First of Three Judges Votes Against Lula in Brazil Trial

(Bloomberg) -- The first of three judges in a Brazilian court voted to uphold the criminal conviction of former leader Luiz Inacio Lula da Silva, in a case that could sink his presidential ambitions and shape the outcome of October’s election.

Lula was one of the authors of a major corruption scheme and the de facto beneficiary of an apartment paid for by a construction company in exchange for favors, said Joao Pedro Gebran Neto, the lead judge in the case. In arguments that lasted more than three hours, Gebran voted to increase Lula’s prison sentence to more than 12 years.

Brazil’s benchmark stock exchange was up 2.2 percent and the currency gained the most among emerging markets at 1:45 p.m. local time. Both started gaining earlier in the day on indications the judge was leaning toward a vote against Lula. The two remaining judges are to vote after the court returns from a lunch break at 3 p.m. local time.

Outside the courthouse in the southern city of Porto Alegre elite snipers and Navy patrol ships helped ensure security. Lula’s Workers’ Party had bused in tens of thousands of supporters in a show of strength for the 72-year old leftist, who leads the opinion polls by a wide margin and denies any wrongdoing. An adverse ruling would likely prevent Lula from running or taking office.

First of Three Judges Votes Against Lula in Brazil Trial

Regardless of the outcome of the trial, the former factory worker plans to launch his election campaign on Thursday, pledging to roll back the business-friendly reforms introduced by President Michel Temer. While some investors fear Lula’s candidacy and would prefer him out of the picture, many prominent politicians -- including Temer himself -- argue he should have the chance to run for the sake of Brazilian democracy.

"This is truly a lose-lose situation for all parties," said Christopher Sabatini, a professor of international relations from Columbia University. If Lula is ruled ineligible it could "look like a target political vendetta, but if he’s allowed to run it will look like impunity."

While Lula retains a passionate and solid support base, many Brazilians are outraged by the prospect of him returning to the presidential palace. With demonstrations planned by opponents as well as supporters, elite snipers are in position on city rooftops and naval patrol boats have been deployed. The airspace above the court house has also been shut down.

Investor Concern

Most investors are expecting all three judges to vote against Lula and will be disappointed if there is a dissenting vote, as this could increase the chances for appeals.

"There are a lot of different possible outcomes from Lula’s judgment, but the markets aren’t working with a pessimistic scenario," said Joao Souza Fernandes, an economist at Quantitas Gestão de Recursos.

First of Three Judges Votes Against Lula in Brazil Trial

In a defiant speech to a crowd of supporters in Porto Alegre on Tuesday, Lula minimized the importance of financial markets.

"The market’s afraid of Lula," he said. "I don’t need the market. What I need is for the people to take part."

Across the Atlantic Ocean, Temer on Wednesday told investors in Davos that Brazil is recovering and open to business.

“Many are asking if our journey isn’t threatened by up-coming elections in Brazil,” Temer said at a World Economic Forum panel in Davos. “Let me tell you, with conviction: we’ll complete our journey,” he said.

Since his conviction in July last year, polls have shown a steady increase in support for Lula, with the latest Datafolha survey finding 36 percent of the electorate would vote for him. His nearest rival, far-right congressman Jair Bolsonaro, had the backing of 18 percent.

But the survey also found that 39 percent of the electorate would not consider voting for Lula under any circumstances.

Credited with hauling millions of Brazilians out of poverty during the commodities boom that characterized his years in power, Lula left the presidency in 2010 with an approval rating of around 80 percent. While he helped steer his hand-picked successor, Dilma Rousseff, to two election victories, his reputation soured as the economy tanked and corruption charges piled up.

Aside from his conviction for accepting 3.7 million reais ($1.2 million) -- principally in the form of a beach-side apartment -- from a construction company in return for favors, he faces six other criminal charges. Lula maintains his innocence and says the accusations are politically motivated.

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