Sleaze shocks shake Brazilian politics

Brazil’s ruling politicians have been shaken by a scandal involving prostitutes, suitcases full of lobbyists’ cash and an apparent violation of bank secrecy laws that brought down the finance minister and again raised questions about the leadership of President Luiz Inacio Lula da Silva.

And while Silva quickly named a replacement yesterday who tried to contain the damage by promising economic stability, analysts worry that the downfall of Antonio Palocci, the architect of Brazil’s economic recovery, may prompt the president to impose costly populist policies in order to get re-elected this year.

This latest scandal shook the confidence of investors: Brazil’s real plunged 1.8% against the US dollar and stocks on Sao Paulo’s benchmark Bovespa index fell 2.5% yesterday.

Palocci’s ouster on Monday deprives the leftist Silva, known popularly as Lula, of a long-time ally, campaign organiser and cabinet minister who had reassured investors by putting Latin America’s largest economy on a course of slow and steady growth.

And it further tarnishes the image of Silva and the ruling Workers Party, which lost much credibility last year after a former ally accused the party of financing campaigns illegally and paying opposition lawmakers for support in Congress.

Silva, who is widely expected to seek a second four-year term in October, wasn’t personally linked to the previous scandal, but his popularity tumbled as his powerful Chief of Staff Jose Dirceu was forced to resign. Dirceu and two other legislators later were expelled from Congress and four others resigned to avoid impeachment.

In this case, Palocci was accused of frequenting a house in the capital of Brasilia where lobbyists threw parties with prostitutes and money arrived by the suitcase, possibly for political payoffs.

He denied the accusations, but the scandal erupted when the personal bank records of a key witness – the caretaker at the house, who testified that he saw Palocci there “10 or 20 times” – were leaked from the state-owned Caixa Economica Federal.

The bank’s president, Jorge Mattoso, charged with violating secrecy laws, told police he personally handed the bank records to Palocci, and the minister’s tenure became untenable.

Palocci was a mainstay for Silva, Brazil’s first elected leftist president.

A grade-school dropout and former factory worker from Brazil’s poor Northeast, Silva was a founder of the Workers Party, which opposed the military government in power from 1964 to 1985, and his election in 2002 caused alarm among investors who feared radical economic policy changes.

But Palocci raised interest rates, reduced inflation to a single digit and strengthened the real.

As Silva’s social reforms foundered, Palocci became a symbol of stability for foreign investors, who poured money into Brazil.

Palocci expressed pride in his work stabilising Brazil’s economy after decades of boom-and-bust cycles, and said he had no hard feelings about his firing, given the “infernal circle of suspicion” he faced.

His successor, Guido Mantega, a former planning minister and head of Brazil’s National Development Bank, denied that he would relax Palocci’s tight restrictions on public spending.

“You can abandon hope. I’m not a spender,” Mantega said in a televised interview Tuesday.

But that pledge did little to ease jittery investors concerned that Mantega may reduce sky-high interest rates too quickly to keep inflation, currently at 5.5%, in check, and give Silva support for more populist economic policies, loathed by financial players and Wall Street, so that he can retain his leftist base.

Some analysts say opposition leaders are sure to capitalise on the latest scandal. Others predict that Palocci’s ouster could appease Silva’s opponents.

“In the short run, Palocci’s exit will calm the scandal … his head was the prize that the opposition wanted,” said Rogerio Schmitt, a political risk analyst at Tendencias consultants in Sao Paulo.

“Besides,” he added, “bringing down Palocci is easier than bringing down Lula.”