Brazil Real, Stocks Drop as Political Drama Returns to Spotlight

  • Newspaper reports top minister plotted to end corruption probe
  • Report hits government days after president was removed

Brazil’s real led losses among major currencies and the Ibovespa fell as a report that Planning Minister Romero Juca suggested ending the nation’s graft probe called into question the new government’s pledge to root out corruption.

The real dropped 1.4 percent to a one-month low of 3.5727 per dollar, and the benchmark equity index declined 0.8 percent to 49,330.42 on Monday. The cost of hedging Brazil’s sovereign debt against losses using five-year credit-default swaps climbed to the highest in a month. Newspaper Folha de S. Paulo reported it had access to recordings in which Juca and a former executive linked to state oil company Petroleo Brasileiro SA discussed how to prevent the graft probe dubbed Carwash from proceeding. Juca said Monday that his conversation was misunderstood.

"This political drama is just adding more tension to a situation that’s already serious enough," said Jason Vieira, the chief economist at Infinity Asset Management in Sao Paulo. "We are paying attention to how Temer will solve his first crisis.”

Brazilian assets have rallied this year on speculation that the impeachment of President Dilma Rousseff would usher in a new government able to break the political paralysis stemming in part from the corruption probe and take measures to support growth. Rousseff was forced to temporarily step down this month as she faces a trial for impeachment, and acting President Michel Temer named Juca to lead efforts to gain lawmaker approvals for a new primary deficit target and fiscal measures.

"Investors are especially bothered by the noise arising from the recordings of Juca, who is Temer’s right arm," said Leonardo Monoli, a partner at Jive Asset Gestao de Recursos in Sao Paulo. "Everything indicates that the Carwash investigation should bring more noise to the PMDB party and, as a consequence, for Temer."

Latin America’s biggest economy is in the midst of its worst recession in a century. Economists expect the country’s gross domestic product to shrink 3.83 percent this year after contraction 3.8 percent in 2015, according to the central bank survey conducted May 20. The analysts also raised their inflation forecast to 7.04 percent.

Brazilian education companies dropped on speculation Temer will seek to cut the social programs they depend on for revenue. Kroton Educacional SA and Estacio Participacoes SA, the two biggest for-profit university operators, declined after Folha de S. Paulo reported a government program to help pay for technical courses and college degrees may end. Kroton dropped 3.6 percent to a two-month low of 10.96 reais, while Estacio fell 2.4 percent to 10.95 reais.

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