Global Insight Perspective

Significance

The year 2005 has not had an auspicious start, what with the defeat of the Worker's Party (PT) candidate in the February Congressional elections; the row over a tax-reform bill; an incomplete cabinet reshuffle; corruption allegations against the central bank president and recently appointed Brazilian Democratic Movement Party (PMDB) minister and little progress on the government's reform agenda.

Implications

A Congress decision to press ahead with a probe into a corruption at the Brazilian Labour Party (PTB)-run post office will therefore raise concerns that voting on important bills could be slowed.

Outlook

Although expectations were low of the government's ability, in a pre-election year, to build a political consensus on more controversial votes such as the harmonisation of state ICMS tax, central bank autonomy or far-reaching political reform, the setting-up of one or more probes could lead to slow voting on other issues that are also important for investor confidence. There is also a risk that if more damaging details emerge, this could negatively impact on the government's popularity.

Government Fails to Block Corruption Probe

While President Luiz Inácio Lula da Silva is away in Asia drumming up investment and support for Brazil's bid for a permanent seat on the United Nations (UN) Security Council, at home his government suffered a major defeat yesterday. It failed to persuade enough legislators to withdraw their signatures from a petition to create a bi-cameral investigation (CPI) into allegations of corruption at the state post office.

The opposition-backed Congressional probe looks set to go ahead after 52 senators and 240 deputies confirmed their votes, which is more than the required number (171 deputies and 27 senators). The news will come as a blow to the ruling Worker's Party (PT), because the probe threatens to implicate the president of the Brazilian Labour Party (PTB) Roberto Jefferson, whose party heads the post office and is allied to the loose governing coalition. The scandal emerged following the publication of a report by the weekly magazine Veja, which claimed to have a videotape showing a post office official, Mauricio Marinho, accepting bribes from companies in return for supply contracts with the post office. Marinho also claimed to have the backing of Jefferson, although in testimony given to the police earlier this week, he retracted this claim, absolving Jefferson of any responsibility. The PTB has denied any involvement in a corruption scheme.

No Party Immune to Corruption Scandals

Although corruption has long been part of Brazilian politics, the PT has traditionally had a reputation for greater integrity than some of the other parties. However, last year's Waldomiro affair was a reminder that no party in Brazil is immune to scandal. That particular scandal threatened to implicate Chief of Staff José Dirceu due to his close association with a government official accused of securing campaign funds from a manager of the illegal Jogo do Bicho numbers game. The PT's attempts to block an inquiry into the bingo industry smacked of hypocrisy to the opposition party, the Brazilian Social Democratic Party (PSDB) as it had seen the PT be an enthusiastic supporter of CPIs during former president Fernando Henrique Cardoso's two terms in office. The opposition is likely to again use the government's opposition to a CPI into the post office scandal to try to discredit the PT's commitment to fighting corruption, even though the government has given its support to a police investigation and claims that a CPI is unnecessary. In the previous Waldomiro scandal the government had managed to block the setting- up of an inquiry (even though enough signatures were collected for the probe to go ahead) through the former president of the Senate, José Sarney's refusal to name members of the investigative commission. In contrast, however, the post office probe is likely to go ahead. This is because the presidents of the Senate and Chamber of Deputies elected in February are not as pliable as their predecessors and because yesterday's vote to set up the probe received support from some members of the PT and its allied parties.

A number of other corruption scandals have also been in the headlines of the local press in recent weeks. Last week the Supreme Federal Court agreed to open an investigation into recently appointed Minister for Social Security Romero Jucá of the Brazilian Democratic Movement Party (PMDB), following a request by the procurator general. Jucá is accused of obtaining a loan from the Banco da Amazônia, using seven farms that do not exist as collateral. Jucá has blamed his former partner in Frangonorte for any wrongdoing. Earlier this month, the Supreme Court agreed to open an investigation into the president of the central bank, Henrique Meirelles, over allegations of tax evasion. Although neither President Lula nor the PT are implicated in the latest scandals, polls due to be released next week should show if they have been damaged by association.

In retaliation government supporters have threatened to push ahead with a separate inquiry into corruption in the electricity privatisation process carried out under the Cardoso government.

Outlook and Implications

The latest corruption scandals are potentially damaging for the government, as the PT has historically had a reputation for more integrity than some of the other main parties. The PT's electoral success in October 2002 was partly based on the perception that it would place greater emphasis on ethics in government than the administration of former president Cardoso, which lost several ministers to corruption scandals during its second term in office. However as neither the Supreme Court investigations nor the Congressional probe implicate a member of the PT, the damage in terms of the party's reputation will be minimal.

Nonetheless, the opening of a probe into the post office scandal does threaten to have an impact on the government. Firstly, yesterday's vote showed divisions within the allied base and will increase pressure on the president to take steps to bolster his support from the coalition - possibly through the award of some more ministerial posts to allied parties. It will be seen as a further reminder that the political environment has become more difficult since the government's defeat in the February elections for a new president of the chamber of deputies to Severino Cavalcanti of the Brazilian Progressive Party (PP). Since then the government has suffered a number of defeats, including the Congress' rejection of a controversial tax proposal and the recent defeat of the government's preferred candidate to head the National Justice Commission in favour of a rival backed by the opposition governor and presidential hopeful Geraldo Alckmin. Secondly, the setting-up of one or more Congressional inquiries threatens to distract legislators and slow the voting process on the government's reforms planned for this year. Although the government got the most controversial reforms out of the way in its first two years, it plans to tackle other key reforms such as political, trade union, regulatory and value-added tax (VAT) reforms.