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Government bribery scandal rocks Brazilian markets

Brace yourselves.

Brazilian markets have suffered a sharp sell-off, with the real wiping out its gains for the year and stocks set to tumble after the country was hit by yet another corruption scandal.

At publication time, the real tumbled over 8 per cent to 3.3500 against the dollar as investors dump the currency following allegations president Michel Temer approved bribery payments for the country’s disgraced former speaker of the lower house. It is the biggest one day fall since 1999, according to data from Bloomberg.

Yields on the country’s 10-year dollar denominated debt have soared by half a percentage point to almost 5 per cent. (Yields rise when prices fall.) Stock futures point to a 10 per cent slump for the Bovespa stock index which has yet to open on Thursday.

Analysts fear the political turmoil will threaten the already unpopular presidency of Mr Temer who took office nine months ago following the impeachment of his predecessor Dilma Rousseff.

“The main economic risk at this stage is that this new turn of event distracts the political attention away from the pension reforms”, said Koon Chow, foreign exchange strategist at UBP.

Brazil’s central bank announced today it would offer swaps in a bid to help shore up the currency.

Michael Every, senior strategist at Rabobank said: “The lack of governability – at least until the uncertainty about the country’s leadership is solved – will push back economic reforms, and even if discussions on reforms do return later in this presidential term, their timing is also highly uncertain.”

Charts via Bloomberg