Temer Vows to Stay, Saying Brazil Probe Will Prove Innocence

(Bloomberg) -- Brazil’s President Michel Temer has defied calls for him to step down, saying a Supreme Court probe will debunk allegations he participated in a cover-up.

"I will not resign," he said in a televised address at the presidential palace in Brasilia. "I know what I did. I know my actions were correct."

Pressure has been growing on the president since a local newspaper reported on a secret recording allegedly revealing that he approved hush money for Eduardo Cunha, the former house speaker and mastermind behind last year’s impeachment of President Dilma Rousseff. The testimony was submitted to the Supreme Court by two senior executives from meat-packing giant JBS SA as part of a plea bargain deal, according to O Globo. The paper provided neither a transcript nor a recording.

Markets tanked on Thursday, as cabinet members and government allies threatened to quit in response to the accusations, jeopardizing the administration’s market-friendly reform agenda. In his speech Temer said that renewed political uncertainty comes just as prospects for Brazil were improving with inflation under control, signs of economic recovery and reform bills advancing in Congress.

"All this immense effort to haul the country out of its worst recession could be in vain," he said. "We cannot throw so much work for the good of our country into the dustbin of history."

Brazilians watched in shock on Thursday morning as federal police carried out search and arrest warrants throughout the capital, Brasilia, in dramatic scenes reminiscent of the impeachment process last year that brought Temer to power.

The allegations are the latest twist in a sprawling corruption scandal that has reached the top levels of the country’s financial and political elite.

Congress was due to vote on a long-anticipated and controversial overhaul of the pension system by the end of May. Eurasia Group said in a note that Temer has lost the capacity to continue his reform agenda. Ricardo Tripoli, a lower house leader from the administration’s main coalition ally, the PSDB, said the party would abandon the government if the recording confirms the allegations.

Despite attempts to show Temer was conducting business as usual at the presidential palace on Thursday, the 76-year-old career politician was deeply shaken by the events, according to a person familiar with his thinking who requested not to be named because of the matter’s sensitivity.

Opposition deputies have already filed impeachment proceedings. People close to Temer told Bloomberg that the most honorable exit may be the president’s removal by Brazil’s top electoral court. The court is currently assessing whether to nullify the results of the 2014 elections on the basis it was illegally financed. Hearings on the case are due to resume in a few days.

There are several options to replace Temer in office, said Luiz Carlos Hauly, lower house deputy leader of the PSDB, the main coalition partner. "The menu is open," he told Bloomberg, adding that the electoral court process may take too long.

For a QuickTake on how Brazil’s political crisis may play out click here.

Both JBS and its holding company, J&F, declined to comment.

Minister Wellington Moreira Franco, one of Temer’s closest aides, said in a video posted on his Twitter account that the government was surprised by the plea-bargain testimony, and urged the coalition to remain united "so the country wouldn’t be paralyzed."

--With assistance from Samy Adghirni

To contact the reporters on this story: Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net, Bruce Douglas in Brasilia Newsroom at bdouglas24@bloomberg.net, Matthew Malinowski in Brasilia at mmalinowski@bloomberg.net.

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Raymond Colitt