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The resignation or the impeachment of Dilma Rousseff: the only substitute to Brazilian debt monetization?

The essential

While the country sinks into an unprecedented political and economic crisis, the President of the Lower House accepted the request of impeachment of the current President, Dilma Rousseff.

This procedure, if it was voted, would be long and its success is not guaranteed. Thus it seems, that it is here a question of a tour de force of the opposition to push Dilma Rousseff to the resignation. At the moment, it is one of the only alternatives envisaged by the politics and the markets to end the current crisis.

 

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This text was finalized the 4th of December 2015. It can’t be excluded that the Brazilian situation will have evolved since then.

Impeachment proceedings have begun against Dilma Rousseff.

Eduardo Cunha, President of the Lower House and member of the PMDB, the principal opposition party against PT, has agreed to begin impeachment proceedings against President Rousseff, who is accused of manipulating public accounts to secure her re-election in 2014. This is the first of five steps in the proceedings, which should be completed in March-April 2016 if taken all the way.

As shown in the box below, these proceedings will take time, not to mention that their success is not guaranteed. Indeed, beyond the two-thirds majority that may be difficult to obtain in the Assembly and/or Senate and the Supreme Court, two other factors could result in failure. The first is that Eduardo Cunha, President of the Lower House , is himself under investigation for corruption. The second, more damaging factor is that only the public accounts for 2015 will be checked, instead of those for 2014, which are the ones in issue. Yet the 2015 accounts have not yet been analysed by the Court of Auditors, nor approved or rejected by the Congress, because the calendar year is not over.

A long procedure with an uncertain outcome

Step two is the formation of a special parliamentary committee composed of representatives of all parties who must evaluate the grounds for the motion for impeachment.

Next, if the process is completed, comes step three, where the committee will hold five sessions, at the end of which a vote by simple majority will validate – or invalidate – the official launch of proceedings. Step four is to vote on the impeachment within 48 hours. For this, a two-thirds majority is needed, or the vote of 342 members out of 513. If the votes go to impeachment, Michel Temer, the current Vice-President and President of the PMDB, will act as President for 180 days. Then, it will be the Senate's and the Supreme Court's turn to vote. If there is a two-thirds majority, then Rousseff will immediately be removed from office, and Temer will officially replace her until the end of the term, unless he opposes this. In that case, new elections will be held early in 2017.

 

These proceedings come at a time when Brazil's situation, both political and economic, appears untenable, even desperate

Since the year began, not a month – not even a week – goes by without some new revelations or new arrests of business or political figures. For example, just last week, the Supreme Court authorized the arrest of André Esteves, a Brazilian millionaire who runs BTG-Pactual investment bank, and of Delcídio do Amaral, a member of the Senate.
From an economic standpoint, too, this is now a catastrophe. The drop in commodity prices caused by the slowdown in China (the first net commodity importer) and the resulting massive depreciation of the real have done much to weaken the Brazilian economy. While negative factors had been limited to these two components, the current recession would have been lesser under the impact of a rigorous policy mix.
Yet political problems have only delayed and complicated the implementation of the fiscal consolidation needed to maintain the credibility of the Brazilian policy mix vis-à-vis the markets. Thus, despite a restrictive monetary policy (the Selic is now 14.25%, and real rates for the year have exceeded 5%), the Brazilian Central Bank (BCB) has been unable to check the capital outflows and the real’s decline due to investor mistrust. Inflation has reached 10%, the public deficit is estimated at 9.5%, and debt is approaching 70%, whereas two years ago it was below 55%.

The situation is so extreme that, even with a recession of more than 3% of GDP, some members of the Copom (Brazil's monetary policy committee) did not hesitate to speak out last week in favour of a new rate increase. Further tightening seems inappropriate to us in economic terms, unless the goal is to ease the market's fears and avoid a skid in inflationary expectations. From where we stand, this is a challenge to fiscal policy and an admission that the BCB is powerless in such a situation.

Unless Rousseff resigns, these impeachment proceedings, if completed, are perhaps the only way to break the vicious cycle in progress and to repair the economic situation in the medium term (i.e. by 2018).

As we explained earlier, these proceedings will take time, and their success is not guaranteed. However, as things now stand, and if Rousseff does not resign, there are few solutions for Brazilian politicians to repair the economic situation and avoid chaos in the medium term. Indeed, as we saw in previous months, this political crisis is weighing on all of the voting on the budget.

In the short term, this decision to launch impeachment proceedings will admittedly have negative effects: more volatility on the markets due to the uncertainty as to the length and outcome of the proceedings, and also perhaps additional downgrading of the sovereign rating for Brazil by the rating agencies, which might read these proceedings as another postponement of fiscal measures.

But it could also have a positive impact: by forcing Rousseff to resign quickly. If that is the case, a new round of elections would be called for quickly, and the President-elect would – by necessity – have greater legitimacy for carrying out the reforms required for Brazil's recovery. Furthermore, that is what the PMDB is probably trying to obtain because the acceptance of Rousseff's impeachment by Cunha, President of the Lower House , comes one week after his party's publication of a liberal economic platform.

If Rousseff does not resign, in the medium term, there are two options: the current Vice-President accepts the position, or he resigns and new elections are held in early 2017. If Michel Temer accepts the Presidency, the task will not be easy for him, and he will have to obtain the support of Congress. If new elections are held, we come back to the scenario whereby Rousseff resigns, except that time will have passed between now and then. Therefore, while in our macroeconomic scenario, we anticipate a recession of 3% this year, 2% in 2016, and an exit from the crisis in 2017, this latter could well be pushed to 2018.

Without massive and urgent fiscal consolidation, the BCB will remain powerless to control the situation. Today we can say there is fiscal predominance in Brazil. But tomorrow, what will happen if nothing changes? Is the monetisation of  Brazil's debt the only possible outcome?

And so, to limit the probability of such a scenario coming to pass, the current political crisis must quickly come to an end. The clearest alternative seems to be the departure of the current President. Furthermore, it is not clear that the markets are waiting, because since yesterday's announcements, the real has regained 3.5% against the dollar.

 

 

 

 

 

The request of Dilma Rousseff’s impeachment has been accepted

 

 

 

2015-12-03-01

 

 

The political problems push the country in a deeper and deeper crisis

 

 

In the short term, this decision will undeniably have negative effects: more volatility on the markets and also perhaps additional downgrading of the sovereign

 

 

 

2015-12-03-02

 

 

 

This decision could also, through a change of Government, help the country to find more credibility

 

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Cross Asset of November 2015 in English

Cross Asset de Novembre 2015 en Français

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Karine HERVE, Strategy and Economic Research at Amundi
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The resignation or the impeachment of Dilma Rousseff: the only substitute to Brazilian debt monetization?
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