Something’s Rotten in the State of Brazil

Brazilian markets are reeling today after corruption investigations now look set to engulf the current President Michel Temer. The Bovespa index of Brazilian stocks is down about 9%, while the real is 7% lower versus the U.S. dollar, meaning a basket of Brazilian stocks is about 16% lower in U.S. dollars. The shock hits Brazil just as its markets seemed to be recovering this year from widespread corruption and large public deficits.

Corruption in Brazil, and across South America, is often seen in a “pay to play” system. Businesses are expected to pay bribes to politicians to gain access and influence. That corruption is both a consequence and a cause of the lingering inequality in the region. JBS, a large meat-packing company in Brazil, is the latest company confirmed to have paid these bribes.

JBS is no small concern. Based in Sao Paolo, the company does some $50 billion in annual sales. Through acquisitions it has also become a major player in the United States’ beef and poultry markets and is the world’s largest producer of beef products. For many years, JBS was a family company, but it went public in 2007, although the Batista family that started it continued to maintain control through their family’s investment firm.

JBS has been caught up in an on-going corruption probe of the Brazilian meat-packing industry in which prosecutors allege meat inspectors were bribed to ignore health and safety violations, some of them quite serious. In March, the headquarters of JBS was raided by investigators. As part of a plea agreement, JBS turned over substantial evidence to prosecutors including numerous taped conversations, which only made the story even more interesting. Those tapes potentially incriminate the current President, as well as a past Presidential candidate and past Finance Minister.

President Temer is alleged to have spoken with Joesley Batista, one of the leaders of JBS, about paying bribes to Eduardo Cunha, a former speaker of the House who has been disgraced in a separate corruption investigation. The money apparently paid to Cunha was hush money to prevent his revealing of other incriminating information. Brazilian newspaper O Globo also reported that the tapes indicate aides close to Temer accepted bribes from JBS in the past for assistance in tapping export markets. Temer denies the claims.

Brazil’s current President is only in office because his predecessor, Dilma Rousseff, was impeached and removed from office on August 31, 2016. Although Rousseff has been rumored to be implicated in corruption surrounding state oil company Petrobras, she was removed from office for the far more mundane reason of violating “budget laws.”

While many in the country are undoubtedly yearning for more stability, revelations of such widespread corruption throughout the vast majority of the political elite is hoped to bring cultural and legal changes to end the worst of these abuses. Both Brazil and the region desperately need it.

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