Brazilian markets are getting rocked amid another growing political scandal

pulse

May 18, 2017 3:37 PM

The Brazilian newspaper O Globo reported that there was a recording of President Michel Temer approving a payment to jailed former house speaker Eduardo Cunha.

Brazilian President Michel Temer.

Brazil's markets are getting slammed amid another emerging political scandal.

Shares of the exchange-traded fund that tracks Brazilian stocks was down by about 16.6% in premarket trade on Thursday.

The Brazilian real was down by 7.1% at 3.3598 per US dollar as of 9:06 a.m. ET.

The Brazilian newspaper O Globo reported late Wednesday that a recording existed of President Michel Temer approving a payment intended to make jailed former house speaker Eduardo Cunha remain silent in the country's biggest-ever graft investigation.

Temer's office released a statement denying the allegations.

Brazilian markets climbed over the past year as investors looked favorably upon the Temer administration's reform program. But some analysts now argue that the latest allegations could lead to shakier markets amid concerns about the country's overall economic agenda.

"The accusations call into question Temer's economic program and the political stability that had emerged in recent months," Marc Chandler, the global head of currency strategy at Brown Brothers Harriman, said.

"The consequences for Brazil could be wide-ranging. Pension and labor market reforms, the former particularly key, could both be under threat," Craig Botham, an emerging-markets economist at Schroders, said in an emailed statement.

"Economic confidence had been on the rise in Brazil following the removal of former President Dilma, and this appeared to have led to a tentative recovery in economic activity. This could now surely be at risk," he added. "Against this, the central bank will need to weigh the likely weaker activity the economy faces if reforms fall flat and Temer is either ejected or spends the rest of his term battling for survival."

The latest allegation is just one part of a larger three-year-long corruption investigation dubbed "Operation Carwash." More than 80 people have been charged with bribery and money laundering, according to figures cited by CNN. Temer has repeatedly denied wrongdoing.

The president's approval rating was about 10% ahead of these latest allegations.

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