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UPDATE 2-Brazil's Bolsonaro replaces head of BNDES development bank

Mateus Maia

(Adds market reaction, analyst comment)

BRASILIA, June 17 (Reuters) - Brazilian President Jair Bolsonaro's government has named a 38-year-old banking executive as the head of development bank BNDES, replacing Joaquim Levy, who resigned on Sunday after Bolsonaro publicly criticized him.

The Economy Ministry said Gustavo Montezano, its privatization secretary charged with advancing the divestiture of state assets, was named to run BNDES, one of the world's largest development banks.

Montezano is a former executive at Banco BTG Pactual SA and had served in London as chief operating officer at Engelhart Commodities Trading Partners, which is owned by the investment bank's partners.

At BNDES he is expected to speed up the divestiture of the bank's assets, the slow pace of which had become a bone of contention between Levy and Economy Minister Paulo Guedes.

Bolsonaro's spokesman said the new head of BNDES is expected to return funds to the Treasury and open up an investigation of loans awarded by the development bank during previous leftist governments.

Frustration over Levy's resistance to fire a bank executive who had worked under Workers Party President Dilma Rousseff led Bolsonaro to say last week that his days at BNDES were numbered and there was a "price on his head."

Levy, an internationally respected economist, was Brazil's finance minister during Rousseff's government and later was managing director and World Bank Group chief financial officer until he accepted the job heading BNDES.

Brazil's lower house speaker, Rodrigo Maia, said on Monday he regretted Levy's departure from BNDES, though Brazilian markets barely reacted to the resignation.

"It was a pity for Brazil to lose someone of the quality of Joaquim Levy, and the way he was removed was cowardly," Maia told reporters in Sao Paulo.

Brazilian assets barely reacted on Monday. The real was virtually unchanged from Friday at 3.88 per dollar, and the benchmark Bovespa stock index closed 0.43% down at 97,623 points.

Levy's sudden departure was yet another example of the institutional chaos surrounding Bolsonaro's administration. The president has fired three cabinet ministers since taking office Jan. 1.

Analysts at brokerage XP Investimentos said that whatever the merits of Levy's exit, it does not reflect well on the government or its efforts to paint Brazil as an attractive and politically stable destination for foreign capital.

Levy's successor will have the challenge of implementing Guedes' plan for a leaner bank that will expedite the sale of its assets while at the same time complying with Bolsonaro's demand for investigation of loans granted by previous governments to countries such as Cuba.

"Commitment to these two tasks, plus the return of funds to the Treasury, make the BNDES presidency one of the thorniest and riskiest jobs in this government," the Brasilia-based consultancy Capital Politico said in a note to clients. (Reporting by Mateus Maia and Jamie McGeever; Writing by Anthony Boadle; Editing by Sandra Maler and Leslie Adler)