Partner, Novam Portam
CFR's Shannon K. O'Neil analyzes of the impeachment of Brazilian president Dilma Rousseff and the implications for Brazil’s economy and its ability to govern in the coming months.
DERHAM: Hi. Thank you all. Welcome to today’s Council on Foreign Relations conference call with Dr. Shannon O’Neil. First, I want to remind everyone that this conference call is on the record.
Dr. Shannon O’Neil is the Nelson and David Rockefeller Senior Fellow for Latin America Studies and director of the Civil Society, Markets, and Democracy Program at the Council on Foreign Relations. Shannon’s an expert on Latin America and Brazil. Her most recent book was “Two Nations Indivisible: Mexico, the United States, and the Road Ahead.” And she also directed CFR’s Independent Task Force on U.S.-Latin American Relations, “A New Direction for a New Reality.”
And Shannon’s going to provide us with an update on Brazil. She was down there last week talking with people.
And I think we’d all agree that Brazil looks grim. It’s gripped by a crisis the depth of which a decade ago we would have imagined the country had put behind it. Most recently, on Sunday, the lower house of Congress authorized impeachment proceedings against President Dilma Rousseff by what I think most people would say is a comfortable margin. And the impeachment proceedings were driven in part by ongoing, wide-ranging Lava Jato political corruption investigation that’s really left no politician unturned—untouched, excuse me. And all this is unfolding against a terrible economic background with the Brazilian economy mired in its longest recession since 1901. So, really, Brazil’s at a turning point here, or a crisis point, where it needs to figure out what the next steps are, both politically and economically. And that’s why having Shannon talk on this stuff—on these issues will be so vital today.
So I’d like to, Shannon, kick it off by saying, what’s next? Politically, what’s the path forward?
O’NEIL: OK, well, thanks, Mike. And thank you all for joining us today to talk about Brazil.
And as we were just joking before we got onto the phone, you know, by the end of this call, the dynamics will probably have changed in Brazil and where things are going. But overall, it is in the middle of—it’s been in a political crisis for many months now, in a stalemate between the different parties, and now we’re starting to see some movement and movement towards the impeachment of President Dilma.
As we all saw this last weekend, the house—more than two-thirds of the house voted to push forward impeachment. Now the Senate will take over that process and probably, by May 10th, 11th, 12th, somewhere in that range, will decide to accept those impeachment proceedings and begin a process in the Senate of judging her. In that process, she will step down and the vice president will step in. So it’s a very fluid time in Brasilia and in general for Brazil on the political side as the nation looks toward dealing with those economic issues that you just pointed out.
DERHAM: And when Dilma steps down, it’s for a temporary 180 days and, as you mentioned, Vice President Michel Temer steps in. What are his incentives? What are his goals during this period? Because he’s not fully aligned with Dilma, is he?
O’NEIL: No. And, in fact, that’s what we’ve seen, is him breaking away. He has been her vice president, but breaking away from her, moving with his party—the biggest party, the PMDB, which has never been known for its ideology, but has always been known for its interest in influence and power—moving with him to the center stage. His party is not all aligned with him. There were some divisions within it, both in terms of its overall party congress it had back a few weeks ago, or a meeting that it had deciding whether to break with the government or not. Some decided, some didn’t. And you saw some divides even in the impeachment vote in the lower house, who stayed with her and who moved on.
So he now will be in the process—he has—the impeachment process, the have six months—180 days—to complete it. If no action is taken, then she comes back in 180 days and becomes president again. If she—if action is taken and they—and they can’t reach the two-thirds majority to impeach her, then she would also come back. But many feel that now, once she steps down, that the Senate will then move forward and she would not be coming back into the presidency.
So he has this difficult task of assuming the presidency under not a—not a(n) electoral mandate, but under a sort of legal and political process within the—within the Congress, and so he will now need to form a coalition. His coalition will not include the PT, not include her party, but it could include other opposition parties—the PSDB, which is the main opposition that ran against her, and their candidate came in second to her in the 2014 election; many of the other 26-plus parties that are in Brazil, bringing those together. And the way Brazilian politicians—and Temer is a longtime Brazilian politician who is very skilled at this—the way they often do this is giving different parties ministries, giving them different access to resources and influence within the overall governing coalition. So he will try to pull together his coalition.
He has a platform that he put forward at the end of October, beginning of November last year. He named it the “Bridge to the Future,” and it is something that markets and economists generally agree are good things. It talks about reforming the economy, indexing wages, and the like. It talks about reining in entitlements, Social Security, raising the minimum wage or establishing a minimum wage for retirement. It talks about privatizing. It talks about lessening some of the bureaucracy—the labor rules, the tax code, making it easier—making it easier to do business in Brazil. So many of the things that eight out of 10 economists agree need to be done in Brazil, or perhaps even more than that. (Chuckles.) But the real question is, can he form the political coalition, coming in with a quite weak mandate to do so, and also with a few challenges on his head?
