A cash-strapped Brasilia eats itself alive

SAO PAULO,  (Reuters) – A political crisis in Brazil  is starting to careen out of control as new allegations of  graft surface almost daily and President Dilma Rousseff looks  increasingly like a bystander with little ability to keep the  fallout from spreading to the economy.

Dilma Rousseff

Media reports over the weekend detailed new allegations of  corruption or allegedly unethical conduct involving five  members of Rousseff’s cabinet — her chief of staff, plus the  ministers of cities, tourism, communications, and institutional  relations — and raised the risk of further departures from a  government that has already lost four ministers since June.
With each passing day, the wave of scandals is looking less  like a coordinated anti-corruption drive by Rousseff, as some  media and government officials have portrayed it, and more like  something more unpredictable and dangerous.

Officials tell Reuters that the crisis seems to come down  to one main factor — money, specifically a sudden lack of it  in Brasilia due to recent budget cuts.

Politicians upset over the cuts began leaking dirt on  government officials to the media and it has since escalated  into a free-for-all between rival factions inside Congress.

“The truth is, (Rousseff) wants this all to end as soon as  possible,” one official said, speaking on condition of  anonymity. “She’s not the one pushing this.”

The distinction is critical because, if Rousseff is not  leading an anti-corruption putsch, it means she also has little  or no ability to stop the onslaught of scandals.

While Brazil’s financial markets have so far shrugged off  the crisis, that may change if new allegations surface  involving Rousseff’s inner circle or if disgruntled members of  Congress move to sabotage her economic policies — as some have  already publicly threatened to do.

“There’s an assumption that Brazil’s economy will be fine  as long as the politicians don’t muck it up,” said Charles  Lieberman, chief investment officer for Advisors Capital  Management, a New Jersey-based money management firm. “But  we’re watching the government closely right now.”

The fallout could take several forms.

A top legislator for the PMDB party, Henrique Eduardo  Alves, this month threatened unspecified “protests” until  Congress received more “respect.”  Officials close to Rousseff  are also concerned that lawmakers in her own coalition could  delay her economic reform agenda or lash out by passing new  spending bills, complicating her government’s fight against  inflation.

 OPEN REVOLT IN SOME PARTIES  

The starting point for the current crisis was Rousseff’s  decision shortly after she took office on Jan. 1 to slash $30  billion from this year’s budget. A large share of the cuts fell  upon the so-called “discretionary funds” that are considered a  sacred perk for members of Brazil’s Congress.

The cuts sought to cool the economy and ensure a “soft  landing” after roaring growth of 7.5 percent in 2010.

They have helped prevent inflation from spiraling out of  control. Yet they have also enraged the parties that make up  Rousseff’s coalition, which had become accustomed to being  handed endlessly increasing revenues, with few strings  attached, during Brazil’s long economic boom under her  charismatic predecessor, Luiz Inacio Lula da Silva.

With Lula gone, Rousseff has struggled at the kind of  back-slapping that has traditionally defused similar crises in  Brazil. Meanwhile, the economy has slowed even more than  expected in recent months, adding to the tensions as lawmakers  fight for control of a smaller pool of resources.

The time-honored weapon of choice for feuding politicians  in Brasilia has long been the artful leak of graft accusations  to magazines — often the influential weekly Veja — which  forces their enemies to step aside.

Such was the case with the resignation last week of  Agriculture Minister Wagner Rossi, a senior figure in the PMDB,  the largest party in Rousseff’s coalition. He quit after a  fellow party member denounced in Veja the presence of “bandits”  in a public company linked to the agriculture ministry, and  accused Rossi of involvement.

The PMDB has been in open revolt all year over the cuts,  which party leaders say have fallen disproportionately on their  heads. PMDB leaders have also trained their fire on each other  as they compete for a reduced pool of spending outlays and  political appointments in Rousseff’s government — a fight that  triggered Rossi’s departure, officials said.

“(Rousseff) was not seeking for Rossi to leave,” a second  official said. “This was fratricide within the PMDB.”

Some officials say that the leak of personal financial data  that cost chief of staff Antonio Palocci his job in June was  likely in retaliation for his role in forcing the budget cuts.  Rousseff stood by Palocci for weeks until it became clear he  had lost the support of the PMDB and her Workers’ Party.

Revenge attacks between different factions are mounting.

The two most serious allegations over the weekend were that  the tourism minister, also of the PMDB, had transferred 1  million reais ($625,000) to a shell company with no clear  purpose; and that the cities minister offered legislators cash  in return for their support. Both denied the accusations.

By responding quickly to more recent allegations, and  publicly vowing to prosecute all involved, Rousseff has avoided  major damage to her own image so far.

Yet that could change. A poll earlier this month showed  that her popularity had dipped in part because of public  fatigue with the constant drumbeat of scandal.

Rousseff herself is widely seen by both friends and foes  alike as untouchable, with a sterling record through more than  20 years in government.

In one sign that Rousseff is trying to ease nerves, her  government vowed last week to release about 1 billion reais to  legislators to fund some discretionary projects.

Meanwhile, some within her government are hoping that the  aggrieved parties will eventually just run out of ammunition.

“(Rousseff) detests corruption, of course … (and) when  these things come to light she will act. But it’s an enormous  distraction, and what we really want is to get on with our  agenda, things like the fight against poverty, the reason we  came to Brasilia,” the first official said.    ($1 = 1.60 reais)

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