Image: Palocci
Andre Penner  /  AP file
Former Brazil Finance Minister Antonio Palocci in a 2005 file photograph
updated 3/27/2006 11:19:14 PM ET 2006-03-28T04:19:14

Finance Minister Antonio Palocci, the architect of Brazil’s economic recovery and market-friendly fiscal policy, resigned Monday after becoming caught up in a political scandal.

Palocci sent a resignation letter Monday evening to President Luiz Inacio Lula da Silva and Silva accepted the resignation, said presidential spokesman Carlos Villanova.

Silva tapped former Planning and Budget Minister Guido Mantega to replace Palocci as head of the Finance Ministry. Mantega now heads Brazil’s National Development Bank, and was a top Silva adviser along with Palocci during the 2002 campaign that made Silva Brazil’s first elected leftist president.

Mantega told reporters he would stay the course on Brazil’s monetary policy aimed at paying down debt and taming inflation. Brazil is Latin America’s largest econony.

Under the policy headed by Palocci to reverse boom and bust economic cycles and spark slow sustainable growth, “Brazil has become a country that is respected abroad,” Mantega said.

Cash by the suitcase
Palocci faces accusations he frequented a house in Brasilia where lobbyists held parties with prostitutes and money arrived by the suitcase, possibly for political payoffs.

He denies the accusations.

The scandal was low-level until last week, when bank records from the caretaker who placed Palocci at the house were leaked from the state-owned Caixa Economica Federal.

The bank’s president, Jorge Mattoso, told police Monday he personally handed the bank records over to Palocci, whose ministry oversees the bank. Mattoso was charged by police with violating bank secrecy laws, the government’s official Agencia Brasil news agency reported.

Palocci denies ever setting foot in the house, but analysts and opposition party leaders said he would be forced to resign if he was linked to the release of the bank records.

Before the resignation announcement late Monday afternoon, uncertainty about his future in Silva’s administration and who might be named to replace him roiled financial markets.

Helped lead economic turnaround
Palocci, a medical doctor by training and former small city mayor, was crucial in generating market support for Silva because investors initially feared he would drive Brazil into an economic meltdown amid populist economic policies after taking office in 2003.

But investors changed their mind and started pouring money into Brazil after he demonstrated that Brazil was committed to economic policies embraced by financial markets and Wall Street.

Palocci’s resignation should not hurt Brazil’s credit rating or change underlying economic policies or conditions in Latin America’s largest economy, said Lisa Schineller, Standard and Poor’s Latin America sovereign ratings director.

“We have a broad view of Brazil and its government,” Schineller told reporters after an investment seminar Monday in Sao Paulo. “Finance Minister Palocci represents prudence but, in our view, that’s government policy, not a personal policy of Palocci’s.”

Brazil’s credit rating is currently two notches below investment grade, with a stable outlook.

Stock market affected
Brazilian stocks fell as much as 1 percent in intraday trading as investors worried about Palocci’s future, but closed up 0.5 percent after news emerged about his resignation letter and Mantega as a likely replacement. Analysts said Palocci’s offer helped clear the air regarding Brazilian economic policy.

“What the market was really looking for was an end to the suspense over Palocci’s position in the government,” said Mauro Giorgi, adding that Mantega’s appointment should sooth markets on Tuesday.

Many analysts initially believed Palocci would survive the scandal because it seemed to be a minor controversy, with no smoking gun.

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