So he will face—there’s a question about whether he would be able to stay president until the next election in 2018. One, his name has come up in some of the Lava Jato scandals as involved in some of these things. And then, also, in a separate proceeding in the Supreme (sic; Superior) Electoral Court, there are challenges to the 2014 election that he and Dilma won as president and vice president, and questions about illegal campaign financing that went into that campaign. And so the electoral supreme court could—in fact, they’re looking at this evidence now. They could annul that election, which would also remove him from, you know, vice presidency and then now the presidency. So there’s a lot of both political and economic things moving around right now.
DERHAM: And so if he gets removed either through an offshoot of Lava Jato or through a decision by the supreme electoral tribunal, what happens then?
O’NEIL: And so there is a big question. There is a question about would Brazil—if the election is annulled and it’s before the end of this year, 2016, then Brazil would likely hold another election. You would see, in 90 days, another presidential election, so various candidates running. Given many of the dynamics that are happening, there is a thought that outsider candidates might do better in that election than insiders or those that have been named in the Lava Jato or other corruption scandals, which is many of the insiders. So people have put forth Marina Silva, who ran in the last election and got about 20 percent of the vote, as one of the only, you know, consensus agree is a very clean candidate out there. Perhaps she would be someone who might do well in that kind of election. You know, questions about whether Aécio Neves, who was the PSDB, the second—the runner-up to Dilma, whether he would run again, whether he would have, you know, support that he had in the last election, where he came quite close to her vote tally, though not beating her.
If this whole process and the annulling of the election and then the appeal of the annulling, which will undoubtedly happen by both Dilma and Temer, if that gets pushed into 2017, then the Congress will appoint an interim president to fill out the term because it will half—it will be over halfway through the four-year term. So then you would have someone appointed. And who that person is, there’s lots of rumors out there. The person who’s third in line after Dilma, after Temer, would be Eduardo Cunha, who’s the head of the lower house, who has many, many investigations into his personal finances, and seems to have a plethora of Swiss and other bank accounts out there. So one of the people that you would imagine Brazilians would be quite unhappy, to have removed Dilma, to have removed Temer, to get Eduardo Cunha. But there are other names. And all of Congress would have to agree. They would have to nominate and accept someone. So it could likely be anyone. It wouldn’t have to go through a succession line.
DERHAM: And so you mentioned Eduardo Cunha as being touched by some of the Lava Jato investigations, and we mentioned that as being kind of in the background of this immediate political evolution. Where does Lava Jato evolve to? Are there other shoes to drop? And what are—what are people on the ground in São Paulo or in Brazil expecting?
O’NEIL: There do seem to be many, many other shoes to drop, and there’s many ongoing investigations. Some are part of the Lava Jato, some are broader investigations. And one figure that’s out there is that 60 percent of the house of representatives is under some sort of investigation right now. So many of those that have voted to impeach Dilma were—they themselves are probably, you know, living in glass houses and casting stones.
But the group of prosecuting attorneys, of judges—Sérgio Moro is one of the leading, but there’s many others there—they’re continuing these investigations. And they—what’s interesting about this case is how—or these separate cases—how long it’s been going on, and really how thorough they have been. In talking with one of the members of this team back a couple of months ago—though somewhat cagey about the actual numbers, of course, and protecting what they’re planning on doing—his sense was that the investigations were only 30 to 40 percent complete. So, obviously, the majority is still to come. And some of those, we’ve seen revelations about former President Lula, we’ve seen other revelations. But I think this will continue.
It will also continue because one of the sort of innovative aspects of this ongoing investigation is using new tools, that Brazil has new legal tools that came into effect in 2013, in particularly plea bargaining. So you’ve seen a lot of those that have been indicted, sometimes convicted, turning and providing evidence to the prosecutors. So continuing the investigation and opening up a whole set of resources and evidence that prosecutors and judges did not have the ability to collect in the past. So that really has been one of the aspects that allowed these investigations to really blossom and expand broadly. And that will continue, I believe, in the future.
DERHAM: And so do you—and this can either be your opinion or the opinion of other people you’ve heard from—do you think Lava Jato is the result of a specific evolution of political and politically acceptable corruption, either under the PT or in Brazil over the past decade? Or is this the interaction of these new tools with, quote/unquote, “the way business got done” up until this point in the country?
O’NEIL: You know, I think it’s a confluence of different factors. I think one part of it is when democracy return to Brazil in the late 1980s they put in a different process of choosing attorneys and judges and the like. They put in a series of merit-based tests. And today, if you want to become a prosecuting attorney in the system, you know, they have about 50 posts a year and 20,000 people apply for it and take a very competitive test. So these are really the cream of the crop in terms of intellect, in terms of drive and ambition. Many of those that are selected have studied abroad, know lots about different legal systems. So you’ve seen a real modernizing and professionalizing of the legal system on the state side over the last, you know, almost 30 years, 25 years.
And so I think you’re starting to see a new generation of prosecutors that are—that are very skilled that have thought a lot about different legal systems around the world and have taken that to heart. So there’s sort of a—there’s a generational change within the legal system that I think is—laid the groundwork for something like this Lava Jato investigations. That isn’t changing. That’s part of it.
