Lula’s comeback adds to long list of Brazil investor worries

RIO DE JANEIRO, BRAZIL – Former President Luiz Inacio Lula da Silva was thrust back into Brazil’s political scene after a Federal Supreme Court (STF) justice tossed out criminal convictions against the leftist icon, adding to angst that has already prompted investors to dump the country’s assets.

The federal court in the southern city of Curitiba had no jurisdiction over cases against the ex-president, including ones that led to sentences for bribery, Justice Edson Fachin wrote in a statement on Monday. The news sent stocks and the currency cratering, deepening some of the worst performances this year at a time Congress discusses approving extra emergency spending to mitigate a renewed coronavirus outbreak.

The decision provides the biggest chance yet at a long-sought comeback for a highly controversial figure in Brazilian politics. While Lula remains revered for lifting millions of citizens out of poverty, many also say he is a symbol of corruption and economic mismanagement. The four consecutive governments of his Workers’ Party (PT) ended abruptly in 2016 with the impeachment of Lula’s successor, Dilma Rousseff.

The ex-president scheduled a press conference for Tuesday afternoon at his former union headquarters in a working class suburb of São Paulo – the place where he hunkered down when then-Lava Jato judge Sérgio Moro ordered his arrest back in 2018.

Election Kickoff

For investors, Lula’s return to the electoral agenda could deal a blow to pro-market reforms, pushing President Jair Bolsonaro even closer to a populist agenda and bringing forward an election debate that wasn’t expected for months.

“Brazil’s 2022 election began today,” said Thomas Traumann, a Rio de Janeiro-based communications consultant who has advised past ministers and presidents. “Lula today won’t be the same Lula in 2002, with a market-friendly message of peace and love. He will seek revenge, and he will blame the markets, the media and business leaders for the downfall of the Workers’ Party.”

The possibility of a repeat of the polarization seen in the election of 2018, when Bolsonaro faced off against Lula’s handpicked candidate Fernando Haddad, is another wrench in what already has been a tumultuous start of the year for Brazilian markets.

The real is down 11% against the dollar, the worst among major currencies, as a raging virus outbreak brings new lockdowns and increases pressure for the government to shift away from cost-cutting pledges. Bolsonaro’s administration has bypassed public spending rules deemed essential by investors, financing emergency aid packages that provide temporary relief but no permanent solution to the pandemic’s toll on the economy.

“If Lula is able to run again, the reform agenda would likely be off the table and the prospects for fiscal discipline would deteriorate,” said Brendan McKenna, a strategist at Wells Fargo & Co. in New York. “Markets place a lot of weight on fiscal austerity when it comes to Brazil.”

On top of that, investors must now confront odds of the rise of the charismatic, anti-austerity crusader. An eventual race between Bolsonaro and Lula would create a “polarized election that will be decided by those who dislike Lula or Bolsonaro less,” said Creomar De Souza, chief executive officer of Brasilia-based consultancy Dharma Political Risk and Strategy.

Lula’s presence would also make it harder for a centrist candidate to gain traction, Eurasia Group wrote in a note.

Direct Ties

Lula has repeatedly denied wrongdoing and said he is the victim of political persecution. The cases against the ex-president shouldn’t have been carried out in Curitiba because the facts that were raised don’t have direct ties to the misappropriation scheme at Petroleo Brasileiro SA, Fachin wrote in Monday’s statement.

Since 2014, the Brazilian oil producer known as Petrobras has been at the center of the Lava Jato Operation, the country’s largest anti-corruption investigation. In that context, the cases against Lula must be tried in court in the capital city of Brasilia, according to Fachin.

The justice’s decision is in sync with defense arguments made over the past five years, Lula’s lawyers Cristiano Zanin Martins and Valeska Teixeira Zanin Martins said in a statement. “Ex-President Lula was jailed unjustly, had his political rights unduly taken away and his property blockaded,” they wrote.

Going forward, there are are still no shortage of hurdles that Lula, 75, would have to overcome to return to the nation’s top job. His candidacy in next year’s vote hinges on whether the courts have time to re-try the former President from scratch – a tall order given Brazil’s notoriously bureaucratic legal system. In order to be ineligible by Brazilian law, as it happened in the 2018 presidential election, Lula would have to be convicted and have the ruling upheld by an appeals court.

Brazil’s top prosecutor’s office plans to appeal Fachin’s decision, potentially setting off a protracted legal battle, newspaper O Globo reported, without saying how it obtained the information.

Political force

Even while out of the spotlight, Lula has proved he can remain a political force to be reckoned with. A poll released this weekend, before the STF decision, showed Lula has more potential ahead of the 2022 elections than Bolsonaro.

The survey carried out by Ipec showed 50% of respondents said they may vote for Lula in the 2022 elections if he were to run, versus 38% for Bolsonaro. Lula also showed a lower rejection rate when compared to Bolsonaro – 44% to 56%, respectively.

“Lula has to assume his position as Bolsonaro’s main rival and join forces to face this disaster of a government,” said Senator Humberto Costa, a close ally of the leftist leader.