Brazil Court Majority Votes Against Lula in Graft Appeal

(Bloomberg) -- Two out of three judges on a Brazil appeals court have voted to uphold a graft sentence against former President Luiz Inacio Lula da Silva, a ruling that could prevent him from running in this year’s general election.

Barring a request by the third judge to delay his vote, the court will uphold Lula’s conviction for money-laundering and corruption for having accepted an upgrade to a beach-side apartment from a construction company in exchange for favors. The ex-president has denied wrongdoing, saying the charges are politically motivated.

Brazilian assets including the currency accelerated gains as Judge Leandro Paulsen read his arguments against the former head of state. The second vote against Lula was key because it rules out the possibility of an acquittal, which would be the worst-case scenario for markets, according to Tullett Prebon Brasil currency trading head Italo Abucater.

Lula personally benefited from bribery, said Judge Paulsen, adding that the ex-president controlled the corruption scheme at state-run oil company Petrobras. There was more than enough evidence to show that he perpetuated the scheme, he said. Paulsen agreed with the the first judge that Lula’s nine and a half year sentence should be extended to over 12 years.

At stake is not only the legacy of the 72 year-old former union leader, but also the future of Latin America’s largest economy. With elections scheduled in October, Lula leads opinion polls and is pledging to roll back the market-friendly reforms of current President Michel Temer. While Wednesday’s verdict wouldn’t rule Lula out of the running for good, it does represent a significant blow to his chances.

The majority of investors expect a 3 to 0 tally against the former head of state. While Lula was a Wall Street favorite during his two terms in office from 2003 to 2010, his opposition to Temer’s polices including the deregulation of the labor market and implementation of public spending caps has spooked many investors.

On the eve of the trial, a defiant Lula reinforced investor fears, telling a crowd of tens of thousands of supporters that he didn’t need the financial market anyway.

Security has been tight around the court house in Porto Alegre with sharpshooters on rooftops, naval ships patrolling nearby waters, and police cordoning off an area some 2.5 kilometers wide to keep protesters at arms length. Thousands of Lula’s supporters camped out in the city during the trial. 

Yet Brazilian society is deeply divided over Lula, who is viewed as a savior of the poor to some, and a reckless populist to others. The latest Datafolha survey showed 36 percent of voters would back him in October’s election, roughly double that of his nearest rival, right-wing Deputy Jair Bolsonaro. But 39 percent of those questioned in the same survey said they would not consider voting for him under any circumstances.

While by law anyone with a criminal conviction upheld in an appellate court cannot run for elected office, a likely appeal by Lula would buy him time. Leaders of the Workers’ Party say they will symbolically launch Lula’s candidacy on Thursday, regardless of the outcome of the trial.

©2018 Bloomberg L.P.