Another part is, as you mentioned, are some of these new laws. Also, freedom of information act that was passed in Brazil, that allows these prosecutors to go get information they wouldn’t have been able to in the past. So they have different tools, including the—(inaudible)—I mentioned, that—you know, that there’s sort of a very strong, very modern, very smart group of people, and they also have stronger tools than they had in the past.
And then I think there is something—and you hear this down there—there is something about sort of over a decade of PT rule and some of the practices that were put in place. And, you know, we saw the—back in I guess 2006-2007 the Mensalão scandal, that there were these practices that had begun, that were already existing then. And some of the things happening in Lava Jato are somewhat of an extension or an interpretation of what we saw back then.
And, you know, in part, maybe it’s the PT. But I think in part, in general, in countries—emerging markets or others—when you don’t have an alternation in power, when you don’t have sort of a renovation in the bureaucracy and governing, sometimes it’s easier for these black holes to be created and then to thrive. And so part of what we’re seeing these investigations uncovering, in my view, is that.
DERHAM: Yeah. And as we’ve discussed this political crisis, the Lava Jato investigations are continuing against a terrible economic background for Brazil. The economy is expected to contract by 4.2 percent this year. Inflation is in double-digits. Unemployment just hit double-digits. And Brazil is in quite an economic hole. If and when Vice President Temer comes into office as at least acting president, what can he do or what can Brazil do to get themselves out of this hole?
O’NEIL: I mean, it is a difficult time. But part of their challenge—there’s the huge economic crisis that you lay out very well there. But part of their challenge is their—it coincides with this political crisis. They can’t get anything done, right? And so, if he can build together a coalition and people—his counterparts in Congress believe he’s going to be there for a while, and so they’ll rally behind him—if they feel like he’s going to leave his will as very uncertain, his tenure, it’s hard to imagine he can bring together the coalition and the political will to get things done.
But let’s say all of a sudden there’s some—there’ some sense that he will last for a while. And there is some urgency on the part of members of Congress, of the population in general, to begin a turnaround. I do think there’s areas that he can begin to—begin to take on some of Brazil’s costs and begin to rationalize some of the budget proceedings. He could begin to work with a Petrobras, begin to sell off assets. He could work with the Congress to change the legal framework around the Pre-salt, allowing Petrobras to not be the sole operator—so alleviating a little bit of the pressure on that state-controlled company, allowing them to rationalize a bit their debt, which is—which is monumental. I think there are things he can do on that side.
Many people have started talking about indexing of wages. They’ve started talking about entitlements, Social Security and the like. I think that is something perhaps they will consider, but it’s very hard to when you—austerity measures are very hard to do when you’re trying to build a coalition.
The other challenge that he has, even if he creates a somewhat stable government, is Brazil is heading into midterm elections is October. And his party, the PMDB, is the largest party at the local level. So when you look at the mayors and the local legislators and the like, the PMDB is one of the biggest at that level. And all of his colleagues who want to be reelected, or those that want to be elected, are going to be looking for state resources to support their campaigns and to support their constituencies. And it will be doubly difficult this time around compared to, say, two years ago, as last October the Supreme Court forbid private campaign financing. So unlike the United States, with our Citizens United, where we allow private investments—or private—excuse me, private funding of campaigns—investment, you might say—in Brazil, that has now been prohibited. So state resources for campaigns will be even more important than they have been in the past.
And for his party, for other parties, these midterm elections are very important because they set up the parties for the 2018 presidential election. If you control a lot of the local municipalities, cities, state budgets, and the like, you can set up your party to be stronger going into the presidential elections, particularly given private funding—there will be much, much less private funding within those—in those campaigns looking forward. So he has—the electoral incentives are very difficult for the austerity measures that he’s laid out in his “Bridge to the Future” and many other parties has acquiesced to or seem to be, you know, supporting, that there’s some challenges between both the electoral incentives and what everybody knows needs to be done in Brazil to get them out of the economic hole. You need to balance your budgets. You need to cut back on the spending. You need to rationalize your tax systems, your labor code, and all these sort of doing-business aspects.
I mean, the one other thing I think Temer could do is Brazil could start opening up. And Brazil is one of the most closed economies in the world. And while the industrial base in Brazil—the CSB, the business association—is often quite protectionist, a crisis like this is a moment when you can actually begin to make changes, and you can take on some vested interests and the like. So I do think Temer might have an opportunity here to begin to open up Brazil’s economy, which would be good for medium-term growth.
DERHAM: Now, it’s a tough needle to thread if you’re going between the need for austerity from an economic perspective, and then the need for patronage from a political perspective.
DERHAM: And so it will be interesting to see how he tackles that.
Do you have an idea as to if and when Temer would come into office, at least in an acting capacity? Have there been discussions on who he would bring in to help execute on this, or are there names going around?
O'NEIL: There are names going around. Some of those that perhaps the investment community is most excited about it seems, behind the scenes, have said they’re not interested. So the Arminio Fragas of the world and others that are, you know, well-known for their capabilities and for their vision it seems are not going to join this government. And even the PSDB, the main opposition party, the party of Cardozo and others, there’s a tenuous inclusion within the new government, questions about how and if they want to be included.
