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Weekly Report - 26 March 2015 (WR-15-12)

BRAZIL: Calheiros and Cunha try to slow fiscal adjustment

Since their names appeared on the list of politicians the supreme court wishes to investigate over the corruption scandal at the state-run oil company Petrobras, the leaders of the federal senate and lower chamber, Renan Calheiros and Eduardo Cunha respectively, have proven determined in their desire to make life difficult for President Dilma Rousseff. The government’s plans for a fiscal adjustment to rein in spending and increase taxes in order to post a primary budget surplus are coming under almost daily attack from the two politicians from the nominally government-allied Partido do Movimento Democrático Brasileiro (PMDB).

In his latest salvo Calheiros told a group of leading executives from the Confederação Nacional da Industria (CNI) that he thought that a key plank of President Rousseff’s new industrial policy was mistaken. “Tax exemptions were important for maintaining jobs,” Calheiros said. “It’s a mistake [to remove them] and it won’t be the last. They want to balance the books on the backs of the poor and this will harm the productive sector. The end of these tax exemptions will lead to a collapse in productivity.”

Calheiros also made it very clear that congress would no longer automatically approve the fiscal adjustment measures proposed by the government. On 24 March congress defied Rousseff’s wishes to push through changes to states’ debts to the federal government.

Calheiros also repeated his party’s position that the number of cabinet ministers should be reduced drastically, from 39 to 20. Cunha, meanwhile, in interviews following the major anti-government demonstrations on 15 March, has amplified his criticism of the executive and rubbished its plans for political reform.

“No one was on the streets demanding political reform,” Cunha said. “The people were asking for a reform of government.” Cunha also criticised the besieged mindset of the higher-ranking echelons of the ruling left-wing Partido dos Trabalhadores (PT). “The PT does not want dialogue. It never has. It only wants monologue.”

Former president Lula da Silva (2003-2011) has apparently been urging Rousseff to include the PMDB more in her inner circle, but so far she has paid little heed to her mentor. However, a minor shake-up of government is expected soon, following the departure of Cid Gomes from the education ministry.

Thomas Trautmann, the social communication minister for the presidency, is also expected to leave shortly. While Trautmann’s position is being tipped to go to the PT, possibly to Edinho Silva, Rousseff’s campaign manager, or congressman Alessandro Molon, the education portfolio is expected to end up with the PMDB.

Lava Jato
Earlier this week, João Vaccari Neto, the PT treasurer, was charged with corruption and money-laundering, following testimony from a former vice-president of the private conglomerate, Camargo Corrêa, that he demanded a R$10m (US$3.1m) donation to the PT’s election campaign. Vaccari is the highest profile member of the PT yet to face charges, but so far the party has stood by him and he has not lost his job.

A further 25 financiers; executives from construction firms; and former employees of Petrobras, were also charged, including Renato de Souza Duque, the former director of services and engineering at the oil giant.

While the prosecution of individuals steps up a gear, companies under investigation are in full damage control mode. At least four of them, including Galvão Engenharia, are believed to be seeking “leniency agreements” with federal prosecutors. Galvão Engenharia is seeking a court-supervised recovery of losses from a court in Rio de Janeiro.

Galvão Engenharia says that it has not received any payments from Petrobras and filed for bankruptcy protection on 25 March as it is having difficulty obtaining credit because of the ‘Operation Car Wash’ investigation. Other companies under investigation by federal prosecutors may well follow the lead of Galvão Engenharia. Serious cash-flow problems for Brazil’s major constructors could put many infrastructure projects on hold.

Under the terms of ‘leniency agreements’, companies can avoid what they fear most: being barred from bidding on future State contracts, in return for admitting a degree of guilt and paying a fine. But the deals are likely to prove highly contentious and many in the public ministry are opposed to negotiating anything at the moment, fearing that they may jeopardise the on-going investigations.

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