President Temer Bribery Report Is Crushing Brazil

U.S.-listed Brazilian stocks are crashing on Thursday on fears that another political scandal will result in the impeachment of President Michel Temer.

Temer, who ran on a platform of economic reform, has been in office for less than a year, but a new report by Brazilian newspaper O Globo has accused Temer of paying off a potential witness in an ongoing graft probe.

Temer was allegedly caught on tape discussing cash payments to former Brazilian speaker of the house Eduardo Cunha. The iShares MSCI Brazil Index (ETF) EWZ opened down more than 17 percent, giving up a large part of its 45 percent gain in the past year. Investors had been hopeful that Temer’s economic agenda would bring an end to a period of political turmoil in Brazil, but they are now concerned that the Temer presidency will simply be more of the same.

Crowds of citizens and members of Brazil’s congress are already calling for impeachment proceedings.

The Temer administration is denying the charges.

“President Michel Temer never solicited payments to obtain the silence of former deputy Eduardo Cunha,” the administration said in a statement. “He neither participated nor authorized any activity with the objective of preventing testimonies or cooperation with justice officials by the parliamentarian.”

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In addition to the EWZ ETF, the Brazil turmoil is dragging down the iShares MSCI Emerging Markets Indx (ETF) EEM by 2.6 percent on Thursday as well. Brazilian stocks make up roughly 7.4 percent of the EEM’s holdings.

The political uncertainty is also affecting other U.S.-listed Brazil stocks:

• Petroleo Brasileiro SA Petrobras (ADR) PBR down 14.3 percent
• Vale SA (ADR) VALE down 8.0 percent
• Itau Unibanco Holding SA (ADR) ITUB down 14.8 percent
• Banco Bradesco SA (ADR) BBD down 19.1 percent
• Gerdau SA (ADR) GGB down 11.2 percent
• Ambev SA (ADR) ABEV down 8.3 percent

Image credit: Anderson Riedel, Flickr