And, you know, the challenge here, one, is how long will Temer last? That’s the question. But let’s say he lasts to 2018. There are some real difficult political incentives here. Well, whatever the next government is going to be will have to make some very hard choices and will have to lead Brazil through austerity and recession. And as you set yourself up for a 2018 win, it doesn’t look great to be the party that oversaw two years of economic downturn.
So there is sort of a political incentive and questioning: Do you want to join a very difficult period? You know, for the good of your country, talented people should, but there’s a question on the politics about whether it sets you up to succeed in the next electoral round as a party.
Maybe there’s also a question here—to build this coalition Temer will have to bring in all different parties. And the way you do that often is to provide many ministries to them. And for talented technocrats out there, the only way you can really put forward a comprehensive reform agenda is if you have all the ministries working together and you have a coherent plan and ideology and platform.
And one thing that PNDB is not known for—they’re known for being wily politicians, they’re known for being very skilled in that sense, but they’re not known for their ideological platforms or their programmatic platforms. And so I think there’s some hesitancy for some of those who might be the most, you know, pro-market friendly, identify with the PSDB, to join a much more amorphous space.
DERHAM: Yeah. No, I think it’s tough to assemble that team together.
And going back to your point earlier, I think I saw a quote from Arminio Fraga—(inaudible)—yesterday or the day before where he said he was willing to help but didn’t want to be—(inaudible). So I think—
DERHAM: So I think that could be a lot of responses, yeah. Yeah.
Stepping back and bit and looking at how Brazil fits into the broader horizon of Latin America, just north of Brazil Nicolas Maduro has been struggling in Venezuela, and potentially, if Dilma is impeached in early May, Maduro will have lost two of its closest allies in the region in the space of five months. How does this affect his ability to get things done either domestically in Venezuela or in a foreign policy agenda? Or is he just sort of stuck, that it doesn’t make a difference at this point?
O'NEIL: Well, if you want to feel better about Brazil, just look to Venezuela because they’re the comparison. It looks much better. (Laughter.)
O'NEIL: I think that—I mean, the challenges Maduro faces are very homegrown and have been building for many, many years. And in maxing out the proverbial—you know, sovereign credit cards in the good years, and now we’ve seen the lean oil years when all of this is coming back. And we’re seeing continuing—I mean, a growing humanitarian crisis there with the lack of food, the lack of medicine, a growing health crisis with bad water, with other problems as just the public infrastructure is breaking down after years and years of the lack of investment and care.
So there is that—some of that element in the dynamic is very domestic within Venezuela. But there are challenges for either Maduro or for perhaps opportunities for a following government, giving the changing political dynamics in the rest of the region, and particularly, you know, Cristina Kirchner leaving Argentina and kind of Macri—Mauricio Macri coming in—very different positions both in his own market but towards Venezuela and towards the rest of the region, and the same thing if and when Dilma steps down in a few weeks.
And so where I see this mattering are sort of on two sides. One is if Maduro—it’s much more difficult, I think, for Maduro to repress his population, and particularly other politicians, particularly opposition politicians. For many years when he would do things and they’d limit freedom of speech—he or Chavez would limit freedom of speech or put political leaders—opposition political leaders in jail—Leopoldo Lopez or others—the response from Argentina and Brazil, the biggest other economies in South America besides Colombia, was very muted. It was silence, right, so he felt he could go ahead and do that.
And that’s already changed. Mauricio Macri, one of the first things he said about Venezuela was questioning, you know, having political prisoners and sort of the arrest of mayors and others from the opposition. So he no longer gets a free ride on that side, so he’s trying to deal with a very tense social and political situation. It will be harder to use straight-out political repression, at least in the international community. It won’t just be the United States or others who say something. It will also be many of his neighbors that he had relied on. So that’s one side.
You know, the other side is for the opposition. And as you think about the scenarios forward for Venezuela, particularly if the economic, the social costs continue to rise and you see—you see some sort of change in government, one scenario is a national coalition government with opposition leaders as well as some perhaps from within the PSDB, the Chavista movement, the peel-offs from Maduro and the others.
And there you could see President Macri, you could see a new president in Brazil who’s less inclined towards Maduro or Chavez, or who had less of a relationship, you could see it perhaps playing a very useful and constructive role in trying to bring together a coalition—a centrist coalition within Venezuela, and then also helping facilitate, you know, what one can imagine is a massive debt restructuring, negotiations with international creditors, others. There’s a space there with new governments in both Brazil and Argentina to help a transition process in Venezuela if it gets to that.
DERHAM: Fair enough.
We’ll open it up to questions from the members in a minute, but before we move to that I’d like to address the most pressing issue here, which is how are the Olympics going to turn out? Is Brazil ready for them?
O'NEIL: (Laughs.) Well, you know, there’s the first question of who’s going to open them for Brazil, and so we’ll see how that is. But I think it will not be Dilma, it looks like.
There is a question there. The state of Rio has said that, you know, many of the states in Brazil are suffering. And in fact, they’re negotiating with the federal government over whether they’re going to pay simple interest or compound interest on their debts as they’re all, you know, reaching near default stages themselves. But the federal government of course is pushing for the compound interest and the states are pushing for the simple interest. This is actually going through the courts in Brazil right now. Dilma has been negotiating with the various governors, but with her exit Temer will have to take this on as well. Probably there will have to be a renegotiation on that side.
