MercoPress. South Atlantic News Agency

Corruption ousts another close aide of President Lula

Brazil's Finance Minister Antonio Palocci, 45, architect of the government's orthodox market policies stepped down on Monday as a corruption scandal swelled around him.

Guido Mantega, president of Brazil's national development bank BNDES, will replace Palocci as the country's new finance minister revealed press reports from Brasilia and Sao Paulo. However the government would not comment on the report.

"Minister Antonio Palocci decided to ask the President of the Republic to be relieved of his duties. The minister is forwarding a letter to President Lula explaining his reasons," the Finance Ministry said in a brief statement.

The former Trotskyite and trained physician has since last August defended himself against allegations he took kickbacks from contractors when he was mayor of Ribeirao Preto, a city in Sao Paulo state, in the mid-1990s, but claims of further corruption acts flared again almost daily for the past two weeks.

A house caretaker said he repeatedly saw Palocci at a villa in Brasilia suspected of being used by Palocci's former aides to divide up the proceeds of extortion and to meet prostitutes. Pressure mounted on the government after a senior official in the Caixa Economica Federal, a state-owned bank, was found to have illegally disclosed the caretaker's bank record in an apparent attempt to discredit him.

The opposition Brazilian Social Democracy Party earlier this month called on Palocci to step down because of the allegations. Palocci on March 14 denied the allegations, saying he never went to the house and didn't know what happened there.

Speculation of Palocci's imminent ousting did not take markets by surprise because President Lula da Silva was forecasted to reshuffle his cabinet this week, looking ahead to the October presidential and Congress elections.

Palocci was President Lula da Silva closest and most trusted aide and is the most important figure to fall victim to a corruption scandal that rocked the government last year forcing the resignation of another strong man in the cabinet, Jose Dirceu.

The former cabinet chief was involved in a wider scandal of illegal campaign funding and vote buying in Congress by the ruling Workers Party.

Paloccci's exit happens at a crucial moment since campaigning for the presidential election next October is heating up and President Luiz Inacio Lula da Silva is widely expected to run for a second term. But eliminating a "serious liability" six months before "will help cut losses", said reliable sources from the ruling coalition.

Palocci's departure would leave the government more vulnerable to pressures to boost spending and probably lead to declines in financial markets, according to economists in Sao Paulo. As Lula's closest adviser, Palocci fended off a push by members of the ruling coalition to boost spending and scale back on repurchasing debt.

However Brazil's former President Fernando Henrique Cardoso today said the country's economic growth won't suffer from political turmoil sparked by the corruption allegations.

"The world sees Brazil as having a solid foundation'' Cardoso said in an interview in New York adding that "the economy is solid and doesn't depend only on the government''.

But Cardoso underlined that Lula seems "lost in command'' of the nation, saying he has done little to reinforce credibility in his government after accusations of corruption were made in Congress.

Since Lula took office in January 2003, Palocci pushed annual inflation rate down to about 5% from 15%, curbed the budget deficit and bolstered economic growth. Brazil's stock market index has tripled and the currency has climbed more than 60% against the dollar since then.