beyondbrics

So, Dilma has lost her best man. Tuesday night’s forced resignation of Antonio Palocci, chief minister to Dilma Rousseff, president of Brazil, is the second serious political defeat suffered by her fledgling administration.

He left after coming under a barrage of criticism for high earnings as a political consultant just before he took office together with Rousseff in January. It is the second time he has been forced out of government – he stood down as finance minister to Rousseff’s predecessor, Luiz Inácio Lula da Silva, in 2005. The Lula government bounced back. But Palocci’s resignation on Tuesday has left Rousseff looking like a lame duck less than six months into her four-year term.

The real target, though, seems to be Rousseff herself. She has been bleeding political capital by ignoring the interests of congress in a way described as arrogant and high handed. She has insisted on hiring technocrats for jobs usually handed out as political favours and, in the case of recent changes to the country’s forestry code, picked a fight with her coalition partners when a compromise would have been possible.

Rousseff badly needs a fresh start and a reformulation of her so far dysfunctional alliance. On the economic side, in the face of rising commodity prices and other inflationary pressure from capacity constraints, the government has made many of the right moves. A further increase in interest rates is likely on Wednesday and spending is being brought gradually under control.

But politically, Rousseff and Palocci – her strong man and, supposedly, safe pair of hands – have been inept. They were forced to back down after trying to strongarm the PMDB, the government’s catch-all coalition partner, known for its love of pork. The danger is that the PMDB will gain more power and threaten Rousseff’s hard won and so far partial fiscal advances. Any threat of fiscal slippage is bound to spook investors.

The scandal has been bubbling under for three weeks so local markets may take the resignation in their stride – it would be no surprise to see them buying on the fact after selling on the rumour. But the longer-term implications cannot be brushed off. While Rousseff has talked convincingly about the need for fiscal restraint, she has yet to deliver a great deal of substance. Letting the PMDB gain the upper hand in spending decisions is the biggest danger she has faced so far.

Palocci’s replacement is Gleisi Hoffmann, senator from Rousseff’s leftwing PT. During speculation over Palocci’s future, the thought was that he would be replaced by a heavyweight such as Paulo Bernardo – Hoffmann’s husband. Hoffmann herself will have to show immense political skills. She and Rousseff have their work cut out.`

Related reading:
Brazil’s Rousseff picks new chief of staff, FT
Brazil file, beyondbrics