The Rio obviously has—is one of those states that has incredible economic difficulties. It’s having a hard time paying wages and the like. And as you say, they’re leading up the Olympics, right? They’ve spent billions of dollars on infrastructure in preparing for the event. They’re expecting the federal government to cover the security costs for the Olympics, which will also run in the billions of dollars.
So, you know, as other countries have done, Brazil will pull it off because Brazil does. They pulled off the World Cup and they’ll pull off the Olympics, but the economic situation is much more dire than it was when the World Cup came around. And, frankly, I think the benefits of the Olympics for Rio in that sense will be lost.
DERHAM: Well, there’s certainly still plenty of tickets left, so maybe it’s time to buy—(inaudible)—so to speak.
At this time we’d like to invite members to join our conversation with their questions. I just want to remind you that conversations—that this conference call is on the record. And we’d ask you to limit yourself to one question and keep it as concise as possible to allow as many members as possible to speak.
Operator, if you want to open the lines.
OPERATOR: Thank you.
(Gives queuing instructions.)
Our first question comes from David Morris of the University of California San Diego.
Q: Hello. Interesting sides of Brazil.
You know, I wonder about not whether the Olympics will come off but what’s the social response to the Olympics coming up? Is there a movement by social groups to stage massive protests during that period?
O'NEIL: Great. Thanks, David.
DERHAM: That’s a good question.
O'NEIL: Yeah. Thanks, David.
DERHAM: I was going to say that’s a good question because we didn’t see that in 2014 with the World Cup. So I’d be interested to hear your thoughts.
You know, I do wonder about the social response. And it may focus on the Olympics but it may focus on the various steps in this impeachment process and some of the—if and when it gets to the Senate, the way the judgment goes forward and the investigation goes forward.
And here’s the difference: You think about the last time Brazil had an impeachment, when Collor de Mello was impeached. And by the time the house vote happened—and he had resigned, but by the time the house vote happened there were only a few people who voted for Collor. He had absolutely no support.
And it was much more obvious—it was about corruption, right, and the case against him was about corruption. I mean, the case against Dilma—we’re talking a lot about corruption in Lava Jato but that’s not the case in front of her. The case is sort of budgetary shenanigans between the state banks and the federal budget and what she as doing, which is illegal but other presidents have done it as well, including Cardoso, but not to the extent that she has done it.
So the charges are different. It’s not as—it’s not as straight up and down, especially for the general Brazil population. It’s not about stealing money. It’s about something else, about sort of financial chicanery, which is a little bit less clear to understand. And, two, in the house vote, 137 people voted to keep her. So that shows that she has a base of support still and that people aren’t all that excited about the other people that might come in afterward.
And if you look at public opinion polls, you know, the PT still has a good one-in-five Brazilians, 20 percent of the population, that believes in it. And many will remember that it was the PT government, whether it was Lula or the beginning of Dilma, that allowed them to climb out of poverty and into a somewhat fragile lower middle class and buy their first TVs and iPhones and everything else, some of it on credit, lots of it on credit.
So there’s a remembrance of the PT, and now you have a new government that’s going to come in and they’re going to implement austerity measures. So times are going to get tough. We’ve already seen 1.5 million people lose their jobs in 2015. More are going to lose it this time. As Mike said, employment is going to go into the double digits. So there is this space for social unrest. She still has, and the party still has, a strong, you know, 20-plus percent of the population that supports it, that feels that these proceedings are unjust and unfair. They’re worried about their own economic livelihood.
And if history tells us something, the PT is very good in opposition. You can argue about whether they are very good at all at governing. Some people think they are. Some people think they aren’t. But they’re good in opposition. They have a lot of experience. So I would expect that as this goes forward, and depending on how it unravels, that we could see a lot of demonstrations, right? And a lot of the people associated with the PT, whether it’s labor unions or the landless movement or other types of organizations, they are organized. They’re used to getting out into the streets, and so I think we might see some of that.
The one wild card here is the ongoing Lava Jato. And I think if charges against—or investigations against Lula, against Dilma, it becomes much clearer that they were involved in actual corruption, not sort of this budgetary maneuvering but actual corruption and those charges move forward, maybe some of the wind gets out of the sails of the social movement. But if it is placed as here are these other parties—the opposition, the elites—trying to take away the benefits that the PT has provided you over the last decade plus, I think you could—you’ve seen a lot of polarization in society around this, and that’s very different than, say, in 1992 with Collor de Mello.
OPERATOR: Thank you.
Our next question comes from Kathy Ward, independent.
Q: Hi. I want to thank you for this. It’s been incredibly helpful for those of us who have not been following everything as closely as you have.
And to that end, on following things, I have sort of a detailed question for you, which is obviously it sounds like you disagree with the analysis in the op-ed that was in the New York Times this morning that says, you know, impeaching Dilma is just basically a short cut to whitewash over all the other corruption that’s going on, and it’s going to derail all the investigations. And you can either say yes I have that right, or no, Kathy, you have that wrong.
