Brazil corruption scandal threatens economic austerity reforms

Economic austerity reforms meant to put Brazil’s recession- damaged economy back on the rails are in danger now that President Michel Temer is on the verge of being ousted in a corruption scandal, analysts say.

Standard & Poor’s, the rating agency, reflected the concern on Tuesday by warning it could further lower Brazil’s credit rating due to political uncertainty.

“The economy will be very much affected by the crisis,” said Gesner Oliveira at GO Associados consultants. “It could be the third consecutive year of recession.”

For Temer -- accused of corruption and obstruction of justice just as macroeconomic signs are improving -- last week was simultaneously the “best and worst moment” for his government.

Inflation is steadily dropping and growth is believed to be at the start of a modest recovery, even if unemployment remains dire at nearly 14 percent. After the economy contracted 7.2 percent in 2015- 16, there are hopes for a renaissance.

Temer has pleaded for Congress to support him as calls for his impeachment grow. “We can’t throw so much work for the benefit of the country into the garbage bin,” he said.

He needs Congress to push through austerity reforms backed by economists but highly unpopular among ordinary Brazilians. Chief among them is raising the minimum retirement age to try to reduce the unaffordable state pensions bill.

But the scandal has triggered just the kind of economic instability he says he is working to eradicate, with the Sao Paulo stock market falling 8.8 percent last Thursday and the real dropping about eight percent against the dollar.

Markets want the reforms to continue with or without Temer.

“Congress has to maintain continu- ity in the structural reforms that are fundamental for putting the country on the right path,” the influential National Confederation of Industry said in a statement on Tuesday. It made only one reference to Temer.

However, Geisner Oliveira says the mess means “right now there are no chances” Congress will approve the reforms.

As Brazil’s President Michel Temer faces the looming possibility of being ousted with his credibility critically eroded by allegations of corruption, observers believe that Brazil is mulling options to tide over the prevailing political crisis.

Though Temer denies any wrongdoing and refuses to resign, the existence of potentially incriminating tapes has led key supporters of his administration to distance themselves from the president.

A turning point came on Friday, when influential mainstream daily O Globo published an editorial calling for the president to step down, echoing the demands of left- leaning opposition parties.

Political analysts have been publicly debating what comes next for the president: a voluntary exit or impeachment.

Paulo Kramer, a political scientist at the University of Brasilia, believes that despite Temer’s insistence that he remain in office, it is likely that mounting pressure will lead him to leave spontaneously.

“I think the political and business elites want a rapid resolution. This political and ethical crisis comes at a time when the economy was beginning to show signs of life, of recovery,” he said.

“The crisis increases fears we will slide backward and that this difficult recovery will be interrupted,” he explained.

Brazil is no stranger to political crisis, with Temer’s predecessor Dilma Rousseff impeached for alleged fiscal violations, though she maintained it was a politically- motivated legislative coup.

Yet the specter of an impeachment trial less than a year after the last one is highly unappealing, as it could affect both the economy and institutions.

“The greatest probability is the resignation of the president. The impression is that by being attacked by the country’s main media group, O Globo, Temer stands less of a chance of holding on to the confidence of his allies,” said Kramer.

In fact, allies are already abandoning what they obviously see as “a sinking ship.”

On Saturday, the Brazilian Socialist Party announced it was pulling out of the ruling coalition and seeking Temer’s ouster.

“If the base ( main ally) leaves, Temer’s government will be over,” said the Kramer.

David Fleischer, a political scientist at the University of Brasilia, agrees with Kramer. Temer’s chances of riding out the storm and retaining his post are small, especially since his government’s package of economic reforms has stalled, he said.

In keeping with Brazilian law, the president of the Chamber of Deputies has 30 days to organize legislative elections to choose a replacement for an impeached president, and a few names have been bandied about, including Rodrigo Maia, president of the Chamber of Deputies; Carmen Lucia, president of the Supreme Court; and Finance Minister Henrique Meirelles.

“One resolution ( to the crisis) would be to elect a president who provides continuity to the current economic program of austerity and reforms and meets with the Congress’ approval, to restore the confidence of national and international investors,” said Fleischer. There may even be a third option. The nation’s top electoral body Supreme Electoral Tribunal ( TSE) recently launched an investigation into illegal campaign financing in the 2014 general elections, specifically into whether Rousseff and her then running mate Temer received illegal funding.

If the court rules they did, it could decide to simply annul the electoral outcome, meaning Temer would have to step down anyway. The case is scheduled to be heard on June 6.

Should the TSE annul the election, it would probably still depend on the Congress to elect an interim president to complete the current presidential term through January 1, 2019.

In the recordings that surfaced last week, Temer could seemingly be heard approving bribes to buy the silence of former lower house speaker Eduardo Cunha.

Brazil’s Federal Supreme Court ( STF) on Monday decided to postpone a hearing scheduled on Wednesday over Temer’s allegations of corruption, taking into consideration Temer’s petition that the case be dropped. STF President Carmen Lucia said the court will consider the request only after experts have analyzed the recordings in which Temer appears to be soliciting the payment of bribes to his former political ally.

Temer’s future may rest on whether the court agrees to drop its investigation into the charges, as he insisted that he will not resign unless he is forced out in a Monday interview with regional daily Folha de Sao Paulo.