Economic Overhaul at Risk as Temer Arrest Roils Brazil Politics

(Bloomberg) -- The arrest of Brazil’s former President Michel Temer on Thursday showed the largest corruption investigation in the country’s history remains a powerful and unpredictable force in its politics, clouding the outlook for the government’s key economic reforms.

Temer, 78, became the second former Brazilian head of state after Luiz Inacio Lula da Silva to be arrested by the so-called Carwash probe that has brought down swathes of the nation’s business and political elite. Former Energy Minister Wellington Moreira Franco, a close friend of Temer, was also detained. They are both members of the MDB, one of the larger parties in Brazil’s highly fractured Congress.

Brazilian markets sank as news of Temer’s arrest sent shock waves across Brasilia, where lawmakers have begun analyzing the government’s pension reform bill; an unpopular piece of legislation deemed vital to shore up Brazil’s battered public finances. While the medium and long-term consequences remain unclear, in the short-term the arrests create another major distraction from the increasingly urgent task of rescuing Brazil’s anemic recovery. Footage of Temer’s detention and journey to jail dominated local media all day.

"It’s undeniable that Temer’s arrest clouds the outlook in Brasilia," analysts from XP Politica wrote in a research note. "The focus on pension reform is lost, even if for only a few days."

Lower house speaker Rodrigo Maia, Moreira Franco’s son-in-law and a keen advocate for reform, said that the arrests would not affect the bill’s passage, but he acknowledged there were "other problems". Concerns about the government’s ability to approve the bill were already on the rise after a separate proposal for military pensions displeased investors and government allies on Wednesday.

The leader of the opposition in the Chamber of Deputies, Alessandro Molon, said that the arrests "create a certain amount of trouble here in the lower house that will inevitably impact the progress of the pension reform that’s going badly."

Criminal Charges

Prosecutors accused Temer of "leading a criminal organization" that received or was promised more than 1.8 billion reais ($471 million) in funds diverted from several state-owned companies and public works, including construction of Angra 3, an unfinished nuclear power plant in the state of Rio de Janeiro, according to a statement. The preventative arrests were authorized by federal judge Marcelo Bretas in Rio.

"Temer has been stealing from the country for the past 40 years," Carwash prosecutor Jose Augusto Vagos said at a press conference in Rio de Janeiro.

A lawyer for Temer said the arrest constituted one of the most serious attacks on the rule of law in Brazil. His legal team also submitted a request for habeas corpus. Moreira Franco’s lawyers said in a statement they disagree with the judge’s decision, and that the former minister remains willing to assist with investigations.

The benchmark Ibovespa stock index fell as much as 2.6 percent. The real was one of the worst performers among major currencies, tumbling by as much as 1.6 percent in afternoon trading.

The leader of the ruling PSL party in the lower house, Delegado Waldir, said the arrests won’t "contaminate" the reform debate because they were already expected. Yet Temer’s MDB party criticized the decision in a statement, saying there’s no sign that neither Temer nor Moreira Franco committed any wrongdoing.

"Everyone is accountable for their own actions," President Jair Bolsonaro said on a visit to Chile. "It is clear that the kind of politics carried out in the name of governability in the past did not work. It was not correct."

Temer was charged with corruption and money laundering in December, along with five others. The former president denied any wrongdoing in the case. He is also being investigated for allegedly receiving bribes from JBS owner Joesley Batista.

A lifelong politician, Temer assumed the presidency in 2016 after the impeachment of his predecessor, Dilma Rousseff. During his administration, the government passed several market-friendly measures including a bill that limits public spending increases.

--With assistance from Vinícius Andrade, Luiza Ferraz, Mario Sergio Lima, Flavia Said, Sabrina Valle and Simone Iglesias.

To contact the reporters on this story: Samy Adghirni in Brasilia Newsroom at sadghirni@bloomberg.net;David Biller in Rio de Janeiro at dbiller1@bloomberg.net

To contact the editors responsible for this story: Daniel Cancel at dcancel@bloomberg.net, Bruce Douglas, Walter Brandimarte

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