But for those of us who don’t follow as closely, I’m reading this thing and going, well, hey, I can kind of see it. And then I’m looking and realizing I have no sense of how to know what sort of the reliable, independent news analysis sources are in Brazil right now. Like if we’re trying to get a sense of good, independent media sources in Brazil, what do you recommend?
O'NEIL: Sure. You know, in terms of the New York Times op-ed, I do think there are forces that want to stop this investigation, and I somewhat agree. One of the arguments is Eduardo Cunha pushed forward these impeachment charges. Rather than waiting for, say, corruption charges or things that are a bit more explainable to a general population and perhaps have a bit more teeth, he pushed these ones ahead rather than waiting because he had his own corruption charges against him. So, you know, the best defense is a good offense, and so he pushed forward.
So I’m not suggesting that there aren’t those who hope, by upsetting the political fruit basket, they can stop this overall anticorruption movement happening in Brazil. I’m just less confident that they can do that. I do think that there is a professional class of very talented individuals, and a lot of autonomy within the justice system that you don’t see in many other countries there. So I think there is a movement that will be hard to stop. And they’re very politically popular.
I mean, there was an event recently in Brazil when one of these judges, Sérgio Moro, was speaking. And, you know, he came on stage and he got a standing ovation for five minutes, right? So there is a lot of support, so it’s a difficult political challenge to shut him down. I mean, I think there are people who will try to but I’m not sure that they’ll be able to do that to the extent that that op-ed suggested.
In terms of independent voices and what to read and the like, you know, I think in all of these things the more different voices you can read from the left, from the right, from the center and the like, and then you triangulate and decide what you think makes most sense is probably the way to go. But if you’re looking for things in English, I would give a shout out to Brian Winter, who is at the Council of the Americas, writes for the America Quarterly. I think he is one of the more thoughtful people who analyze Brazil and all the ongoing work there. He’s a longtime journalist and now up in New York, but has, to me, a very good grasp on what’s happening in Brazil.
DERHAM: I would second Brian and mention that his Twitter feed is very informative as to what’s going on down in Brazil, and would compare the New York Times op-ed today with an op-ed in the Wall Street Journal yesterday that I think really summed it up well with just the headline was, “Impeachment Won’t Save Brazil,” and whether a coup or a cover-up is almost secondary to the fact that while there are a lot of people that are looking to this as a potential solution, it’s less that they’re just moving into a new phase.
OPERATOR: Thank you. Our next question comes from David Reichsfeld with JPMorgan.
Q: Thank you for this call. And apologies; my question might be a little redundant. Unfortunately, I was a little late.
But it seems a best-case scenario is Temer taking over. Nevertheless, it’s in a very difficult environment. So my question is, given the Electoral Court investigations, do you see a—what type of probability do you see of them stating that the last campaign was illegally financed, thus calling for new elections? It seems that would be the best outcome given the current environment. I don’t know if you agree or not. And if you can try to connect that to Lula.
If Temer comes in, I assume Lula is out of the government and Lava Jato investigations are all over him. So what type of connection do you make Lula to the PT given the fact that he has 20 (percent), 25 percent still of support, right? Thank you.
DERHAM: Correct me if I’m wrong, Shannon—
DERHAM: —but Lula’s technically not in the government yet, right?
O'NEIL: He’s not technically. In fact, I think they’re deciding that—the court is deciding his case today or tomorrow, whether he can come in as the chief of staff. Now, even if they decide he can, it looks he’ll be a short-lived chief of staff. But he’s technically—there’s an injunction against him joining the government right now.
But for those that aren’t following the inside baseball, the reason—one of the reasons it’s beneficial for him to join the government is then any investigations into him will be taken out of the regular courts, either state or federal courts, and will be put into the supreme court, because if you’re a sitting government official, a minister or an elected official—a senator or a representative or the like—only the supreme court of Brazil can investigate and try your case. It can’t be tried by other courts. He gets a bit of immunity from the ongoing process.
And the supreme court is known for taking its time, so there might be many years that would pass before he would really get a full investigation and even be brought up on charges, if that happens. But given that she will probably be removed in a couple of weeks, then he too would be—even if he comes in as chief of staff, he would then be removed as well and Temer would choose other people.
David, as you mention, there are these—this investigation by the Supreme Electoral Court into the 2014 presidential election and whether illegal campaign financing occurred. And if they would find that it had, that money had be gotten illegally, then that election would be annulled. But the president and vice president would have the opportunity to appeal that ruling, but presumably, if they ruled that there was illegal financing, they would have a lot of evidence to the case. In fact, Dilma’s chief strategist or campaign manager has been arrested on charges of illegal money laundering and the like. So there does seem to be some—definitely some smoke and potentially some fire there. We’ll see how this unfolds.
We saw, in the run-up to the house impeachment process, Dilma, the president, sent an appeal, or sent a motion to the supreme court to stop it, saying that there had been some irregularities and the like in the process, which the supreme court turned down. And, one, you know, she probably didn’t have a case. But, two, it shows that the courts are a little bit reluctant to come in and intervene and they’d rather have the legislative process—they’d rather have that political process take this on rather than the answer and the decision come from the courts.
