Lula arrest in Brazil graft probe raises risk of Rousseff's fall

[BRASILIA] The implication of Brazil's ex-president Luiz Inacio Lula da Silva in a graft scandal at state oil firm Petrobras has reignited opposition hopes of unseating his successor Dilma Rousseff and increased the risk she may not finish her term.

The federal police's decision to take Mr Lula in for questioning on Friday raised the temperature of Brazil's political crisis on the streets, with demonstrators for and against the ruling Workers' Party clashing outside his home in the outskirts of Sao Paulo.

Ms Rousseff's opponents now expect a larger turnout for a national protest on March 13 to rally support for their efforts to impeach the president or get her 2014 re-election overturned.

The main opposition party, the Brazilian Social Democracy Party (PSDB), has asked Congress to impeach Ms Rousseff and said it plans to add accusations made by prosecutors that Ms Rousseff benefited from the Petrobras bribes and political kickbacks.

"The Rousseff government is over," PSDB leader in the Senate, Cassio Cunha Lima, told reporters. "The latest revelations show the country urgently needs a constitutional way out of this deepening crisis, either through impeachment or new elections."

Expectations that Ms Rousseff might fall from power, ushering in changes in economic policy that pull Brazil from its worst recession in decades, drove Brazil's stock market and currency to the highest in at least six months.

For a second day in a row, Ms Rousseff called an emergency meeting of her political advisors to limit the damage from the sprawling investigation, a presidential aide said.

On Thursday, media reports that a Workers' Party senator had linked her to corruption in a plea bargain with prosecutors had sent shockwaves through the government.

Ms Rousseff's political fortunes slumped despite her aides having grown increasingly confident that she had marshalled the support in Congress to defeat the impeachment process.

"The risk of impeachment was dead and buried but it has come back with force," said the Ms Rousseff aide, who requested anonymity because of the delicate situation. "Forget reforms. Brazil is paralysed," the aide said, downplaying any prospect of advancing fiscal and pension reforms to plug a massive fiscal deficit.

The reforms were regarded as important to bolstering flagging investor confidence in an economy that shrank 3.8 per cent last year.

ALLY MAY QUIT COALITION

Prosecutors who ordered Friday's raids on Lula's home and offices said they had evidence the former president had enriched himself and financed election campaigns with money skimmed from Petrobras contracts by Brazil's largest engineering firms.

Lula and Rousseff both gained politically from the corruption scheme, they said.

If confirmed, Thursday's reports of a plea bargain deal by Senator Delcidio Amaral would bolster an investigation by the Supreme Electoral Court (TSE) that threatens to annul Rousseff's 2014 victory on the grounds it was funded using illicit funds.

Adding to Rousseff's woes, the strategist behind her 2010 and 2014 victories, João Santana, was arrested last week on suspicion that he was paid by Odebrecht engineering conglomerate with funds from the Petrobras graft scheme.

The spread of the Petrobras scandal to the presidential palace will put her coalition allies in a difficult position.

Her main ally, the Brazilian Democratic Movement Party (PDMB), appears to be already positioning itself for an end to the era of Workers' Party dominance that began with Lula's election in 2002. The centrist party plans to field its own candidate in 2018.

The split could now happen earlier. The smaller Brazilian Socialist Party (PSB), a former ally that had taken a neutral stance, announced on Friday it was moving to the opposition.

"The immediate consequence of the latest events is that there will be more pressure inside the party to abandon ship and break with the government," said an aide to Vice President Michel Temer, leader of the party that has six ministers in Rousseff's cabinet.

The PMDB has its convention in Brasilia on March 12 where factions in favor of joining the opposition will voice their support for the impeachment of Ms Rousseff, which would put their leader Temer in the presidential seat.

REUTERS