Resignation of Top Aide Raises Doubts about Brazilian President Rousseff

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Just six months after her inauguration, Brazilian president Dilma Rousseff is faced with political scandal as the resignation of her top advisors calls into question the strength of her new government.

Chief of Staff Antonio Palocci resigned last week due to growing suspicion that he earned money illegally through consulting contracts while a federal legislator and coordinator of Rousseff's presidential campaign.

The resignation of Palocci casts doubt upon the Rousseff government's ability to maintain Brazil's economic growth and rein in inflation due in part to heavy spending by the previous administration. Palocci, despite suspicions of corruption, was respected by investors and considered key to Brazil's economic stability.

Rousseff's replacement for her chief of staff, Gleisi Hoffman, has only four months experience in congress and has never served at any major governmental post. The timing of the scandal could not be worse, as the Brazilian economy appears to be slowing.

Brazil is the largest South American economy and was one of the quickest to recover following the 2008 global financial crisis. Gross domestic product growth returned to positive numbers in 2010, and in this past April, unemployment reached an all-time low of just 6.4 percent.

In 2010, the Brazilian economy grew by 7.5 percent, the largest increase since 1986, and Brazil overtook Italy as the seventh-largest global economy.

However, hat incredible rate of growth is unlikely to be matched this year. Concerns over rapidly rising inflation and wage gains for Brazil's massive labor force caused the Rousseff government to try and reduce government spending by 50 billion reais ($31.6 billion) this year.

The worry is that the Brazilian economy is overheating and will be unable to sustain such heavy growth. Rousseff's budget cuts remove all government stimuli implemented in the previous two years to spur economic growth following the financial crisis, as well as trimming the spending of all government ministries.

If investors become alarmed and the flow of foreign capital into the country slows, the exchange rate will weaken and inflation will continue to rise.

Palocci was perceived as an economic anchor within the government so his departure could cause some investors to doubt Brazil's economic policy going forward.

He was also a key negotiator for Rousseff, and in the wake of his departure she must attempt to rebuild the trust of the legislature while trying to navigate Brazil through a period of possible economic instability.

The scandal surrounding the resignation raises worries about Rousseff's lack of political skills as her response was seen as weak and reactive. Some opposition legislators are also calling for a full senate investigation into Palocci's finances and any connection they may have to Rousseff's political campaign.

Rousseff's current position is tenuous and she has had to call upon her massively popular predecessor and master negotiator, former president Luiz Inàcio Lula da Silva, to try to quell the crisis in congress.

If her government is seen as weak in the aftermath of Palocci's resignation, Rousseff's legitimacy could be cast in doubt.

Going forward, Rousseff will need to be perceived as strong and capable if she hopes to lead Brazil through this new period of economic turbulence.

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