Emerging Markets

Brazil turmoil: Driving force behind Dilma impeachment suspended

Jessica Hartogs, Special to CNBC.com
Miguel Schinncariol | AFP | Getty Images

In the latest twist of a political scandal that has gone from bad to worse, Brazil's Supreme Court suspended the country's Lower House Speaker.

Eduardo Cunha, the man many see as the driving force behind the campaign to impeach President Dilma Rousseff, was removed from duty late on Thursday.

Cunha, an Evangelist Christian who often cites the Bible in his speeches, is accused of blocking an investigation into whether he took millions of dollars in bribes from companies hoping to sign contracts with state-run oil giant Petrobras. He is also accused of hiding bank accounts in Switzerland. Cunha has repeatedly denied any wrongdoing.

The Petrobras scandal – nicknamed Operation 'Lava Jato' (Operation Car Wash)– implicates an enormous amount of the country's politicians.

"Cunha is just one of numerous politicians in Brazil and especially in the Brazilian line of succession who could be losing their position over the coming months," said Jimena Blanco, head of Americas at Verisk Maplecroft, to CNBC on Friday.

"I think anyone who is looking at Dilma's potential impeachment as the end of the political crisis is at best misinformed… This is a process and the process will continue and it could mean political volatility for the rest of 2016, even into 2017," said Blanco.

Brazil, once touted as the successful example of the so-called emerging markets, has been embroiled in a political scandal that just keeps unraveling. At the heart of it, Rousseff, the country's first female president, is accused of tampering with government accounts to make her re-election campaign stronger – a charge she flatly denies.

Brazil's Senate will vote next week on whether to proceed with an impeachment trial against her. Should this go through, she will be suspended from office for 180 days while vice-president Michel Temer takes over as acting president. However, Temer himself is also implicated in the charges against Rousseff, as he ran as her VP in 2014.

"I think the fate of Rousseff is nearly settled now – she has lost the support she needed to prevent this impeachment," said Carlos Caicedo, Senior Principal Analyst at IHS, to CNBC on Friday.

A market friendly replacement

Michel Temer listens during an interview in New York, U.S.
Brazil thrown into even greater political limbo

Brazil, deep in its worst recession in over two decades, faced another blow Thursday as its sovereign debt was once again downgraded by credit ratings agency Fitch to a 'BB' from a 'BB+' along with being given a negative outlook. Fitch stated that the "continuing deep economic contraction reflects the high level of political uncertainty" in the country.

But many view Temer, who will in effect become the president of the country if Rousseff's impeachment goes forth, as more business friendly and able to help steer Brazil out of its financial woes.

"He has a pro-business program and the support of the private sector to implement some policies to tackle the fiscal deficit," Caicedo told CNBC.

"A Temer administration will be very friendly to the markets and the markets would welcome an almost certain appointment of Henrique Meirelles (former head of the central bank) as his finance minister," agreed Blanco. "The problem is how much can Meirelles do within the current political crisis."

For investors, the biggest question will lie in whether Brazil would be able to pass the structural reform test it needs over the coming year. "It will be crucial for vice-president Temer to try to keep some of the social programs championed by the PT (Rousseff's Workers Party) in place because otherwise he could face significant social unrest on the streets," said Blanco.

With two-thirds of the Lower House of Congress and half of the Senate implicated in the political scandal, the mood on the streets is that the Brazilian population wants the political class out, Blanco told CNBC. "If we get to the case where the whole line of presidential succession is eventually removed and Brazil needs a snap election within 90 days of that happening, who is left to stand?"

Opponents of President Dilma Rousseff celebrate after the Lower House of Congress voted to proceed with her impeachment in Brasilia April 17, 2016.
What's next for investors in Brazil's impeachment scandal

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