Brazil’s president faces toughest fight for survival

Brazil's President, Dilma Rousseff, rushed to be by the side of her predecessor, Luiz Inacio Lula da Silva, over the weekend after the former leader became the most high-profile subject of the corruption investigation into the state-run oil firm, Petrobras.

Rousseff flew to visit her former mentor and close ally at his Sao Paolo-area home on Saturday, a day after Lula was detained by police for roughly three hours of questioning. Police searched Lula's home, his institute and various properties amid allegations he benefited directly from kickbacks tied to Petrobras.

Dilma Rousseff, president of Brazil
Ueslei Marcelino | Reuters
Dilma Rousseff, president of Brazil

Lula's shock detention not only strikes a symbolic blow to Rousseff, who is already struggling with the country's worst recession in decades, it could also mark the strongest challenge to her position and her Workers' Party (PT), since she narrowly secured a second term in 2014.

The Brazilian real spiked more than 1 percent against the dollar on Friday as equity markets capped the best week since 2008 with investors betting on the growing likelihood of impeachment. Despite the near-term risks of political uncertainty, the feeling that "anyone but Dilma" could lead the country seems to be driving improved sentiment, according to Capital Economics' Neil Shearing.

The dramatic turn in the investigation, dubbed Operation Car Wash, comes just days after local media reports said that the former PT leader in the Senate, Delcido do Amaral, had struck a plea bargain with prosecutors following his November arrest that directly implicates both Rousseff and Lula in the Petrobras scandal. If that evidence comes to light, Rousseff will be facing her toughest fight for survival. Rousseff, who served as Chairwoman of Petrobras during a number of years when corruption took place, has never been formally accused of any wrongdoing.

Mario Marconini, a Managing Director at Teneo Intelligence has outlined three potential paths that could see the president removed from office.

The first scenario would be impeachment. The President is already battling a separate impeachment hearing tied to allegations of manipulating public accounts. The Supreme Court rejected the way in which the House impeachment committee was formed. But Teneo suggests that the latest developments will revive political pressure to restart the proceedings. The second course of action could come in the form of mpugnation, if the Superior Electoral Court (TSE) has sufficient evidence that campaign funding came from contractors implicated in the Petrobras scandal. That would effectively nullify the 2014 election results and throw Rousseff out along with her Vice-President Michel Temer. Finally, the Supreme Court could remove the President if they have evidence that Rousseff directly committed obstruction of justice.

Senator Do Amaral's testimony reportedly includes charges that the President tried to influence judges to release prominent contractors held in the Car Wash investigation.

Of the three scenarios, Teneo says impeachment is the most likely and quickest outcome. "There is a perception that at least through the impeachment process, the country would be less at a loss since Temer could take the reins of power." The note suggests impeachment could take up to four months, but other analysts forecast a longer timeline. Handing the reins to Temer, however, assumes that the PT is cleared of any wrongdoing in the investigation.

If the party is found guilty, the baton passes to opposition leader Aecio Neves, who may be reluctant to take up the task in the current economic climate. It is still early days following Lula's detention and without formal charges on the table, there is a real possibility that Rousseff stays in power if no incriminating evidence comes to light. Meanwhile, as investors wait on further developments from Operation Car Wash, the escalating investigation is already showing signs of stirring political unrest, with weekend protests pitting Lula loyalists against opposition supporters. The next test for Rousseff and the PT will come on March 13 with a major demonstration planned across the country.

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