Analysis: Brazil's Rousseff weakened by scandal, Lula return

BRASILIA/RIO DE JANEIRO Fri Jun 3, 2011 1:41am EDT

Brazil's President Dilma Rousseff gestures during the launch of the Brasil Sem Miseria (Brazil Without Poverty) scheme at the Planalto Palace in Brasilia, June 2, 2011, to lift millions out of extreme poverty by 2014. REUTERS/Ueslei Marcelino

Brazil's President Dilma Rousseff gestures during the launch of the Brasil Sem Miseria (Brazil Without Poverty) scheme at the Planalto Palace in Brasilia, June 2, 2011, to lift millions out of extreme poverty by 2014.

Credit: Reuters/Ueslei Marcelino

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BRASILIA/RIO DE JANEIRO (Reuters) - As Dilma Rousseff coasted to Brazil's presidency last year, one doubt kept cropping up -- would the career bureaucrat be savvy enough to handle Brazil's dog-eat-dog political world?

After a turbulent few weeks that have shaken her young administration, the evidence is mounting that she isn't -- a failing that could have serious policy consequences as the government manages a slowing economy and high inflation.

Rousseff has emerged weaker from a scandal that has embroiled her influential chief of staff Antonio Palocci and revealed cracks in the coalition that exacerbated a defeat in Congress last week.

At the heart of the crisis are doubts over the leadership style of Rousseff, a former leftist militant who lacks the easy charm of her popular predecessor Luiz Inacio Lula da Silva.

Her advisors acknowledge she paid too little attention to political matters in her first five months in office, focusing more on technical and administrative issues.

That left the government vulnerable when revelations emerged last month that Palocci, whose position now appears at risk, had enjoyed a surge in his personal wealth that could result in a federal investigation. Rousseff's problems have been compounded by lingering health issues following her successful cancer treatment in 2009.

Aides say she has learned from her mistakes and is devoting her attention to defending Palocci -- a Wall St. favorite whose departure would likely rattle markets -- and patching up ties with her main coalition partner, the PMDB party.

But the risk is that Rousseff's agenda will get bogged down further as she is forced to give more concessions to lawmakers and her approval ratings likely fade along with Brazil's economic growth.

"The political cost for Dilma to govern could rise sharply," said Cristiano Noronha, an analyst for political consultancy ARKO.

One senior government official acknowledged that Palocci had been weakened by the scandal, but that Rousseff would not seek to replace him unless damaging new evidence emerges over his earnings as a consultant while he was a lawmaker.

"It's difficult to say whether the worst is over," the official said.

'POWER BEHIND THE THRONE'

Nothing illustrated Rousseff's problems more starkly than the sight last week of Lula striding back on to the political stage in Brasilia five months after he bowed out with stratospheric approval ratings.

He was there to scratch backs and soothe the concerns of disgruntled members of the ruling Workers' Party and the PMDB, which turned rebellious in a vote on a new forestry code over what it perceives as a lack of favors from the Planalto presidential palace.

He helped broker a truce between the coalition allies but the return of the former union boss, who has not ruled out running for president again in 2014, was a clear blow to Rousseff's efforts to shape her own presidency.

Rousseff did not request his help and was dismayed that he did not do it in a more low-profile way, another senior government aide told Reuters.

"Dilma has been gravely affected by Lula's interference in the crisis," said Amaury de Souza, a senior partner at consultancy MCM Associados. "It essentially showed that he is the power behind the throne, that he will come and sort things out whenever necessary."

Rousseff could well bounce back from the first major crisis of her administration. Lula himself was almost felled by a far bigger corruption scandal in his first term that led him to pay more attention to political coordination with Congress.

But the lower house defeat on the forestry bill last week was an ominous sign for a government that has yet to advance an agenda that includes bills to reform Brazil's sclerotic tax system and tap huge new oil reserves.

Rousseff's low-profile approach -- reinforced by health problems that have resulted in her taking frequent breaks -- has made her appear aloof in a political culture that thrives on personal contact.

PALOCCI AT RISK

Backed by a resounding election win and improved majorities in Congress, Rousseff made a conscious effort in the first weeks of her presidency to emerge from the shadow of Lula.

She projected an image of quiet diligence and efficiency, and insisted on filling prized political posts on "merit" rather than as political favors to coalition allies.

Lawmakers from the Workers' Party and the PMDB have complained of a lack of access to the president, whose minister responsible for relations with Congress is regarded as a political lightweight with little influence.

While the PMDB has not joined opposition calls for Palocci to face a congressional investigation, it is widely seen as using the case as leverage to wring concessions from Rousseff.

One government source said that Palocci's strong influence had slowed down decision-making in the first months of the administration and that his lower profile as a result of the scandal had helped to speed things up.

"Everything is suddenly going forward," he said. "This could be great for the government. If he's weaker, it will be much easier to get things done."

But most analysts believe the loss of Palocci, who is a talented communicator and a strong proponent of tough anti-inflation policies, would be a major blow to Rousseff.

"Palocci is seen as a guarantor for market-friendly economic policies. Doubts over him spell doubts over the economy," Noronha said.

Palocci's chances of survival may depend on whether the federal prosecutor's office decides in the coming days to open an investigation into the 20-fold rise in his wealth when he was a federal deputy from 2007-10.

While no specific allegations of wrongdoing have been made, the suspicion is that he used his consulting firm to peddle influence -- something he denies.

(Additional reporting by Brian Winter in Sao Paulo; Writing by Stuart Grudgings; editing by Kieran Murray and Will Dunham)

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