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SAO PAULO, Dec 3 (Reuters) - Brazilian markets jumped on Thursday after the opening of impeachment proceedings against President Dilma Rousseff, but analysts warned that lengthy and unpredictable political wrangling could worsen a severe recession.
Lower house speaker Eduardo Cunha agreed late on Wednesday to start proceedings against Rousseff for allegedly flouting budgetary rules to help her reelection last year. The move added to political uncertainty as the Latin America's largest economy struggles with its deepest downturn in 25 years.
The real gained 1 percent, and the benchmark Bovespa stock index rose nearly 4 percent, led by surging shares of state-run companies. Oil company Petrobras and lender Banco do Brasil SA both jumped 7 percent, while power company Eletrobras rose 6 percent.
Earnings at those state enterprises have suffered from Rousseff's interventionist policies, and some investors expressed optimism that a harsh political reckoning would force her to shift her position.
Still, several analysts warned that contentious impeachment proceedings could paralyze Congress, distracting from efforts to address a growing budget deficit and deepening economic crisis.
"We have to remember the process is long and uncertain and it makes this embattled government even more fragile, pushing the country closer to losing its investment-grade rating from a second agency," said João Paulo de Gracia Correa, a trader at the SLW brokerage in Sao Paulo.
Standard & Poor's downgraded Brazil's credit rating to junk in September, and a similar move from another agency could trigger more capital outflows. Many institutional investors are required to unload bonds once two separate agencies rate them as speculative-grade.
Brazil's economic outlook has been clouded by the political crisis and the country's largest-ever corruption scandal, which center on a price-fixing and political kickback scheme at Petrobras. Rousseff's approval ratings have fallen to single digits.
The economy shrank in the third quarter from a year earlier at the fastest pace on record, and new data on Thursday showed industrial output fell far more than expected in October, adding to concerns that the recession will stretch well into 2016.
"Regardless of the outcome of this impeachment proceeding, we expect paralysis in the government's fiscal agenda during the next month as focus shifts completely to the political process," JPMorgan analysts told clients in a note.
In a small victory for Rousseff on Wednesday, Congress voted to let her government run a hefty deficit this year, allowing the administration to pay its bills in December. (Reporting by Brad Haynes and Bruno Federowski; Editing by Daniel Flynn, Jason Neely and Lisa Von Ahn)