Brazil On The Brink As Rousseff’s Coalition Collapses, Bar Association Joins Impeachment Push

In the latest blow to Brazil’s embattled President Dilma Rousseff, VP Michel Temer’s PMDB will split with the coalition government, further isolating the Worker’s Party as the country lurches towards a political meltdown.

The PMDB’s decision was expected, but it still marks a key turning point in the effort to oust Rousseff, who angered opposition lawmakers when she attempted to appoint former President and Worker’s Party founder Luiz Inacio Lula da Silva to a ministerial position earlier this month. As Reuters writes, that “was the last straw for many of her allies who saw it as a desperate move to shield him from prosecution by a lower federal court that is overseeing most of the Petrobras case.” For a full recap of recent events, see the following posts:

“Dialogue, I regret to say, has been exhausted,” Tourism Minister Henrique Eduardo Alves, a PMDB leader and former speaker of the lower house of Congress, said yesterday as he resigned from Rousseff’s cabinet. The split with PMDB “makes it likely Rousseff will be temporarily suspended from office by Congress as early as May and replaced by Vice President Michel Temer while the Senate decides if she should be permanently ousted,” Reuters goes on to note.

Of course just like seemingly every other prominent political figure in the country, Temer faces legal problems of his own. “Those who know him best say he’s a business-friendly pragmatist who’s developed a knack over a multidecade political career for forging agreements with fellow lawmakers,” Bloomberg wrote on Monday evening. “But then there’s this too: He runs the risk of getting forced out of office by charges related to the same impeachment case being brought against Rousseff.” If an electoral court rules that Rousseff’s 2014 re-election should be annulled, Temer would be implicated as well. If neither Rousseff or Temer can govern, general elections would come next and that’s just fine with the country’s disaffected masses.

“Temer will be a second Dilma,” one anti-government protester in Brasilia told Bloomberg. “We need new elections.”

(Temer)

Meanwhile, in yet another headache for Rousseff, Brazil’s Bar Association has submitted a new impeachment request to Congress. The request alleges that Rousseff attempted to obstruct a court investigation when she tried to appoint Lula to her cabinet. The Bar Association’s request effectively gives Rousseff’s opposition a backup plan in case the current impeachment effort fails. “”If by some chance there’s a problem with the current impeachment process, we have the association’s request as a backup,” opposition lawmaker Pauderney Avelino of the Democrats said. “The Bar Association’s request is well argued.”

“The OAB is a traditional, respected organization,” Paulo Kramer, a political scientist in Brasília remarked. “The fact that it is joining the impeachment bandwagon is very meaningful.”

“Rousseff’s relationship with the party has been rocky for some time [as] she’s openly feuded with House Speaker Eduardo Cunha, a powerful PMDB member who still holds sway in the Chamber of Deputies despite his own legal woes,” WSJ recounts. “It is Mr. Cunha who will decide whether to accept the OAB petition and start a second impeachment process.”

As a reminder, Cunha is, like multiple other current and former politicians, under investigation for bribery and money laundering tied to bid-rigging at Petrobras.

(Cunha)

Meanwhile, as we and others have noted, hopes for a political shakeup have i) catalyzed BRL strength and ii) led directly to a furious rally in Brazilian risk assets.

When it comes to the BRL, the BCB is dead set on curtailing further appreciation as an excessively strong real will keep the currency from doing the heavy lifting in terms of helping the eocnomy adjust. In order to keep a lid on things, the central bank is now offering reverse swaps. “Random BCB interventions may discourage traders from holding big USD short positions overnight due to risk of a surprise auction call after market closes,” Bloomberg’s Davison Santana wrote this morning.

As for Brazilian stocks, we remind you once again that domestic investors seem to know something foreign investors do not:

In short, the idea that political (not to mention social) upheaval is BRL/risk positive is absurd on its face, and on that note we close with a quote from Craig Botham, an emerging markets economist at Schroder Investment Management: “You don’t invest in a place where you don’t know who’s in charge.”

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Bonus chart: credit creation just saw its first consecutive M/M contraction since 2003