Forbes: Brazil In A Post-Dilma World Not Quite Nirvana

OCT 9, 2015 @ 02:19 PM

Getting rid of beleaguered Brazilian president Dilma Rousseff might be interesting to some investors, but it is a lot more interesting to the opposition party. And politics and economics can be like oil and water. In this case, I think it is.

The Dilma administration suffered another serious blow this week when an accounting court said she cooked the books on Brazil’s fiscal accounts. It’s no small offense. This is supposed to be a transparent government, and Dilma’s fudging the numbers does not bode well for credibility. Worse yet, this ruling gives congress the grounds for impeachment.

“I think the charges are substantial,” says Adam Sarhan, CEO of Sarhan Capital, an investment advisory in Bay Hill, Florida. “The fact that a Federal Court ruled against her covering up a widening fiscal deficit is a major problem and is not something that can be taken lightly.”

So she will be impeached. Or maybe she even steps down. I really don’t know.  The odds of her sticking around are slimmer today than they were last week. Congress used to be her allies. But seeing how the two top guys in the Democratic Movement Party (PMDB) — House Speaker Eduardo Cunha and Senate Majority Leader Renan Calheiros — have appeared as possibly corrupted politicians in the scandalous Petrobras  investigation, which Dilma has not roadblocked, the PMDB has turned its back on her. Once allies, they’re now enemies.

This is basically all they have in common with Dilma’s real political power rival, the Social Democrats (PSDB). They both hate the Workers’ Party, albeit for different reasons. Getting rid of Dilma is just good politics for them. It’s like the enemy of my enemy is my friend.

f PMDB were a Russian party, they would be United Russia, only without the charismatic muscle man to lead them. Or they’re like the mujahideen of Brazil, a group that PSDB can use to blow up Dilma and capture the flag in Brasilia. PSDB has been the only real political challenger to Dilma’s Workers Party for 20 years.

If Dilma goes, her Vice President Michel Temer takes over. Temer is PMDB.

If Dilma and Temer go, Cunha takes over. Cunha has Swiss bank accounts believed to have been used to launder bags full of cash paid to him by Petrobras contractors. He denied he has them. Swiss authorities already confirmed he has money there. So this is the guy you get running the business. A real, honest man.

Cunha wouldn’t lead for long, if ever, actually. The electoral court, known as the TCU, would hold elections if Dilma and Temer were removed. PMDB might put up a candidate, but they would be beat by Aécio Neves of the PSDB. PSDB would have “won” the presidency in what appears to be nothing short of a soft coup. PSDB would have to throw PMDB, the biggest party in congress, all sorts of bones. My guess is that the biggest bones thrown their way would be the white-washing of the Petrobras investigations. Unless it involves knocking out the Workers’ Party, it will be made to look like the scandal is over. The problem is solved. PMDB, and any other rich businessman now behind bars or trying to save himself by ratting out other executives and elected officials, will be quietly given their “get out of jail free” cards.

Just a hunch.

In other words, the political battle in Brazil has yet to lighten up.  The Workers’ Party will not cooperate if Dilma leaves the presidency. This is not a submissive party. It runs the unions in Brazil, remember. Have fun getting cars built and trucks to port. Have fun getting bank tellers to work on time and good luck pumping oil when that rag-tag bunch of fugitives from the dying Dilma party take to the streets in protest. It’ll be like 1999 all over again. Not fun times.

With a new election, Neves wins. He puts Arminio Fraga in charge of the economy, perhaps. Is there a huge difference between Fraga and Finance Minister Joaquim Levy? No. Is there a huge difference between ex-central banker Fraga and his inflation fighting counterpart Alexandre Tombini? I don’t think so.

I have no crystal ball. I know it is hard to say whether Dilma finishes her term. Right now, the base case scenario seems to have her sticking around.

If she does go, the market will rally a bit on the news. But if it rallies in a weak dollar environment, it won’t be because Dilma is gone. It will be because emerging markets have been perceived to have hit bottom. There won’t be a prolonged PSDB rally.

Still, on balance, everyone I speak to for FORBES thinks that Dilma is terrible. And that if she goes, it will be better for investor sentiment.

“There are many possible permutations and many of them are probably beyond my twisted imagination,” jokes Jan Dehn, head of research at the $70 billion asset management firm Ashmore Group in London. ”In a nutshell I think impeachment will be a major trauma for the country. If it happens, I think it will bring the political establishment together to pass a bunch of reforms in the name of national reconciliation and healing or whatever in order to ensure this does not happen again,” he says.

“This” is the Petrobras scandal, where contractors were allowed by politicians, like Cunha, to overbill the oil giant, putting it deeper in debt and killing shareholders. One of the lobbyists for a contractor testified in court hearings that Cunha received around $5 million in bribe money.

Some say there are even bigger fish to fry. The behemoth BNDES bank, for instance. No one knows where it puts its money. A lot of it goes to the same Petrobras contractors. Knowing Brazilians, some of it is either in an offshore bank account or South Florida real estate.

Link: http://www.forbes.com/sites/kenrapoza/2015/10/09/brazil-in-a-post-dilma-world-not-quite-nirvana/

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