Brazil's Rousseff tries to move on after aide quits

BRASILIA Wed Jun 8, 2011 2:57pm EDT

Brazil's President Dilma Rousseff gestures during a news conference after a meeting with Venezuela's President Hugo Chavez at Planalto Palace in Brasilia June 6, 2011. REUTERS/Ueslei Marcelino

Brazil's President Dilma Rousseff gestures during a news conference after a meeting with Venezuela's President Hugo Chavez at Planalto Palace in Brasilia June 6, 2011.

Credit: Reuters/Ueslei Marcelino

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BRASILIA (Reuters) - Brazil's President Dilma Rousseff struggled on Wednesday to overcome the loss of her most powerful minister, as new questions emerged over who will lead the fight against rising inflation and rebuild her government's strained relationship with Congress.

Investors mostly took the departure of Chief of Staff Antonio Palocci in stride a day after he quit in a drawn-out scandal over his sudden enrichment and acquisition of a multimillion-dollar home while he was a lawmaker.

Brazil's currency and stock market edged lower in line with global markets, reflecting the view that there will be no major change to the stable, slightly left-of-center policies that have made Brazil's economy one of the world's brightest stars.

Over the longer term, though, Rousseff's young government will likely suffer from the loss of Palocci, an anchor of fiscal discipline and rigorous inflation fightings at a time when Brazil's red-hot economic growth has pushed prices above the government's official target range.

Even Rousseff's allies recognized Palocci's departure essentially signals a new phase for her government, which enjoys high popularity ratings but has struggled to push economic reforms through Congress.

"Now she will establish a new way of governing," said Senate President Jose Sarney, a member of Rousseff's main coalition partner, the PMDB party.

Palocci, an experienced former finance minister, was the main champion of $32 billion in budget cuts this year to help prevent Latin America's largest economy from overheating. He also favored allowing Brazil's currency to rise to help subdue inflation, despite the painful effect on local industry.

His replacement is Gleisi Hoffmann, a 45-year-old first-time senator whose most high-profile previous job was finance director for a hydroelectric dam. She indicated she will have a much narrower and more technical role than Palocci, raising the likelihood that other senior officials such as Finance Minister Guido Mantega will become more powerful.

COMPROMISES AHEAD

The absence of an accomplished political operator in Rousseff's inner circle may exacerbate her problems with Congress, particularly if her approval ratings drop as the economy slows this year and inflation -- now running at an annual rate of 6.55 percent -- remains high.

"(Hoffmann) doesn't have Palocci's experience, she doesn't have the leadership that Palocci had, the confidence that he transmitted to a lot of people, nor the kind of political skills that he demonstrated," said Sergio Guerra, a legislator and head of the PSDB opposition party.

Rousseff may make further changes to her government to try to fill that void. She was expected to meet on Wednesday with her minister of institutional relations Luiz Sergio, who media speculated would be replaced after criticism that he had been an ineffective interlocutor with Congress.

The former leftist militant may now have to compromise more with her allies, possibly slowing a reform agenda that includes business-friendly tax changes and a bill to clear the way for exploitation of huge new oil reserves.

The past few weeks have also raised doubts over her authority after popular former president Luiz Inacio Lula da Silva, her political mentor, returned to the public stage to try to broker a solution to relations with Congress.

Aides acknowledge Rousseff did not pay enough attention to coalition relations in her first months, reinforcing perceptions of her as aloof.

"What no one realized was that this would cause such damage in so little time to the president's authority," the Folha de Sao Paulo newspaper, which first broke the story about Palocci's wealth, said in an editorial on Wednesday.

Markets may end up paying more attention on Wednesday to Brazil's central bank, which is expected to raise its benchmark Selic rate by 25 basis points after market close to 12.25 percent to try and slow the pace of rising prices.

"Dilma has no political operator to hold her coalition together, to fend off power-hungry allies," said Jose Luciano Dias, analyst with CAC political consultancy in Brasilia.

"This crisis is not over."

(Editing by Brian Winter and Todd Eastham)

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