Allegations that Brazil’s president has been caught on tape endorsing bribe payments shook the country’s financial markets on Thursday, sending shares and the Brazilian currency sharply lower amid investor fears that his government could collapse.
The charges against Michel Temer, published in the leading newspaper O Globo, forced market regulators to trigger a circuit breaker after the Ibovespa benchmark dropped 10.47 per cent in morning trading.
The real weakened 7 per cent against the dollar on fears that the allegations would torpedo the government’s crucial reform programme to overhaul Brazil’s sinking public finances. Mr Temer has vehemently denied the allegations.
The scandal threatens to lead Brazil into uncharted waters. Mr Temer and his centre-right coalition came to power only last August following the impeachment by Congress of his leftist predecessor Dilma Rousseff for budgetary violations.
If the charges were to lead to Mr Temer’s impeachment, it would be the first time since at least the start of Brazil’s modern democratic period more than 30 years ago that two presidents have been removed in quick succession.
“We are now in the middle of the hurricane, there is a lot of uncertainty,” said Zeina Latif, chief economist at the São Paulo-based XP Investments.
O Globo reported that Joesley and Wesley Batista, respectively chairman and chief executive of JBS, Brazil’s largest meatpacker, had presented a secret recording of Mr Temer approving bribes to Eduardo Cunha, the disgraced former speaker of the lower house, to authorities as part of plea-bargain negotiations.
The report comes as the country’s political and corporate establishment is reeling from sprawling political corruption investigations into state oil company Petrobras in a scandal known as Operação Lava Jato, or Operation Car Wash, which has also implicated Mr Temer and eight of his ministers, as well as a large part of the Congress.
Analysts said that unless Mr Temer could quickly prove that the allegations were false, his reform programme would probably be dead in the water, leaving Brazil’s economy at grave risk from an unsustainable fiscal deficit.
Latin America’s largest economy is only starting to emerge from its worst recession in history, when gross domestic product contracted more than 7 per cent over two years.
According to the O Globo report, Mr Temer heard from Joesley Batista that JBS was paying Cunha, who is serving 15 years in jail related to Lava Jato, to keep silent. The president is alleged to have responded: “You’ve got to keep this up, OK?”
The report did not specify what Cunha, who was crucial in the impeachment of Ms Rousseff, was alleged to have been asked to keep silent about.
The president’s office said in a statement that Mr Temer had “never asked for payments to obtain the silence of the former deputy Eduardo Cunha”.
Confirming the meeting with Joesley Batista at Mr Temer’s official residence, it added that “there was nothing in the dialogue that compromises the conduct of the president”.
JBS declined to comment. Cunha, who is in jail, could not be reached for comment.
Protesters gathered on Wednesday night outside Brasilía’s modernist presidential palace and in São Paulo’s main thoroughfare honking horns and shouting: “Temer, out!”
Mr Temer, already suffering from an approval rating of just 9 per cent, is battling to introduce deeply unpopular changes to Brazil’s over-generous pension system.
“If these allegations are confirmed, probably Temer would not have the ability to approve the pension reform,” said Thomaz Favaro, political analyst at Control Risks.
“The development substantially increases the risk of an unscheduled government change before the 2018 election,” he said.
If the allegations are proved, Mr Temer could be removed in one of four ways, analysts said. He could be tried by the Supreme Court for obstruction of justice, or he could have his mandate terminated as part of an existing case looking at alleged irregularities in the 2014 election, when he was vice-president. He could also be impeached or simply resign.
In each case, the head of the lower house of Congress, Rodrigo Maia, an important ally who is also being investigated for corruption, would be required to hold an indirect election within 30 days in which lawmakers would choose an interim president to serve until elections scheduled for next year.
The Supreme Court and Congress are also considering amendments that would allow for general elections to be held immediately in such cases but these have not yet been approved.