This article was published by The McAlvany Intelligence Advisor on Monday, March 7, 2016:  

The assumption is that, once President Dilma Rousseff is out of office and her mentor, former President Luiz Inacio Lula da Silva, known as Lula (shown above), is in jail, everything in Brazil will be just fine, back to normal, regular programming to resume shortly.

That’s not likely. The corruption being exposed by “Operation Car Wash” goes clear to the bone. New suits will replace the old in Brazil, but little else is likely to change.

The big news driving the index higher was last week’s detentions and arrests of dozens of politicians and businessmen following a raid by 200 police officers and 30 tax auditors. And the news inside the news was that one of those detained was none other than Brazil’s former President Lula, the founder of the Workers’ Party. It was that party, working closely with its corrupt sister, the Party, which not only kept Lula in from 2003 to 2010, but put into power Brazil’s present president, Dilma Rousseff.

To risk analysts it was a Hallelujah Day. Brian Winter, vice-president of Americas Society/Council for the Americas, called it “historic”:

It is obviously a historic moment for Brazilian politics. [Lula’s detention] signals a completely new moment for the Petrobras probe, for [Lula’s] Workers’ Party and for Brazil generally.

For Jimena Blanco, the head of the Latin American department of political risk advisory firm Maplecroft, it was even better:

Brazil’s perfect storm has reached its climax and the likelihood of a sudden change in government, either through judicial or legislative means, has skyrocketed. [Lula’s] involvement … [increases the] social and political pressure for Rousseff to leave office.

The instant case began when Petrobras, Brazil’s huge oil company, announced that it had found two new immense oil fields: the Tupi in the Santos Basin and the Juniper just off the coast of Rio de Janeiro. Drawing the attention of corrupt officials both inside the company and inside the government was this: Petrobras had to raise $25 billion in order to develop those fields. And that drew those corruptocrats like flies to yesterday’s pizza: bribes, kickbacks, pay-to-play schemes, influence buying and selling – you name it.

So much money was involved that those participating couldn’t just stuff it into their shirts or into their local bank accounts. They needed offshore banks. But how to move the thousands and tens of thousands involved? The currency exchange of choice was located in the Tower Car Wash in downtown Brasília, just blocks from the government offices and convenient to officials transferring their bribes and payoff money during their lunch hours.

The owner discovered those officials were using his currency exchange to funnel the money offshore and called the police. It was like picking up the corner of a piece of carpet and discovering a cockroach: there’s never just one.

The first arrest took place in March, 2014, taking into custody Paulo Roberto Costa, the former head of Petrobras’ refining and supply department. The police used “plea and pressure” tactics as described by Kenneth Rapoza, a Forbes contributor:

One name has led to another, which has led to another, which has led to this: some of the closest men to Dilma Rousseff and Lula.

 

[Those arrested] will not want to spend the rest of their lives in jail. They … will sing, sing loud and clear….

 

If they have anything that implicates Dilma and/or Lula in this mess, it will not only destroy the Workers’ Party … but it will surely lead to an impeachment [of Rousseff].

Rapoza sang like a meadow lark, leading to the arrest of 18 people later that year. In March 2015 the Supreme Court empowered the police to investigate another 50 people including Senate President Renan Calheiros and House speaker Eduardo Cunha.

The investigation broadened by setting up Operation Zealots which looked into Brazilian officials who solicited bribes from major companies in exchange for reducing their tax liabilities.

In April police arrested the treasurer of the Rousseff’s Workers’ Party, Joao Vaccari, as the noose tightened. In June they arrested the CEOs of the country’s largest construction conglomerates, Odebrecht and OAS, putting the former in jail and the latter in a holding tank awaiting his trial. In August they arrested Lula’s chief of staff who served him while Lula was Brazil’s president from 2003 to 2005.

Also in August house speaker Cunha (who remains in office thanks to Brazil’s “relaxed” rules concerning misconduct of elected officials) was charged with pocketing upwards of $5 million in bribes in connection with Operation Car Wash.

In November the richest man in Brazil, Andre Esteves (who, appropriately, is head of Brazil’s largest independent investment bank, PTC Pactual) was arrested along with Senator Delcidia do Amaral, another member of the Workers’ Party and also the Senate Whip. Both were charged with paying millions in bribes to a key witness in the Petrobras investigation and then spiriting him out of Brazil on a private jet to keep him from testifying.

The final nail in both Rousseff’s and Lula’s political coffins was also driven home last week when ISTOÉ, the Brazilian equivalent of Time, published an article about Amaral’s claim that Rouseff moved heaven and earth to appoint a political lackey to one of Brazil’s highest courts in an attempt to release some of her cronies that the police had locked up.

Naturally Rousseff claims to be innocent of all this, a claim that is increasingly falling on skeptical ears. After all, she served as Lula’s Minister of Energy for five years while the scheme was going on!

Any assumption that, once Rousseff and her mentor are removed from power, everything will return to normal will shortly be proven dreadfully wrong. The economy shrank nearly four percent last year, shortages continue thanks to government put in place to fight inflation, and unemployment is off the charts. Remaining in place will be the Workers’ Party and its partner in crime, the Party, supported by most Brazilians who still think the government is the fount of all benefits.

That’s the problem with the big jump in the Bovespa last week. The corruption in Brazil is, thanks to decades of statism, permanent, with little likely to change merely by putting new suits in charge.

—————————

Sources:

: Brazil’s Troubles Go From Bad to Worse

: Fitch Downgrades Brazilian Debt to “Junk”

: Brazil’s Petrobras Scandal Widens, Threatens President Rousseff

The Wall Street Journal: Brazilian Police Question Ex-President Lula da Silva in Petrobras Probe

The New York Times: Brazil’s Ex-Leader, Luiz Inácio Lula da Silva, Is Held and His Home Raided

The New York Times: Brazil’s President Rousseff, Facing Impeachment Effort, Is Deluged by More Bad News

Five-day price chart on Brazil’s Bovespa Index

Background on Communist Party of Brazil

Background on Brazil’s Workers’ Party

Weekly magazine ISTOÉ

Background on Maplecroft

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