Temer Aide Resigns Over Tape and Ethics Scandal in Brazil

  • Former minister involves Temer in influence-peddling scandal
  • Scandal poses risk to approval of reforms, could escalate

Brazilian President Michel Temer lost a key aide on Friday after being dragged into an influence-trafficking scandal that threatens to revive political uncertainty in Latin America’s largest economy.

Geddel Vieira Lima, Temer’s top congressional liaison, stepped down after he and the president were accused of exerting undue pressure to construct a building in which Lima has a stake. Former Culture Minister Marcelo Calero told police that Temer urged him to settle an impasse over the construction project, according to a copy of his testimony that leaked to the press. O Estado de S.Paulo and other newspapers reported that Calero recorded his conversation with the president, but no such tapes have emerged yet.  

Brazil’s real fell the most among the world’s major currencies earlier on Friday over speculation that Temer’s possible involvement may derail his government’s reform agenda. The currency weakened as much as 2 percent but trimmed losses after Lima’s resignation.

The ethics scandal comes at a delicate time for the government, which is pushing for final approval of a key spending cap bill in the Senate. Legislators are already on edge as executives of a leading construction company finalize plea bargains with prosecutors with details on kickbacks from state-run oil company Petrobras to politicians. Leaked tapes and testimonies surrounding the scandal earlier this year heightened political instability that culminated in the impeachment of President Dilma Rousseff in August.

“It all depends on whether a recording will emerge confirming whether Temer really pressured the former minister,” said Luciano Rostagno, chief strategist at Banco Mizuho do Brasil. “The situation would become tough for the debate of reforms.”

Presidential spokesman Alexandre Parola confirmed on Thursday evening that Temer spoke with Calero twice in an attempt to avoid conflict over the construction project. But Parola said that the president “never induced any of his ministers to take a decision that breaches internal rules or convictions.”

Temer’s approval rating stood at 28 percent in September, according to an Ibope poll commissioned by the National Industry Confederation. Since assuming the presidency on an interim basis in May, Temer has also lost three ministers over alleged cover ups surrounding a corruption probe.

Political Quicksand

Lima’s departure may give Temer a momentary respite, but the whole episode has put the government back on the defensive, said Andre Cesar, a political analyst at Hold Consultoria. “It’s like quicksand, everyone is looking carefully where to step,” said Cesar.

While it’s still hard to know the extent of the political crisis, fiscal reforms will most likely still be approved, said Mauricio Oreng, an strategist with Rabobank in Brazil.

Temer’s main ally, the Brazilian Social Democracy Party, known as the PSDB, continues to stand behind the president, said Joao Doria Junior, Sao Paulo city’s mayor-elect. “This moment of transition with Temer’s government should be preserved for the country to be pacified,” said Doria. “We’ll only have social calm in the country with economic growth.”

Temer has been in talks with the PSDB regarding Lima’s replacement, and is considering party Deputy Antonio Imbassahy as an option, according to a government member with knowledge of the discussions. The government wants to tap an ally who is capable of securing votes for bills in Congress, the official said.

Opposition lawmakers plan to file a request for an impeachment process against Temer, said Senator Lindbergh Farias of Rousseff’s Workers’ Party. With an overwhelming majority in Congress, Temer’s coalition is likely to reject the request and several congressional leaders said they saw no grounds for it.

Protests against the president could arise but “it’s not this scandal that will remove him from the presidency," said Roberto Padovani, chief economist at Banco Votorantim.

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