So I think there’s a question with the Electoral Court, if the impeachment process is moving forward in the senate—and you’re starting to see that whole investigation unfold—would they want to step in and just annul the elections right away, or would they want to let the other branches of government deal with this?
And I think there is a—while it would resolve the issue and perhaps lead to another election, you know, within three months—so a very quick election—I think there’s a worry in some ways of overstepping—of the justice branch, the judicial branch overstepping their sort of democratic bounds. When you have these three branches, how do you balance power and influence? So we’ll sort of see how that process unfolds.
If you had quick elections, I think there’s a real question of, so who would be elected, right? If you look at public opinion polls there’s a huge frustration right now with politicians in general. Sixty percent of people want Dilma out but 58 percent of people want Temer out. And a lot of the others that follow are not all that more supported. You know, there’s a sort of sense of let’s throw them all out.
And so that to me suggests that, in a quick election with only three months to go, you could see an outsider candidate come in, somebody who has name recognition, somebody who isn’t seen as part of this corrupt mix. And that’s when I mentioned before Marine Silva, who was a foreign minister with the PT but went out on her own, left the government, resigned for what she felt were unethical practices and the like and has run twice as an independent sort of presidential candidate and gained 18 (percent) to 20 percent of the vote each time.
And she is—I think by consensus everybody thinks she is very clean. She has a very inspiring story of coming from—a very rags-to-riches story and the like. And so perhaps she would be someone that people know her name because she’s run before and she’s seen as different than all those others in Brasilia. So perhaps someone like her would be out there. Perhaps there’s others, you know. But I think there is a challenge there.
And the risk there—and your question is would it be better to have elections, it could be better to have elections but you may get an outsider in there. And outsiders are not necessarily bad. Sometimes they can be quite good, but you need someone who’s going to come in—you’ve got 26, 27 parties in Brazil. You need somebody who’s going to be able to come in and form a coalition to get the reforms done. And many of the changes—Brazil has an incredibly long constitution, and many basic things are put into the constitution about the way you pay wages and how they’re indexed and what Social Security benefits look like. And those sorts of things are in the constitution, which means if you want to change them you need a two-thirds majority, not just a simple majority. So the one challenge of an outsider is, can—is that person politically skilled enough to pull together the coalition to get anything done? Or do you just get another few years of gridlock, which will not help Brazil get out of its economic situation.
Q: Thank you. That was very helpful.
OPERATOR: Thank you. Our next question comes from Richard Herold with Newmont Mining Corporation.
Q: Hi, Shannon. Thanks from me, too, for an excellent conversation.
So, from the point of view of American companies looking at all of this, for companies that may have been considering an investment perhaps this year—an investment with, let’s say, a 10- to 15-year lifespan—is the glass half-full, in that the crisis perhaps presents opportunities to get better terms on an investment this year; or is the glass closer to empty, meaning that companies would probably be well-served to wait and see what—see what happens in the succession process—you know, wait another six months or a year to see how things look going forward?
O’NEIL: Yeah, thanks, Richard. You know, I think if you are—if you’re a business that’s looking or you’re looking to invest in something that is looking on the, you know, two- to three-year horizon, I think it’s going to be difficult. I think you’re going to see a lot of austerity. If you’re a business that’s based on consumption and retail, the like, I think there, too, you’re going to see a tough time.
One of the engines of growth for Brazil, in addition to the commodities upswing—which matters for Brazil, but the commodity exports—exports in general are only 10 percent of Brazil’s economy, so it wasn’t the deciding factor. One of the big deciding factors was consumption. And so you saw a huge boom of consumption—people coming into this middle class, people using credit to buy all these things. And so that—I think you’re going to see a bit of a deleveraging of the consumer in Brazil, and so I think that’s a bit of a difficult sector in the short term.
But if you have a 10- to 15-year outlook, I do think there are going to be opportunities in Brazil. And particularly, you know, if you’re—whether Temer or someone else, how are you going to make Brazil grow again? You’re going to—you’re going to bring in investment. And so you are going to privatize some things. You’re going to offer concessions in infrastructure, perhaps in energy, in mining, in all of these different sectors. And I think there may be some deals to be had. And if you’re not susceptible to or sensitive to short-term volatility in the exchange rate—which I think, you know, as this political process unfolds, we may see some volatility. And, you know, as—you’ve seen it over the last few weeks: as impeachment looked more and more likely, the real was strengthening and its stock market was rising. I think as a new government comes in and things aren’t resolved quickly, we may see some weakening or some softening of those as well. But I think if you have a longer-term outlook, there’s a lot going for Brazil in the long term as well.
So right now, when we’re in the gloom and doom, and you’ve got this double economic and political crisis, and there’s a lot of ugliness there and difficulties with the deficit and inflation and its debt and all of these things, I think those things can be worked out, especially if you’re—if you’re taking this 10- to 15-year term I think there’s good opportunities there.
OPERATOR: Thank you. We have a follow-up question from David Mares with the University of California San Diego.
