Brazil Selloff Resumes as Temer's Graft Defense Falls Flat

  • Real and Ibovespa are among world’s worst performers Monday
  • Criticism, protests overshadowed efforts to rally supporters

Aviva's Ballard Says Brazil Is in a Tough Position

Brazilian assets resumed a selloff Monday as investors fled what had been one of the most popular trades in emerging markets.

The real and local stocks were among the world’s worst performers as President Michel Temer’s support deteriorated further over the weekend, days after an audio recording emerged in which he appeared to endorse illegal bribes to a disgraced lawmaker. The losses have been magnified because so many global investors had piled into Brazilian assets on bets that Temer would push through measures to shore up the country’s finances.

The Ibovespa equity gauge lost 2.1 percent to 61,301.2 at 1:30 p.m. in Sao Paulo, with the real 0.9 percent weaker at 3.2845 per dollar. JBS SA, the meatpacking giant whose executives made the recording implicating Temer, plunged 20 percent to the lowest in almost four years. Brazilian banks also dropped, with Banco do Brasil SA the biggest loser.

Traders are abandoning the country as its political crisis deepens, with Temer’s attempts to discredit the allegations over the weekend failing to convince ordinary Brazilians and investors alike. A key coalition partner, the PSB party, joined the opposition in calling for his resignation as members of the influential bar association known as OAB voted in favor of starting the process to impeach Temer, who himself came to power after his predecessor was forced from office about a year ago. Eurasia analysts put the odds of Temer leaving office at 70 percent.

“With future leadership prospects in Brazil now significantly more uncertain, the outlook for fiscal reform and budget consolidation has deteriorated,” said Erik Nelson, a currency analyst at Wells Fargo Securities in New York who expects the real to keep underperforming. “It’s not clear yet if or when this could be resolved.”

Temer on Saturday had requested the country’s top court suspend a corruption and cover-up probe against him, arguing that a recording used by the Prosecutor General Rodrigo Janot as evidence had been doctored. Temer portrayed the person who recorded the conversation with him, JBS Chairman Joesley Batista, as a businessman disgruntled with his government’s tighter purse strings. The court will decide on the request Wednesday.

While Temer tried to rally supporters to defend him from allegations he authorized hush money, the lawyers’ group painted a broader picture of wrongdoing. It faulted the president for failing to denounce criminal activities, breaking with presidential decorum, and promising inappropriate favors to certain individuals. The OAB will file its request for impeachment in the lower house of Congress in coming days, it said early on Sunday.

Brazilian assets had rallied over the past year -- posting some of the world’s best returns -- on speculation that Temer would put an end to the worst recession in a century and win back the country’s investment-grade rating by trimming popular social-welfare programs and making the economy more efficient. While his proposals were popular with investors, he was not loved by the public at large, leaving him with an approval rating of about 10 percent.

On Sunday afternoon tens of thousands of Brazilians demonstrated in various cities to demand his resignation.

“There are lots of obstacles on the road and it remains to be seen whether there will be more revelations over the next couple weeks,” said Edwin Gutierrez, the London-based head of emerging-market sovereign debt at Aberdeen Asset Management, which oversees $401 billion of assets. “Right now, saving his presidency is all Temer can focus on.”

— With assistance by Raymond Colitt

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