Former Brazilian President Luiz Inacio Lula da Silva — arguably the most celebrated Latin American politician of his generation — was just convicted of corruption and sentenced to 10 years in prison.
This news changes everything for the 7th largest economy in the world.
Lula, as he is known around the world, led Brazil during its economic boom. He served two terms as president from 2003 to 2011 before handing the reigns of power to fellow Workers Party (PT) member Dilma Rousseff. Rousseff was narrowly reelected in 2015 before being impeached in her second term.
Lula and Rousseff were both brought down in the same anti-corruption wave, and at the center of this wave is one company — Brazilian quasi-state oil company Petrobras. Starting in 2014 investigators uncovered massive government corruption in the company, and carried out a sting called Operation Car Wash to bring those responsible to justice. Politicians and businessmen across the country have been swept up in the scandal.
And that brings us to Lula, who on Wednesday was convicted of accepting $US1.2 million worth of bribes from engineering company OAS SA in exchange for Petrobras contracts.
This was the first of five trials Lula must face, and he will likely appeal this conviction. Still, this changes everything in Brazil’s 2018 presidential election. If Lula had run he would have won handily.
“Until now, Lula had led most polls of voting intentions in 2018. A Datafolha survey from last month gave him 30% of the vote – more than double that of his nearest challenger,” wrote analysts at Capital Economics following the news.
So this leaves the field for president wide open. The country’s current president (Rousseff’s former vice president), Michel Temer, was also charged with corruption last month and is incredibly unpopular in the country.
“Given that a Lula victory would quash any hopes of much-needed economic and fiscal reforms, this would have been market-negative,” Capital Economics wrote. “It follows that today’s ruling is likely to give a boost to Brazilian markets. Expect the real to strengthen and long-dated local currency bond yields to drop over the next 24 hours.”
The reforms Wall Street is looking for mostly involve cutting the country’s budget and government workforce, but the fact that Lula’s out of the race doesn’t make those things a given. Left in the running are far-right congressman Jair Bolsonaro and environmentalist Marina Silva. If the latter gains ground, expect some Wall Street hand-wringing.
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