Operation Car Wash leaks set to create another political crisis

We’re covering the Car Wash leaks. How the pension reform is processing in Congress. And the exit of foreign investors from Brazil.

The Car Wash leaks, explained

On Sunday evening, news website The Intercept published a series of reports based on private messages exchanged between Operation Car Wash prosecutors and then-federal judge Sergio Moro and leaked by a source. The website says their reports bear no relation to the recent phone hacking of Justice Minister Sergio Moro. As the journalists also had access to conversations between prosecutors only (not limited to Mr. Moro), that seems to be true.

The tone of the messages exchanged between prosecutors prove their disdain for the Workers’ Party—and their delight in keeping former President Lula from running for a third term. The leaks should leave an indelible dent on the operation’s image, which prosecutors always tried to portray as “apolitical.” There is an important caveat, however: as far as yesterday’s reports go, there is no indication of forged evidence. The waters get muddier when it comes to how Mr. Moro acted throughout the case.

Why it matters. Unlike in some countries, judges in Brazil don’t play a part in investigation efforts. They are supposed to be neutral arbitrators between prosecutors and defense teams. But the messages (which we only got in fragments) indicate Mr. Moro quarterbacked the prosecutors in many situations. In one case, he tipped off Car Wash coordinator Deltan Dallagnol about possible evidence against former President Lula.

What could happen to Lula. The former president now has solid reasons to question his trial. It is important to bear in mind that the revelations don’t prove his innocence—but cast serious doubts on the legality of his trial. However, it is uncertain if he would be able to overturn a guilty verdict because of (a) the Judicial system’s corporatism, and (b) the fact that the evidence (the leaked messages) was possibly illegally obtained by The Intercept‘s source (which, from a journalistic standpoint, doesn’t mean the website has done anything wrong).

Crisis. The Workers’ Party had called for a general strike on June 14. The leaks should galvanize left-wing militants and make the strike all the more consequential—creating a negative political climate for the government.

Reactions. Both Operation Car Wash and the Justice Minister reacted to the reports, calling them “sensationalist” and saying the conversations were taken out of context and suggest messages could have been doctored—without getting into specifics. The Supreme Court is to decide on a request to disqualify Mr. Moro from Lula’s trial. One of the justices in the case is the anti-Car Wash Gilmar Mendes.

Moro to the Supreme Court? It remains too early to draw any conclusions, but according to the climate in Brasília, Mr. Moro could be about to kiss his nomination to the Supreme Court goodbye. Not because President Bolsonaro would no longer want him there (if anything, this scandal might have made Mr. Bolsonaro like him even more), but because a Senate confirmation (where Mr. Moro has created many enemies) would seem unlikely. Moreover, in private, Supreme Court Justices have called the former judge’s coziness with prosecutors “appalling.”

Irony. The leaked messages were exchanged on Telegram, a Russian app. For years, the left has called Mr. Moro an agent of the CIA. It is ironic that his demise could come for using an app that can share information with Russia’s spy agency …

Pension reform report to be presented on Thursday

After meeting with House Speaker Rodrigo Maia and party leaders in Brasília yesterday, Congressman Samuel Moreira, the rapporteur of the pension reform, will make alterations to his report—which should only be presented on Thursday. Harsher aspects of the reform, such as limiting benefits to poorer elderly citizens and restricting rural pensions, should be scrapped from the bill.

The system of capitalization—when each worker is responsible for their own savings—also risks being slashed. With the delays, a House floor vote on the bill should not happen before mid-July.

Mr. Moreira said that, in the search for consensus, he will present alternative paths (other than the government’s) to transition from the current system to the new one, with a minimum retirement age and the need for more years of work before eligibility for full pensions. The problem here is that, should the transition be too smooth, savings for the federal budget could go way down—drastically reducing the reform’s impact.

• Go deeper: The ins and outs of Brazil’s pension reform bill

Foreign capital flight in May the biggest since election

In a sluggish year marked by caution from investors, foreign market operators have continued to take their money out of Brazil. In May, over BRL 4.6bn fled the country’s stock market. Not even the first positive month of May in the past 10 years (the Ibovespa index rose 0.7% in the month) was enough to keep foreign investors around. The trend continues in June—over BRL 1.5bn was withdrawn by June 4.

Experts say foreign investors are waiting for more concrete evidence that economic growth is on the horizon. And the first step is, of course, the pension reform. But while the reform is a must, it is not seen as the solution for the country—which will need to do more to stimulate economic activity. Additional stimulus measures, such as a further cut in interest rates, might be in order.

In the year, the Ibovespa index has gained 11.81% of value in U.S. Dollars. That’s way better than other emerging markets, such as Argentina (-0.99%), Turkey (-6.74%), and even better than Dow Jones’ gains (11.39%). In base points, the index should remain shy of the figurative threshold of 100,000 points until the pension reform passes.

• Go deeper: Have foreign investors turned on Brazil?

Also noteworthy

Politics. House Speaker Rodrigo Maia and Senate President Davi Alcolumbre gave a joint interview to Folha de S.Paulo which is published today. They have positioned themselves against most of the government’s agenda (environmental policy, traffic code changes, looser gun laws) and said the president will have to withstand them for the next two years. Both said that, even without a solid congressional base, Mr. Bolsonaro doesn’t risk being impeached—but will have trouble governing.

Church. The evangelical Universal Church of the Kingdom of God has been convicted in multiple cases (and including by courts of appeals) for allegedly forcing religious leaders to get vasectomies. Without children, it would be easy to move them from city to city—the church finances all the costs.

Energy transition. Solar power generation leads investments from the National Development Bank in the energy sector. In 2017–2018, financing rose 13%, to BRL 10.8bn. The biggest jump, however, was in investments for the transmission segment, up by 137%, to BRL 10.1bn. Meanwhile, credit for hydropower plants dropped 85% to BRL 1.2bn.

Cryptocurrency. The Curitiba-based Bitcoin Banco has recently identified fraudulent withdrawals amounting to BRL 50m. Due to a criminal investigation into the bank, clients have essentially had their money frozen in their accounts, with withdrawals limited to BRL 10,000 a day and BRL 50,000 a month. There is no timetable for regularizing payments to customers.[/restricted]

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