stocks Sink With Real as Rousseff Fights to Stay in Power

  • State-controlled companies including Banco do Brasil plunge
  • Former President Lula accepts cabinet position, Globo says

Brazilian stocks led world losses as state companies plunged on speculation the government is boosting efforts to stay in power and pursue an economic agenda that calls for greater spending.

The real also weakened, making the Ibovespa the worst performer in dollar terms among more than 90 global stock gauges tracked by Bloomberg. State-controlled lender Banco do Brasil SA plunged the most since 1996 while oil producer Petroleo Brasileiro SA lost 11 percent. Steelmakers sold off on the outlook for reduced demand from China.

Investors dumped Brazilian assets Tuesday after local media reported former President Luiz Inacio Lula da Silva will take a cabinet post with the current government, making it harder for prosecutors to investigate corruption during his administration and that of his successor, Dilma Rousseff. Traders had bid up stocks, bonds and the currency over the past weeks on mounting speculation that Rousseff would be ousted, potentially ushering in new leadership that would be able to pull Brazil out of its worst recession in more than a century and shore up fiscal accounts after the country lost its investment-grade rating.

"All that hope is now being replaced by caution," Paulo Henrique Amantea, an analyst at brokerage H.H. Picchioni, said from Belo Horizonte. "A change in government is seen as the only way of keeping the contraction from extending more years, and this possibility seems further away if Lula is named minister. A turn to the left would mean a catastrophe, because those populist measures were the cause of our current problems."

Banco do Brasil’s 21 percent plunge made it the worst performer on the Ibovespa, while Petrobras had its biggest two-day slump since October 2008. The cost to insure Brazil’s debt against non-payment surged the most since September in the credit-default swaps market. The price of the country’s benchmark dollar-denominated bonds fell the most since December. The real weakened 2.8 percent to 3.7668 per dollar.

Lula has told allies he’s agreed to become minister, newspaper O Globo reported, without saying how it got the information. Lula would probably be appointed the president’s chief of staff, according to a government official briefed on the matter who requested not to be identified because talks are not public. Under Brazilian law, only the Supreme Court can probe, indict and try ministers, so the move could potentially insulate Lula from efforts by state prosecutors to go after him in a money laundering probe they’re carrying out.

"The news on Lula is clearly negative, because there is this fear that it might weaken the impeachment drive," said Bianca Taylor, a sovereign analyst and strategist at Loomis Sayles & Co. in Boston. "Removing this government would mean a very necessary political and economic change."

During Lula’s eight years as the nation’s leader, from 2003 through 2010, the government implemented an economic strategy based on cheap credit from state-owned banks and social benefits to boost growth. His ally and successor, Rousseff, suffers from record-low popularity and was the target of millions of demonstrators who took to the streets Sunday to protest her administration and alleged corruption within her government. She is already the target of an impeachment push being carried out by lawmakers.

Brazilian assets had been the world’s best performers in 2016 amid speculation that a new government would come to power. Now, investors are focusing on the difficulty in ousting the president and turning around Latin America’s largest economy. The country suffers from inflation of more than 10 percent and is in the midst of a two-year recession that analysts say will see the economy shrink 3.4 percent this year after a 3.8 percent contraction last year.

The Ibovespa fell 3.6 percent to 47.130.02 in Sao Paulo as 49 of its 61 stocks dropped. Gerdau SA led losses among commodity exporters as iron ore dropped for a sixth day after Chinese steel production weakened further. Concern that demand from China, Brazil’s main trading partner, will continue to wane exacerbated the gloom surrounding Latin America’s biggest economy.

Meatpacker JBS SA extended a three-day decline after the release of the plea bargain made by Senator Delcidio Amaral in connection with an investigation into corruption at Petrobras, in which he said that a friend of Lula influenced Brazil’s development bank, known as BNDES, to give JBS a loan. Shares tumbled 7.9 percent. JBS’s press office didn’t immediately respond to a request for comment.

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