Brazil Plunges Back Into Political Crisis as Markets Brace

  • Temer denies having authorized any obstruction of justice
  • The allegations are the latest development of Carwash probe

Markets React to Brazil in Crisis as President Accused

Brazil was plunged back into a political crisis reminiscent of last year’s impeachment saga following reports that President Michel Temer was embroiled in an alleged cover-up scheme involving the jailed former speaker of the lower house of Congress.

One of the country’s largest newspapers reported on Wednesday evening that a secret recording exists of Temer approving a payment to Eduardo Cunha, the mastermind behind last year’s impeachment of former president Dilma Rousseff. The tape was submitted to the Supreme Court by two senior executives from meat-packing giant JBS SA as part of a plea bargain deal, according to O Globo newspaper, in which information is offered in exchange for reduced sentences. The paper provided neither a transcript nor a recording.

The presidential press office vehemently denied the allegations. "President Michel Temer never requested payments to obtain the silence of ex-deputy Eduardo Cunha," according to a statement. "The president defends a deep and wide investigation to get to the bottom of the claims put forward in the media." Both JBS and its holding company, J&F, declined to comment.

The new crisis calls into question everything from Temer’s crucial pension reform to the presidency itself and could trigger a rout when Brazilian markets reopen. Amid growing protests in Brasilia last night, lawmakers from five opposition parties called on Temer to resign and at least one has already filed for impeachment hearings. A Brazilian ETF plunged almost 10 percent in Tokyo trading, its biggest drop since November. Brazil’s 2021 Eurobonds slumped most on record early on Thursday. Mauricio Oreng, a strategist at Rabobank, told Bloomberg that the real could fall 6 percent on Thursday.

Markets

Brazilian markets have soared over the past year as Temer’s administration embarked on an ambitious reform program that cheered investors. Brazilians, however, are overwhelmingly opposed to his austerity measures and the president’s approval rating hovers at around 10 percent.

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As Brazil’s capital fell back into crisis mode, military police moved into position around the presidential palace and one of the judges on Brazil’s Supreme Court called for calm. "It’s a moment for serenity, moderation and watching the institutions work," said Marco Aurelio Mello. Local TV images showed a crowd of protesters gathered in Sao Paulo, Brazil’s largest city.

The allegations are the latest development in Operation Carwash, a three-year long corruption investigation that has implicated many in Brazil’s business and political elite, including some in both the government and the president’s own party. Temer has repeatedly denied any wrongdoing.

No Transcript

According to the newspaper’s report, when the president became aware that the executives were paying Cunha to keep silent he said, "You’ve got to keep this up, right?" O Globo did not provide a transcript of the conversation, or the question leading up to the president’s alleged comment. Nor did it explain how it obtained the information.

The report also cited Senator Aecio Neves, president of the Brazilian Social Democracy Party, which is Temer’s main ally in Congress. O Globo said Neves requested 2 million reais ($635,000) from a JBS executive to help pay for the lawyer who’s defending him in the Carwash probe. Neves denied wrongdoing in a statement. On Thursday morning, federal police raided his apartments in Rio de Janeiro, Brasilia and Belo Horizonte, local media reported.

Late on Wednesday, the Globo report caused an immediate stir in Congress, where opposition congressmen started to shout anti-government slogans. The session was subsequently suspended. Temer went to his official residence after an emergency meeting with some of his closest aides.

A senior member of the Brazilian government told Bloomberg on condition of anonymity that the administration’s economic team was worried that the crisis could impact its reform agenda. The government is on the verge of sending its long-anticipated, and highly-controversial, pension reform proposal to the lower house of Congress.

Delayed Timetable

"The dramatic political weakening of the government must, at a minimum, delay the timetable for passage of the labor and pension reforms," Arko Advice, a political consultancy, said in a note. It added that the episode may affect the ruling of Brazil’s top electoral court, which is currently assessing whether to scrap the results of the 2014 election. Such a decision could eventually strip Temer of the presidency, pending possible appeals.

The head of the Brazilian Bar Association, Claudio Lamachia, said in a statement that society needs immediate answers and that the alleged recordings need to be made public as soon as possible.

"Brazilians can no longer live with doubts regarding their representatives," Lamachia said.

As the events of last year proved, impeaching a Brazilian president is a tortuous affair. In order for Congress to initiate proceedings, Rodrigo Maia, the leader of the lower house and Temer’s ally, would have to sign off on the move.

Even then, it would trigger a lengthy process involving several rounds of voting in both houses that require two-thirds majorities to find Temer guilty of wrongdoing. In Rousseff’s case, the entire process took 8 months. Temer could also file appeals at the Supreme Court at any stage in the process.

If Temer resigns or is impeached, Congress would elect an interim president until the next scheduled vote in October of 2018. An early election could only be held with a constitutional amendment approved by lawmakers.

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