Last week, the CEO of LatAm's largest independent investment bank was arrested. As we reported on Wednesday [9], billionaire Andre Esteves - who once joked that BTG Pactual would be “better than Goldman” - was escorted by an officer into the federal police building in Rio de Janeiro after being arrested at his home. Also detained was Delcidio Amaral, Rousseff’s “guy” in the Senate. Here, in Bloomberg’s words [10], is what the pair allegedly did:
“Amaral tried to convince former Petrobras director Nestor Cervero, who was arrested in January, to not mention him or Esteves in testimony to federal prosecutors, according to a document of the accusations read aloud in Brasilia Wednesday by Judge Teori Zavascki. Cervero’s family would have received 50,000 reais ($13,000) every month in the proposal, and Esteves 'would bear the burden of financial aid.'The offer also included a promised 4 million-real payment to Cervero’s lawyer."
Got it. The two men tried to bribe Cerverco not to implicate them in the seemingly never-ending Carwash investigation (more than a 100 people have been arrested in the space of 18 months). Shares of BTG promptly crashed and as Joao Augusto de Castro Neves, director of Latin America for political consulting firm Eurasia Group said last week, “BTG Pactual has exposure to the oil and gas sector, and the arrest of its CEO is the first time the Lava Jato probe raises the earnest prospect of financial contagion.”
Yes, “the earnest prospect of financial contagion,” like when clients pull a third of their money from your fixed income funds in the space of 48 hours. As Bloomberg pointed out [11] on Friday, “Grupo BTG Pactual SA’s clients took 4.2 billion reais ($1.1 billion) out of some of the bank’s most liquid fixed-income funds in the two days following the arrest of Esteves.”
Earlier today, Globo suggested that Esteves is also being investigated for links to businessman Jose Carlos Bumlai who was arrested in the capital last Tuesday on suspicion of brokering a number of unsavory deals and inappropriately name dropping former President Luiz Inacio Lula da Silva. That particular investigation (which also involves Petrobras) looks set to ensnare Brazil's development bank. Commenting on recent events, Eurasia says "the potential indictment of former president Lula and senior members of the PMDB ... could force Rousseff from office."
As bad as all of this most certainly is, those who follow the country closely are more worried about the implications of Amaral's arrest than they are about anything else. Brazil is of course in the midst of a dramatic economic downturn that's left the country to suffer through the worst inflation-growth outcome (i.e. stagflation) in more than a decade. Unemployment and inflation are soaring (annual headline IPCA inflation at 10.28%, unemployment at 7.9% in August, up from just 4.7% a year earlier) while output is plunging (IBC-Br monthly real GDP indicator down 6.1% Y/Y in September) and the market is losing confidence in the government's ability to end a political stalemate on the way to shoring up the fiscal books and hitting primary surplus targets.
But hitting budget targets and avoiding deficits means getting austerity by lawmakers and that's been complicated immeasurably by House Speaker Eduardo Cunha's crusade to have Rousseff impeached and also by calls for Cunha to step down in connection to several secret Swiss bank accounts. In short, just about the last thing Brazil needed was for a senator to get arrested as it raises the distinct possibility that sitting lawmakers are no longer above the law. Here's Bloomberg [12]:
When a world-renowned banker and a congressman were busted last week as part of the biggest corruption scandal in Brazil’s history, the international spotlight naturally fell on the young tycoon, Andre Esteves.
Yet to long-time Brazil watchers, it was the detention of the legislator -- a ruling party dealmaker named Delcidio Amaral -- that marked a far more worrisome development for a country desperately seeking to contain a deepening financial and political crisis. His arrest not only delayed government efforts to resolve this year’s budget dispute, but it also dispelled a long-held belief that sitting lawmakers are all but untouchable because of a quirk in Brazilian law that affords politicians special treatment in criminal investigations.
While that can be seen as a true silver lining in the scandal -- a sign that a legislative branch rife with alleged corruption will no longer be tolerated -- it also injects a wild card into the crisis: Who will fall next and where will it all end? With the heads of both houses being investigated, it raises the possibility that Brazil’s political apparatus could unravel before ever passing the spending cuts and tax increases needed to restore investor confidence and ward off a new round of credit-rating downgrades.
More than a quarter of the deputies in the lower house are facing criminal lawsuits or probes before the Supreme Court, according to Congresso Em Foco, an online publication that specializes in legislative news.
In other words, an already intractable political stalemate has now been transformed into a situation wherein everyone is looking over their shoulder meaning the entire political apparatus will henceforth be too paranoid to legislate anything, let alone controversial austerity measures. Here's the reaction in the BRL:
Meanwhile, the country's finances continue to deteriorate as the consolidated public sector deficit came in at BRL11.5 billion in October. As Goldman (the real one, not the Esteves version where executives go to jail) notes, "the central government continues to struggle and so far, beyond the severe cuts in investment spending and higher taxes, there has been little tangible progress in the much-needed fiscal consolidation."
Overall, the public sector fiscal deficit widened to 9.50% of GDP and the general government debt-to-GDP ratio rose to 66%, up from 58.9% at the end of 2014 (remember, Barclays says the figure could rise as high as 105% by 2021 under a "stressed" scenario).
[13]
As for whether Brazil will be able to get its fiscal house in order in time to avoid another downgrade, we'll close with the following from Gabriel Petrus, a political analyst at business consulting firm Barral M Jorge, who spoke to Bloomberg on Sunday:
"The idea that the political leaders have a plan to pull the country out of this crisis died because their very own future is at stake. Never before in history have we had so little certainty about tomorrow."
