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Brazil in crisis: What happened and what next?

Brazil's former president, Luiz Inacio Lula da Silva (L) walks with President Dilma Rousseff as he is sworn in as the new chief of staff in the Planalto Palace on March 17, 2016 in Brasilia, Brazil.
Igo Estrela | Getty Images
Brazil's former president, Luiz Inacio Lula da Silva (L) walks with President Dilma Rousseff as he is sworn in as the new chief of staff in the Planalto Palace on March 17, 2016 in Brasilia, Brazil.

Amid its worst recession in 25 years, Brazil is also facing its worst political crisis in decades.

CNBC takes a look at what is happening with the South American giant.


Petrobras scandal

Both former president Luiz Inacio Lula da Silva and president Dilma Rousseff, who Lula appointed as his successor in 2010, are under scrutiny along with key figures in their Workers' Party government. The investigation — known as Operation Car Wash or "Operacao Lava Jato" — is looking into a massive corruption scandal at Brazil's state-run oil company, Petrobras.

After Lula was briefly detained last week over accusations of money laundering and concealing ownership of a beachfront condo -- a charge he denies, according to Reuters -- moves were made this week to accelerate his appointment back into government.


Chief of staff appointment

It was announced on Wednesday that Lula would take a position in Rousseff's government as her chief of staff, a position she once held during his presidency.

Many critics of the government saw Lula's appointment as an attempt to protect the former premier from prosecution for money laundering. Cabinet members cannot be investigated, charged or imprisoned unless authorized by the Supreme Court, according to the Associated Press.

The announcement was met with enormous protests across 22 of Brazil's 26 states.

On Thursday, two judges issued an injunction saying this appointment could impede the money-laundering investigation into the former premier.

Despite this, Lula was sworn into office late Thursday.


The phone call

A transcript published by the national media on Wednesday details a phone conversation between Lula and Rousseff that was allegedly taped by Brazilian Federal Police. In it, Rousseff says that her main goal in inviting Lula to join the cabinet is to try to avoid his detention.

Judge Sergio Moro, the federal judge who is leading the corruption probe at the state-run oil company Petrobras, is allegedly behind the transcript leak.

At Lula's swearing-in ceremony, Rousseff accused Moro of violating the constitution and acting in a partisan manner, reported the Associated Press. Lula's appointment now makes him immune from Moro's prosecution.


Impeachment

Calls for Rousseff's impeachment have centered on allegations, unrelated to Petrobras, that she broke budget rules intentionally to boost spending as she campaigned for re-election in 2014. A 65-member impeachment committee of the lower house will now formally begin studying whether there are sufficient grounds to remove her, reported Reuters

However, it's not that simple. "It's a presidential regime not a parliamentary regime. So for the president to go down, it just takes a lot," Daniel Tenengauzer, Head of Global FX & EM Strategy at RBC Capital Markets, said to CNBC.

Rousseff will have 10 sessions in congress to present her defense, Jimena Blanco, Head of Americas at Verisk Maplecroft, told CNBC Friday.

Starting Monday, the "clock is now ticking," for Rousseff, said Blanco.


The economy

The International Monetary Fund forecasts Brazil's economy will shrink by 3.5 percent this year, following a 3.8 percent contraction in 2015 - a slap in the face for a country until recently hailed as a shining example of a prosperous South American economy.

Business is suffering, said Tenengauzer. "There is nothing going on in Brazil right now. No one is taking a decision given the uncertainty," he told CNBC.

Brazil was recently handed a two-notch downgrade by U.S. ratings agency Moody's, the third agency to strip the country of its investment-grade rating.

"My main concern with the economy right now is people are avoiding taxes as much as they can because they don't believe in the regime so the fiscal story is deteriorating by the minute here and that's a huge concern so we should expect downgrades going forward," Tenengauzer said to CNBC.

However, Brazil's stocks were buoyed Friday by the prospect of a political change in leadership.



What next

"The government focus today (Friday) will be to secure the lifting of injunction so that Lula can practise as minister," Blanco told CNBC. However, it's unclear that if the injunction is lifted, another could come through different courts, she added.

If Brazil's political party survives, Lula has not ruled out re-running for president in 2018.

"At the end of the day, we need clean elections in Brazil," said Tenengauzer, although he echoed the sceptic sentiment of many Brazilians that this would actually happen.


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