Brazil crisis: Temer resists calls to resign after bribe tape

Thursday, May 18, 2017

In a nationally televised speech on Thursday, Brazil's President Michel Temer denied any wrongdoing and said he would not resign, after the chairman of meatpacking giant JBS allegedly recorded him discussing bribes to silence a key witness in the Lava Jato scandal.

The latest political fallout from the nation's largest-ever corruption investigation broke late Wednesday, when the O Globo media group published a report citing a plea bargain deal between prosecutors and JBS chairman Joesley Batista. The executive reportedly taped a conversation in which Temer asks him to continue paying monthly bribes to former lower house speaker Eduardo Cunha, who was arrested for his role in Lava Jato in October.

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The revelation sent shockwaves across the political establishment in South America's largest economy, with rumors swirling that Temer would step down when addressing the nation Thursday afternoon. Instead, Temer said: "My government saw its best and worst moments this week. The best due to falling inflation, signs of economic recovery and the advance of reforms. I demand a rapid investigation and I will not resign."

The country's local currency and its stock market index both took a big hit early Thursday, with the real closing over 7% weaker to 3.38 per dollar. The Ibovespa closed down 8.80% to its lowest level since January.

Batista allegedly recorded a conversation in March, when he supposedly told Temer that he was paying Cunha to remain silent from his jail cell. Temer, according to the O Globo report, replied: "You have to keep that going, alright?"

The tapes, which Batista delivered to prosecutors as part of his deal, haven't been released. Before the televised speech, former president Fernando Henrique Cardoso, an ally of Temer, called for the tapes to be made public and for any official involved in the scandal to step down, although he stopped short of calling out Temer by name.

The latest political scandal comes as the government is trying to advance unpopular reforms, including pension and labor overhauls, considered by many economists as key to restoring the country's economy after two years of deep recession.

"It is very difficult at this moment to assess all impacts of this accusation, but for sure, at first glance the reform agenda is compromised," Newton Rosa, chief economist at asset manager Sul América Investimentos, told BNamericas. "This will affect the prices of assets in today's session and the next, and we will see the impacts of this on the exchange rate and stocks."

Cunha, a member of the ruling PMDB party, was considered one of Brazil's most powerful politicians and was responsible for opening the impeachment process against former president Dilma Rousseff last year. Her removal from office in August 2016 allowed her then-VP Temer to take over the reins at the Planalto presidential palace.

Meanwhile, the influential Folha de S. Paulo newspaper published another explosive development coming out of Batista's plea deal with prosecutors. According to the report, Temer gave Batista advance warning that the central bank was going to cut the Selic base rate by 100 basis points on April 12.

Some opposition politicians have already asked congress to open an impeachment process against Temer.

"What will decide if the impeachment calls will move ahead or not will be details of the recorded conversation. We need to check how bad and incriminating they are," said Rosa.

The potential impeachment of Temer generates uncertainty about the line of succession. As the next general election is less than two years away, in October 2018, the current speaker of the lower house, Rodriga Maia, would assume the presidency on an interim basis and would call for an indirect election - in which the lawmakers, and not the voters, would choose someone to finish out Temer's term.

Amid the backdrop of repeated corruption scandals involving politicians, the challenge for the political establishment would be to bring the general population on board with having a very unpopular congress choose the successor, which would all but assure massive protests across the nation.

Temer was not the only politician denounced by Batista. The JBS executive also told authorities that he paid 2mn reais (US$595,000) to legislator and former presidential candidate Aécio Neves, who on Thursday was removed from the presidency of his PSDB party, which is allied with the ruling PMDB. Earlier on Thursday, Brazil's federal police raided Neves' office in congress and his home.

With the scandal and its impacts on capital markets, analysts are uncertain about the central bank's next key rate decision.

"The currency has already weakened in the non-deliverable forwards market; yields on Brazil's euro-denominated bonds have risen, and a Brazil ETF in London is down more than 12%. A drop in the real and a jump in bond yields, especially if sustained, would spook some members of the Copom [central bank rate committee] and could prevent another large 100bp rate cut at the next meeting" on May 31, wrote Edward Glossop, an economist of Capital Economics.

With the continued inflation slowdown, the central bank embarked on an aggressive campaign to cut the Selic, which has been reduced by 300bps since October 2016 to 11.25%. It is expected to reach single digits in the next months, according to economists.

"The central bank is monitoring the impact of the information recently released by the press and will act to maintain the full functionality of the markets," central bank said in a press release.