Crisis in Brazil Leads to Gridlock with No End in Sight

The prospect of prosecution of corruption is the silver lining in a country once known for impunity of powerful people.

Less than a year after reelecting President Dilma Rousseff, Brazil finds itself gridlocked in a self-inflicted crisis of a complexity without precedent and no resolution in sight. With impeachment looming, Rousseff's tenure in power is increasingly uncertain. The country, viewed once as an emerging powerhouse in the global scene, is politically paralyzed in the face of a full-fledged recession made worse by a federal investigation and prosecution of a corruption allegation of biblical proportions involving state oil giant Petrobras, leading construction companies, and the main political parties of Rousseff's government coalition.

A discredited leader, approved now by less than 10% of the voters, the lowest on record, Rousseff has resisted calls to step down. She has also vowed to fight attempts of removing her from office through an impeachment process, which is supported by a significant majority of Brazilians in opinion polls and could gain traction in the coming weeks. On Saturday September 5, the Federal Supreme Tribunal, Brazil's highest court, authorized the federal prosecutor's office to move ahead with investigations on campaign finance fraud involving two members of the president's inner circle, including the minister of media affairs, Edinho Silva, who was treasurer of her 2014 presidential campaign.

According to information obtained under a plea bargain agreement with Ricardo Pessoa, former CEO of construction company UTC and leader of a cartel of Petrobras suppliers that stole billions of dollars in fraudulent contracts, the equivalent of at least two million dollars of these funds were solicited by Silva and deposited in a bank account of Rousseff's Workers' Party. Federal investigators will also examine payments made to Rousseff's campaign in 2010 and to her predecessor's Luiz Inácio Lula da Silva campaign in 2006. Also targeted is at least one prominent opposition leader - São Paulo's senator Aloysio Nunes, a vice-presidential candidate in the ticket led by senator Aécio Neves, who narrowly lost to Rousseff.

Vice-President maneuvers as impeachment threat looms

During Independence Day celebrations on September 7, Rousseff conceded having made mistakes as parades turned into anti-government protests. Signs of her increasing isolation are front page news. Two weeks ago, vice-president Michel Temer, an experienced politician, gave up the mission he had accepted from the President to smooth relations between the executive and Congress, controlled by his party, the PMDB, in order to ensure passage of an economic austerity plan aimed at reintroducing fiscal discipline to federal accounts and restore investor's confidence. The last straw was a disastrous attempt by Rousseff to reinstitute a tax on banking transactions. Temer worked behind the scene to block the proposal and has since publicly expressed doubts about the president's chances of staying in office in the more than three years left in her second mandate.The statement, made at an event organized by supporters of Rousseff's impeachment, caused alarm in Brasilia and was seen as confirmation that the vice-president is positioning himself to replace the president.

Rousseff's situation is made more tenuous also by the uncertainty surrounding Finance Minister Joaquim Levy. A respected liberal economist who was close to the opposition in last year's campaign, Levy accepted, last January, the difficult task of undoing the damage done by the mismanagement of economic policy during her first term.

Viewed once as an anchor of credibility in the financial markets, Levy saw his proposals to reestablish fiscal discipline and credibility to government accounts sabotaged by cabinet colleagues and blocked by Congress. In July, he was forced to revise down budget targets. The new, more modest objectives soon proved to be unreachable.

On August 31, the minister endured the humiliation of submitting a budget proposal for 2016 with a projected primary deficit (before payment of interest on the mounting Brazilian public debt) the government does not know how to finance. It was an admission of failure that underlined a view shared by Rousseff's opponents and allies about the president's lack of ability to govern. Last week, Levy came close to resigning. He stayed after receiving conditional backing by leading bankers and captains of industry, who warned Rousseff that failure to reach a primary surplus of 0.7% of GDP in 2016 budget and Levy's departure would trigger a downgrading of Brazil's sovereign credit rate below investment grade and further complicate efforts to contain and reverse the crisis.

"The government is coming apart"

Not all is as bleak as it seems, however. Massive street protests against Rousseff have been remarkably peaceful. And democratic institutions built in the thirty years since the reinstatement of democracy in the 1980s have proved resilient, particularly those related to the rule of law.

"In the past, in similar circumstances, we would be talking about names of generals," said former president Cardoso in an interview in which he said Rousseff's government "is coming apart". "Now we are discussing names of judges, nobody that I know is proposing a coup, except a few crazies who talk about the return of the military [to power], which the military do not want."

While the reassuring conduct of federal judges, prosecutors, and investigators can justifiably be seen as the Brazilian crisis silver lining, the challenge to revive the economy should not be underestimated.

"The government has bankrupted the state," said former Central Bank president Arminio Fraga, referring to the disastrous strategy of massive state intervention in the economy followed by Rousseff. The harsh assessment highlights the tough challenge the nation faces of reconciling growing public expenditures with diminishing tax revenues of a bloated and inefficient state apparatus people are happy to benefit from but no longer willing to pay for. Some $400 billion of reserves and a public debt level still manageable, at 65 percent of GDP, are the two factors that separate Brazil from a payment crisis similar to the ones the country experienced in recent decades, and leave open the possibility of finding a managed exit from the crisis. But finding a solution won't be easy nor fast.

"This crisis is much more severe than the two the country confronted and recovered from, in 1999 and 2003, after successful stabilization of the economy" 21 years ago, wrote economists Mansueto Almeida Jr., Marcos Lisboa and Samuel Pessoa in a paper about the upcoming " Inevitable Adjustment" . The problem is the growing cost of a bloated and inefficient government that last year absorbed in taxes the equivalent of 35% of the country's GDP, compared to 25% in 1991. "In this period, the national income grew 103% while the tax income of the government rose 184%, which means that in fifteen years the public sector absorbed 45% of the increase in the national income to finance its expenditure, including programs of income transfer [to the poorer], social security, education and other public policies," wrote Mansueto, Lisboa and Pessoa.

Avoiding the coming train wreck built in these numbers will require structural reforms and a quality of political leadership not currently available but that may emerge, as it has in the fight against corruption. A country once known as the homeland of impunity for those in high places, Brazil is turning itself, in democracy, into an example to others of a society capable to change and affirm the rule of law, as painful as it may be.

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This article was originally posted on The Huffington Post

Image courtesy of Flickr user Israel Mundo and Senado Federal