Petrobras scandal threatens to scupper Brazil austerity drive

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Last updated: March 4, 2015 6:14 pm

Petrobras scandal threatens to scupper Brazil austerity drive

Joe Leahy in São Paulo

Petrobras

Brazil’s currency slid to a 10-year low against the dollar on Wednesday as concerns grew that a corruption scandal at state-run oil group Petrobras engulfing the country’s political elite threatens to scupper the government’s austerity drive.

The real fell 2.2 per cent against the dollar to R$2.9947 after the senate leader Renan Calheiros of the PMDB, the main coalition partner of President Dilma Rousseff, blocked an important fiscal measure in congress that is seen as essential to helping reverse Brazil’s growing budget deficit.

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The move coincided with a request to the supreme court by the attorney-general`s office to pursue 54 people, mostly politicians, allegedly involved in the Petrobras case, Brazil’s biggest corruption scandal. Members of congress can only be put under formal investigation with the permission of Brazil’s highest court.

Domestic media have reported that attorney-general Rodrigo Janot’s as-yet undisclosed list of suspects includes Mr Calheiros and another senior PMDB figure, Eduardo Cunha, the leader of the lower house of congress.

Both declined to comment on Wednesday and have denied involvement in the scandal. But local media speculated that by blocking the government’s fiscal measures, they could be trying to push Ms Rousseff into providing the PMDB with more protection from the investigation.

“Calheiros’ outburst could be a play to hold the government hostage and strengthen his own leverage,” said Chris Garman of Eurasia Group in an analyst’s note on the move to block the fiscal measure.

The inclusion of politicians in the investigation marks a critical moment in the scandal at Petrobras, which has already brought Brazil’s once burgeoning oil and gas sector to a halt and is threatening to deepen an expected recession this year.

Petrobras, the country’s largest company with a virtual monopoly over oil exploration in Brazil, is reeling from allegations that senior Petrobras executives accepted bribes from many of Brazil’s biggest construction companies in exchange for contracts.

Much of the money was allegedly passed on to politicians, mostly in the ruling coalition.

The scandal is complicating an already difficult political and economic scenario for Ms Rousseff, who won elections last October by the narrowest margin in recent history. The PT’s main coalition partner, the PMDB, is now the largest party in congress and is trying to force Ms Rousseff to share more power.

At the same time, Ms Rousseff’s new finance minister, Joaquim Levy, is trying to set Brazil’s public finances back on track to avoid a sovereign credit rating downgrade after years of fiscal largesse.

Ms Rousseff had sent one of Mr Levy’s proposals, a partial rolling back of payroll tax breaks, to Mr Calheiros in the senate for approval this week. But the normally compliant Mr Calheiros had refused to approve the measure – only the third time a senate president has rejected a presidential “provisional measure”, or presidential decree, since Brazil returned to democracy.

The reform will now have to pass through normal legislative channels rather than the fast-track of a presidential decree, with the delay likely to cost the government R$2-3bn in savings, Mr Garman of Eurasia calculated.

The move was a clear shot over the bow of the government from the PMDB and its allies of the need for more power-sharing, analysts said, and increases the risk that Brazil might not meet its fiscal targets this year.

“The result increases risks about congress approval of the fiscal adjustment plan,” said Itau Unibanco in a note.

For Ms Rousseff, the problems with her coalition allies are compounded by reported splits within her own ruling Workers` Party, the PT, and by fraught relations with her mentor, Luiz Inácio Lula da Silva, the former president.

Tension has focused on her appointment of Mr Levy, a University of Chicago-trained orthodox economist. His fiscal austerity programme, which includes trimming benefits and raising taxes and interest rates, is straining relations with more leftist elements in the party.

Mr Janot’s list could deepen this rift, analysts say. They believe that, if a large number of PT politicians are involved, Ms Rousseff could be forced to choose between trying to defend the party and protecting her own legacy as president. The dilemma would be especially difficult if Mr Lula da Silva is implicated in the scandal but in the end Ms Rousseff would be expected to try to save herself.

“She is not going to drown with Lula or with the PT,” said João Augusto de Castro Neves of Eurasia Group.

The next step in the Petrobras investigation will be for the supreme court to authorise the probe into the politicians by the attorney-general. This approval, which is also expected to involve the release of the names of most of the suspects, could come quickly. But the investigation and subsequent trials could take years, analysts said.

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Copyright The Financial Times Limited 2015.

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