Hanging in.

Photographer: Maksim Blinov/Host Photo Agency/Ria Novosti via Getty Images

Inquiry Could Upend Brazil's Government

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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Say the word "impeachment" in Brazil, and you're sure to get an earful. Supporters of embattled President Dilma Rousseff charge that ousting the popularly elected leader would be coup d'etat, and pundits warn of yet another tender Latin American democracy succumbing to turmoil.

With nationwide anti-government protests set for Aug. 16, the conversation is going to get uglier. That bodes ill for the political entente that the suddenly conciliatory Rousseff has embraced to rescue her economic stabilization plan and end the cold war with congress.

Brazil's Highs and Lows

But as risky -- and ill-advised -- as sending her off may be, there is a plausible argument for impeachment that would neither trample the constitution nor weaken democratic institutions.

Early next month, the federal auditing court, TCU in Portuguese, is expected to give its final word on the Rousseff government's 2014 accounts. In its preliminary report, the auditors flagged more than a dozen serious fiscal irregularities and gave the Planalto Palace a month, and then another 15 days, to explain.

At the heart of the inquiry is so-called fiscal pedaling -- the government's habit of putting off this month's bills until next to pretty up its books.

Federal authorities quickly countered that plenty of governments had missed payments before, and so far not even Rousseff's sworn enemies have raised much of a fuss.

After all, what's fudging a few numbers compared to the vast bribery and kickback scam which has tainted cardinal figures in Brazil's ruling coalition and devastated Petrobras, Latin America's biggest corporation, where Rousseff chaired the board for seven years?

But the auditors' red flags are hardly trivial. The only time the account tribunal has ever rejected a government's accounts was in 1937, under the spendthrift populist strongman Getulio Vargas, who answered by sacking the tribunal's chief justice.

The autocrats, thankfully, are gone, but "creative accounting" still flourishes.

Critics say fiscal pedaling became routine by 2010, when Rousseff was running for her first term.

In 2013, the bean counters questioned more than 2 trillion reais (around $800 billion) in "occult liabilities" and "overstated" assets, and ordered government to clean up its books.

And yet the fiscal carnival wasn't done. By 2014, Brazil's economy was already strained, but with the corruption investigation closing in on the Planalto and Rousseff battling for reelection, she chose pedaling over parsimony.

Government economists repeatedly ordered state-controlled banks to front the bill for unemployment benefits and cash transfers for the poor, promising to settle up later.

The auditors concluded that the government was essentially lending to itself, so violating the 2000 Fiscal Responsibility Law. Executives breaking that law can be removed from office.

The larger risk may not be of fiscal folly but moral hazard, economist Jose Roberto Afonso, of the Getulio Vargas Foundation, told me. "What if bankers started writing rubber checks to themselves?" he said. "The regulatory authority would lose all credibility."

Former finance minister Mailson da Nobrega said the court has little choice but to reprove Rousseff's accounts. "Everyone noticed what government was doing," he said.

That doesn't mean Rousseff and the 12-year Workers Party dynasty are on the brink; the auditing court has no power to punish, merely to advise congress. There, a bipartisan committee can decide to clear her of fiscal improbity or send the matter to the House floor.

A no-confidence vote could prompt Congress to censure or fine the government, or possibly clear the way for an impeachment trial in the Senate. Rousseff's opposition would still need to muster a daunting two-thirds of both chambers to turf her out.

Such a high threshold for regime change attests to Brazil's sturdier democracy, where the rule of law and consensus-building have been guardrails against political opportunism.

The odds, so far, are in Rousseff's favor. Still, a sharper economic slump, another sheaf of corruption indictments, or a massive turnout on Sunday and beyond -- or some combination of all three -- could further debilitate her and push even "companheiros" and core "governistas" into the rebel camp.

And that's something not even Brasilia's creative accountants will be able to fix.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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

To contact the editor on this story:
Philip Gray at philipgray@bloomberg.net