Rousseff faces fallout from Palocci scandal

Brazilian President Dilma Rousseff enters a crucial week in her young presidency on Monday as the government fights to contain a scandal that is tainting her chief of staff and could hurt her reform agenda.

Revelations of a surge in the personal wealth of Antonio Palocci, the government’s chief power broker and a key economic policy-maker, have abruptly ended Rousseff’s political honeymoon after nearly five months in office.

An emboldened opposition is calling on Palocci to explain a reported 20-fold increase in his wealth during his tenure as a federal deputy from 2007 to 2010 and is pushing for Congress to open an official investigation.

That is unlikely to succeed given Rousseff’s ample majorities in both houses, but she may be forced to make concessions and hand out more posts to allies in the unwieldy governing coalition in exchange for their backing.

Palocci, who quit as finance minister in 2006 because of a separate ethics scandal, also faces a demand from Brazil’s federal public prosecutor to provide further details on contracts with clients of the consulting firm that he ran while serving in Congress.

Rousseff held a regular “coordination meeting” with her top ministers on Monday. A senior government source told Reuters she would order her cabinet to forcefully defend Palocci, who has denied any wrongdoing and said that his income was fully documented in tax returns.

It is legal for Brazilian lawmakers to run private companies as long as they are not used to peddle political influence.

The case appears unlikely to advance unless solid evidence of wrongdoing emerges, but it highlights the government’s fragile base of support in Congress that could splinter further if Rousseff’s approval ratings fall in the coming months.

Coalition allies, in both the centrist PMDB party and Rousseff’s own Workers’ Party, are upset at the president’s practice so far of handing out key posts to technocrats rather than political allies, said Brazil analyst Christopher Garman at the Eurasia Group in Washington.

“It’s very hard to say where these allegations are coming from – is it pure investigative journalism from Folha de Sao Paulo or are they getting some help from disgruntled segments of government?” he said, referring to the newspaper that first reported Palocci’s wealth increase.

“The fact that Rousseff is squeezing her allies… generates an environment more prone to scandal.”

Rousseff, the first woman to lead Brazil, cruised through her first few months in office after her convincing victory in last October’s election that confirmed her as the successor to wildly popular Luiz Inacio Lula da Silva.

But clouds have loomed in recent weeks, particularly on the economic front. Inflation broke through the ceiling of the government’s target range in April even as the economy slows from last year’s rapid growth of 7.5 percent and Brazil’s strong currency causes headaches for exporters and policy-makers.

A bout of pneumonia that Rousseff suffered this month rekindled concerns about the health of the 63-year-old cancer survivor, whose government has yet to pass any major reform legislation through Congress.

The centre-left Rousseff’s legislative agenda includes business-friendly tax reform and a crucial law to determine revenue-sharing from the exploitation of huge oil reserves.

Her support in Congress faces a test on Tuesday when lawmakers are expected to vote on a new land law that has pitted farming interests against environmentalists who say it will cause a surge in deforestation. Newspapers have speculated that the government’s attempts to secure more environmental safeguards may be weakened by the Palocci scandal.