Dec 29, 2016 | 09:15 GMT

7 mins read

In Brazil, Testimonies Against Tradition

The scandal at engineering company Odebrecht could topple the Brazilian president.

The political consequences of the record plea bargain struck by Brazil's largest engineering company, Odebrecht, have put Michel Temer's presidency at risk. Brazilian politics has long been mired in corruption scandals, compounded by increasing fragmentation and unstable ruling coalitions. Temer himself only took power in August after then-President Dilma Rousseff was impeached and removed from office for violating budgetary laws. But her exit from office did not bring stability, and Temer, too, has been beset by corruption allegations surrounding Odebrecht, which has admitted to making illegal political donations and manipulating government contracts. If this scandal ends in the ouster of Temer, it would pave the way for an outsider to become a strong candidate in the next presidential election in 2018.

Odebrecht Group formalized a leniency deal with the Brazilian Federal Public Ministry on Dec. 1, agreeing to pay an unparalleled civil fine of more than $2.5 billion for its involvement in the Petrobras corruption scandal. The consortium made illegal donations to politicians, using funds obtained by overcharging Petrobras, as well as revenue generated from inflated government contracts. After owning up to paying over $1 billion in bribes to government officials in 12 countries, the conglomerate also signed leniency deals with U.S. and Swiss authorities. To assist the Brazilian investigators dealing with the case, nearly 77 Odebrecht executives and former employees signed informant deals, and their testimonies have already started to roll in.

Despite efforts to maintain secrecy, many insider accounts have already been leaked to the press. The Brazilian media has been instrumental in keeping the Petrobras corruption probe alive, using frequent disclosures (some of questionable legality) to stoke public interest. The case is very politically sensitive and constant media exposure prevents implicated parties from neutering the investigation. One leaked report implicated the current president as well as potential future presidential candidates, including Luiz Inacio Lula da Silva and Aecio Neves. Another names around a quarter of Brazil's 513 lower house deputies. These politicians are accused of negotiating bribes and soliciting illegal donations to their political campaigns. Federal prosecutors, however, expect the actual number of politicians charged to be lower than what is purported in the Brazilian press.

Political Consequences

The political fallout from the Odebrecht plea bargain could result in the fall of President Michel Temer next year. Specific testimonies could be used as evidence to prove that Temer's 2014 campaign for the office of vice president benefitted from illegal donations. These are not new allegations. After former President Dilma Rousseff and her vice president, Michel Temer, won the election in October 2014, the opposition Brazilian Social Democracy Party (PSDB) took legal action against the Rousseff-Temer campaign. PSDB's main argument was that the campaign received illegal donations from companies that were involved in the Petrobras corruption scandal — companies such as Odebrecht. The allegations did not gain traction at the time. Since then, however, the Superior Electoral Court has allowed investigations.

The court is expected to present its preliminary findings in February on whether Temer's 2014 campaign received illegal funds. Then, the court's plenary of seven judges will rule on the final decision in the second half of 2017. The prospect of Temer being made to step down next year is forcing the Brazilian congress to consider alternative plans. Cassio Cunha Lima, PSDB's senate leader, suggested that Supreme Court Chief Justice Carmen Lucia would be a good alternative to assume the presidency should Temer leave office.

Next Steps

If the Superior Electoral Court rules against Temer, the president will have no choice but to resign. The next steps, however, are open to debate. There is a debate within the congress as to whether the constitution requires a new election for president. If this interpretation prevails, it would have to be an indirect election in which lawmakers would choose a new president. This president would govern until 2018, when Brazil is scheduled to hold its next nationwide presidential election. The Superior Electoral Court, however, said Dec. 23 that according to the electoral code, a new election would be called by direct vote as opposed to a congressional ballot.

It is not all bad news for Temer, however. Unlike his predecessor, Dilma Rousseff, his political coalition in congress holds the majority of seats in both the lower house and the senate. And the coalition has shown enough cohesion to pass unpopular economic measures such as a spending cap bill and a controversial pre-salt oil regulation. The spending cap bill in particular was a significant victory for Temer because it needed two-thirds of the lower house and senate to vote in agreement. Such sway means that Temer has significant political insulation against a congressional impeachment process. His removal from the presidency, if it happens, would have to be through the Superior Electoral Court instead.

Temer is also accentuating the narrative of economic growth, saying that next year will be key to kick-starting recovery. For that, he argues, Brazil needs a government with a strong coalition in congress to help speed up the approval of vital economic measures. Before the Odebrecht debacle surfaced, Temer planned in 2017 to approve reforms to make labor laws in Brazil more flexible. This was in addition to a pension reform bill that will set a minimum retirement wage in Brazil. These measures are aimed at taming Brazil's fiscal deficit, which the government believes will allow the central bank to speed up the pace of interest rate reduction. (Brazil's interest rate currently sits at 13.75 percent.) Temer hopes that by focusing on the economy and preserving his political coalition in congress, he will be able to deal with the allegations of corruption against him and his political allies. Yet Brazil's economy is expected to grow less than 1 percent next year, which may unhinge some of his political countermeasures.

Collateral Damage

Given its magnitude, the Odebrecht plea bargain deal will not only affect Temer. A significant portion of Brazil's political establishment could be implicated in some way, too. Among those mentioned are Eliseu Padilha, who is Temer's chief of staff, and the main prospective presidential candidates for the 2018 presidential election. If solid criminal cases against these candidates coalesce ahead of elections and preclude them from running, parties will be forced to select comparative unknowns. Former president Luiz Inacio Lula da Silva — the likely Workers' Party (PT) presidential candidate — was mentioned in the Odebrecht testimonies, along with the three main candidates of the PSDB party, all of whom are alleged to have received illegal donations. 

A poll conducted by Datafolha before the Odebrecht leaks showed Luiz Inacio Lula da Silva, Marina Silva and Aecio Neves leading the presidential race.

If any of these candidates do not stand for election, the corruption probe sparked by the Odebrecht investigation could therefore pave the way for someone outside the political establishment to come to power. Da Silva, for example, may stand trial on corruption charges in 2017, which could end his 2018 presidential aspirations if he ends up in jail. Potential alternatives include the judge presiding over the Petrobras corruption probe in Curitiba, Sergio Moro, and the former Supreme Court Chief Justice Joaquim Barbosa. In August 2016, Moro won 54 percent of the popular vote in a poll conducted by Parana Institute.

Brazil's municipal elections of October last year gave some indication as to the prospects of a politician from outside the mainstream. Voters in the cities of Sao Paulo, Belo Horizonte and Rio de Janeiro all elected mayors who had never run for public office before or were from non-traditional political parties. Sao Paulo's mayor is the former host of a television reality show; Belo Horizonte's mayor is the former president of a soccer team; and the mayor of Rio is the bishop of an evangelical church.

Traditional political parties and politicians from across the board have been hit hard by the Odebrecht testimonies. The proof of wrongdoing will further increase anti-establishment sentiment among the Brazilian population. Should the latest scandal lead to Temer's fall from grace, it could pave the way for a political outsider to sweep into power in the next presidential election.

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