She's had better weeks.

Photographer: Evaristo Sa/AFP/Getty Images

Petrobras and Politics Sandbag Brazil's Rousseff

Mac Margolis writes about Latin America for Bloomberg View. He was a reporter for Newsweek and is the author of “The Last New World: The Conquest of the Amazon Frontier.”
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When the Brazilian Supreme Court authorized formal investigations into 49 politicians for corruption last week but left President Dilma Rousseff off the list, the sigh from the Planalto Palace was nearly audible.

But anyone counting on an easier ride for Rousseff in her second mandate is on the wrong bus. The investigation into a multimillion-dollar kickback scandal at state oil giant Petrobras is just beginning to hit paydirt. And in that toxic climate, Rousseff must not only convince voters -- who elected her last October on a message of plenty -- to accept sharp austerity measures to revive the prostrate economy. She also must marshal support for unpopular reforms from a bilious congress strafed by corruption charges.

Yesterday, Finance Minister Joaquim Levy called on senate leaders to salvage a bill to raise income tax revenues from congressional mutiny. Without more revenue or deep budget cuts to close a ballooning deficit, Brazil's sovereign bonds could go the way of Petrobras's credit rating, which was cut to junk status as the corruption scandal deepened. Yet Levy was just half-successful: Congress late Wednesday night agreed to uphold Rousseff's veto of new a tax table that would have compensated all wage earners for inflation, which reached 6.5 percent last year. But they forced Levy to soften the tax bite for lower salaries, a measure that will cost national coffers another $1.9 billion.

At first, loyal Dilmistas nursed hopes that the Petrobras scandal might diffuse political tensions by spreading the blame for Brazil's worst bribery and kickback case among the country's 28 political parties. After all, the leaders of both houses of Congress -- and half the congressional Ethics Committee -- also stand accused of helping themselves to the Petrobras dipstick.

Yet instead of contrition, Rousseff got blowback. That's because 47 of the names now under scrutiny for raiding the state oil company for political campaign funds are government allies.

Nor is Rousseff entirely in the clear. A former Petrobras executive told Congress yesterday that an estimated $150 to $200 million in oil bribes ended up in her Workers' Party coffers, including Rousseff's 2010 campaign fund.

All this must still be proved in the Supreme Court, and Rousseff has implored Brazilians for patience. Many, however, seem already to have made up their minds: Echoing previous protests in 2013 driven by economic discontent, marches for impeachment will take place in 32 cities this Sunday. 

Rousseff's plan to rescue the economy (and her floundering presidency) now rests disproportionately in the hands of two doubtful allies: Lower House President Eduardo Cunha and Senate President Renan Calheiros. Though tarred by the scandal, both have shown they can still mobilize their caucuses to inflict pain on the Planalto.

They drew blood with the tax rollback. The next battle will be over government-sponsored bills to roll back wage bonuses and social security benefits.

Cunha and Calheiros are caciques -- chieftains -- in the Brazilian Democratic Movement Party, a senior coalition partner that nonetheless controls only five ministries (versus the ruling party's 13). That imbalance has fueled resentment, and the Petrobras scandal has made it worse.

Rousseff is under pressure to clean house by dumping tainted aides, including Cunha and Calheiros, who could face trial in the high court or be stripped of their seats by the Congressional ethics committee. But don't bet on it.

"Both leaders still wield plenty of clout and control the legislative agenda," Carlos Pereira, a political scientist at the Getulio Vargas Foundation, told me. "They have signaled that they will cooperate with Rousseff only if they have guarantees that the government also will fight to protect them."

Pereira says Rousseff is between the cross and the sword.

That doesn't mean she is headed for impeachment. It just means that the price she -- and Brazil -- will pay to avoid the worst has just gone up.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mac Margolis at mmargolis14@bloomberg.net

To contact the editor on this story:
Maria Lamagna at mlamagna@bloomberg.net