UPFRONT NOTE: I usually write on global long/short equity ideas, but as I have lived 8 years full-time in Brazil until last year, still live there part-time and know some of the players involved, I thought I would write up some quick, if incomplete, notes. If you have specific questions, feel free to ask them in the comments section.
As originally reported Wednesday night by Brazilian newspaper “O Globo,” President Michel Temer was taped approving bribery payments to jailed former speaker of the lower house, Eduardo Cunha, in exchange for the latter’s silence.
Brazilian assets sharply sold off on Thursday. This reflects fears that political uncertainty will stall direly needed reforms (upper house approval of a labor law reform and approval by both houses of a pensions reform), which were slated to happen over the next couple of months – indeed the congressman in charge of the pension reform already announced on Thursday that he would suspend any further work on the reform until ‘our house was in order.’ The fact that Brazilian assets have been up significantly over the last twelve months certainly also helps to convince people to de-risk here. The selling seems to have been rather indiscriminate across stocks, which may also reflect ETF dynamics.
What are the possible scenarios going forward?
President Temer clings on
This is what he is trying to do, as he clearly stated in a public TV address Thursday afternoon, alleging he had done nothing wrong and that he would fight the charges. The Brazilian Supreme Court published the tape recording in question late last night. Temer apparently had access to the tape prior to his TV address, which clearly will have influenced his decision. The tape is 38 minutes long, but the key point here is that there is no smoking gun – the initial press reports seemed to suggest that the tape would show that he explicitly sanctioned ‘hush money’ which is not the case from the tape.
Supreme court justice Fachin opened an…