Brazil faces rocky road ahead even if Rousseff ousted, investors say
By Paul Kilby and Sujata Rao
NEW YORK/LONDON, March 4 (Reuters) - The arrest of former Brazilian president Luiz Inacio Lula da Silva fueled a massive market rally but once the euphoria fades, investors will still face concerns about political chaos and an economy mired in a deep recession.
Lula's detention for questioning in a bribery and money laundering probe and the move's dire implications for his protege and successor, President Dilma Rousseff, sent Brazil's benchmark Bovespa index soaring more than 5 percent, bringing its two-day gain to roughly 10 percent.
Rousseff is widely blamed by investors for spending policies that brought a ballooning budget deficit and surging inflation, problems compounded by a political crisis that has gripped the country in the 16 months since she won a hard-fought re-election as the Workers' Party candidate.
The market rally also saw a nearly 4 percent gain in the real currency against the dollar to a six-month high of 3.65, although it later roughly halved those early gains.
Lula's emergence as a target of the probe that began as an examination of kickbacks and inflated contracts at state oil company Petrobras is clearly bad news for Rousseff. Yet it is far from clear it will bring in a more investor friendly government any time soon.
"I don't think this is positive for the market at all in the sense that Lula will likely take the union and leftist movements to the streets in a defensive move," said Jorge Piedrahita, CEO of broker Torino Capital. "This means things will get nastier in Brazil before they get better. I would be selling into this rally."
Brazil suffered a 3.8 percent drop in gross domestic product last year which set the stage for Brazil's deepest recession on record. Latin America's largest economy will not return to its pre-crisis size until 2019, a Reuters poll of economists showed this week.