Q: Hi, yeah. The OAS and a number of regional organizations have questioned the credibility of this impeachment process, and the defense of democracy clauses in various regional organizations were designed to try and raise the cost to domestic agents moving in this direction. Do you—do you think that any of these things would have an influence on the voting in the Senate for impeachment?
O’NEIL: I don’t think those international organizations will have much of an influence on the voting. But impeachment processes always have the political element. And, you know, you can look back to the United States and the 1997-1998, right? It was legal to impeach Clinton on lying about him having, you know, extramarital affairs, but it probably was ill-advised. These weren’t the charges to bring up, right, if you’re thinking about it.
And I think that is the challenge for Brazil and for the Senate going forward is, yes, you know, it is legal to bring them up on charges of these fiscal budgeting shenanigans and moving of funds between the state banks and the federal budget. But is it advised? And are these really the charges that legally, but really politically, can you get people to rally around? Can you get the average Brazilian to understand why this is bad behavior? It’s much more complicated and opaque.
And as she will do, and as the PT will do, they will say that other presidents used it. Dilma used it, but so did Cardoso, right? So it’s not just PT bad behavior. Lots of presidents have used this particular way of fiddling with the budget. And so, as I sort of mentioned before, I think with Collor de Melo it was much clearer. There were corruption charges. It was very obvious. They had the evidence. He had money. He had fancy cars. He had these things. And so it was a much more cut-and-dry thing.
Well, this is not as cut and dry that it’s unethical and it’s illegal, especially for the broader population. So I think that is the challenge with these cases. But I don’t see the admissions of the OAS or other international bodies, frankly, influencing these senatorial votes. I think what will influence them is response of their constituencies and for some of them, at least, the political opportunities and access to resources they may receive by voting one way or another.
OPERATOR: Thank you.
(Gives queuing instructions.)
DERHAM: While we’re letting people collect their thoughts for maybe one last question, I wanted to hear your—we compared earlier—talked about Brazil and Venezuela, and Venezuela makes Brazil look good by comparison. Certainly over the past week Brazil has made Argentina look good by comparison. While Brazil’s been going through an impeachment crisis, Argentina returned to the markets for the first time in 15 years with a $16.5 billion bond.
I’d be interested to hear your thoughts on, you know, is Argentina out of the woods, or what is going on there?
O’NEIL: Well, it’s interesting. Before I went to Brazil, I went to Argentina. And both had a bit of a sense of euphoria when I was there. Argentina has one, and then some Brazilians in São Paulo were excited about the changes happening in their country.
But, you know, I think the Argentines in many ways are in a different situation. They, as well, face very difficult economic headwinds. They are also in recession, though not quite as great. They face much higher inflation. They have a lot of challenges. And, you know, the international commodity markets are not helping them at all, nor is what’s happening in Brazil. Brazil is Argentina’s largest trading partner.
The one thing you are seeing in Argentina is you see many of the economic changes that need to happen already have happened. Macri, during his first 100-plus days, has unified the exchange rate, has pulled off the subsidies on energy, has gotten rid of or lessened many of the export taxes, the different licenses that you needed before that allowed political intervention, and he resolved the issue with the holdouts. And he has formed—he has formed a coalition and brought on fairness and brought on other opposition figures, as well as his own, to begin making these economic changes. And the biggest ones were the two laws that need to be repealed to allow the government to pay the holdouts. And there they got well over a two-thirds majority with people across the political spectrum, not Kirchner supporters but most everybody else.
And so it shows the questions we have about Brazil, about whether they can actually pull together a political coalition to make the tough economic reforms, that’s happened in Argentina already. And for Macri, I think the big challenge is can these changes—can the payoff of these changes—can he get the economy growing again fast enough that the Argentine population doesn’t lose hope and faith and support in him?
So this month is going to be a really tough one. Inflation is going to come in at probably 6 percent because of the lifting of energy subsidies, so rising energy tariffs. You’re seeing other things, wages and—all of these are feeding into inflation. Will that taper off the second half of the year, and can they get investment back in Argentina by the end of the year? So come the beginning of 2017, the economic growth direction and trends look much better. And then he heads into midterm elections come a year from October, so 18 months from now. And can he and his party strengthen their position?
So while they both face somewhat difficult economic circumstances, at least so far Argentina has shown the ability to pull together the political coalition to make some of the tough decisions. But the real question is, come the end of this year, will Argentina—will—(inaudible)—off and will it be growing again? If it’s not growing, if inflation is still very high, if they’re not able to start reversing those trends, then I think that political coalition may begin to fall apart, and it makes it very difficult for Macri.
DERHAM: Operator, do we have any other questions?
OPERATOR: No, sir. At this time we do not.
DERHAM: Well, in that case, I think we’ll bring this to a close. Shannon, once again I’d like to thank you very much for taking the time to talk with us today. We’ll be following your thoughts on the evolving Brazil crisis as it moves forward. And it sounds like it’s not ending any time soon. We’ll read you on Latin America’s Moment, your blog, and elsewhere. And once again, thank you very much for your time.
O’NEIL: Great. Thanks, Mike. And thanks, everybody, for joining us.