Brazil shares fall 10% on Temer bribery claims

Brazil’s markets crashed on their opening on Thursday, with the benchmark Ibovespa stock index down 10.47 per cent after one of the country’s leading newspapers alleged President Michel Temer had been taped endorsing bribe payments.

The real weakened 7.69 per cent against the dollar after the reports, which threaten to topple a government that had won market support with a set of crucial reforms to overhaul Brazil`s sinking public finances and rein in its over-generous pension system.

Brazil`s Treasury said it stood ready to ensure there was “adequate liquidity” in the markets and their “smooth functioning”.

“We are now in the middle of the hurricane, there is a lot of uncertainty,” said Zeina Latif, chief economist at the São Paulo-based XP Investments.

The scandal threatens to plunge Mr Temer and his government, which was brought to power only last August with the removal by Congress of his leftist predecessor Dilma Rousseff, into another impeachment process.

O Globo reported that Joesley and Wesley Batista, respectively chairman and chief executive of Brazil’s largest meatpacker JBS, had presented a secret recording of Mr Temer approving bribes to Eduardo Cunha, the disgraced former speaker of the lower house, as part of plea bargain negotiations.

The report comes as the country’s political and corporate establishment is reeling from sprawling corruption investigations into state oil company Petrobras in a scandal known as Operação Lava Jato, or Operation Car Wash, which has implicated senior politicians, police, union bosses and indigenous leaders in a vast web of bribery.

According to the O Globo report, Mr Temer heard from Joesley Batista that JBS was paying Cunha to keep silent. The president is alleged to have responded: “You’ve got to keep this up, OK?”

The report did not specify what Cunha — who was crucial in the impeachment of Ms Rousseff — was alleged to have been asked to keep silent about.

The president’s office said in a statement that Mr Temer had “never asked for payments to obtain the silence of the former deputy Eduardo Cunha”.

Confirming the meeting with Joesley Batista at Mr Temer’s official residence, it added that “there was nothing in the dialogue that compromises the conduct of the president”.

JBS declined to comment. Cunha, who is in jail, could not be reached for comment.

FT Special Report

Brazil appears to be on the move again. After a rocky 2016, there are signs that the deep recession could be coming to an end. Despite protests, the government is trying to cut back on spending and introduce changes that will ensure a more sustainable future.

Thursday, 18 May, 2017

The unverified report is already rattling the unpopular government. Protesters gathered on Wednesday night outside Brasilía’s modernist presidential palace and in São Paulo’s main thoroughfare honking horns and shouting “Temer, out!”

“If true, this is a bomb,” said Thomaz Favaro, political analyst at Control Risks, adding that if the recordings were confirmed, Mr Temer faced an investigation, public pressure to resign and impeachment proceedings in Congress.

“The development substantially increases the risk of an unscheduled government change before the 2018 election,” he said.

If Mr Temer left power, the next in line would be Rodrigo Maia, head of the lower house of Congress, who is also under investigation.

Plea bargains in Brazil allow suspects to receive lighter sentences in exchange for giving evidence, which in the case of Operation Car Wash has led to investigation threads that have reached ever higher echelons of power. The latest batch of plea bargains prompted the Supreme Court to open probes in April into many politicians, including eight government ministers.

Mr Temer, already suffering from an approval rating of just 9 per cent, is battling to introduce an ambitious reform agenda including deeply unpopular changes to the pension system. Not only could the latest revelations trample on his plan — they could conceivably topple him.

Alessandro Molon, an opposition lawmaker, said he had filed an impeachment request against Mr Temer. Janaína Paschoal, a jurist and co-author of the impeachment request against Ms Rousseff, said on Wednesday night that if the recordings were confirmed, Mr Temer could not remain in office.

Columnist Igor Gielow wrote in Folha de São Paulo newspaper that while a mixture of luck and skill had allowed Mr Temer to get through the Car Wash investigations so far, “now he can at the very least be accused of a crime . . . obstruction of justice”.