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Brazil reeling in wake of `Waldomiro Affair'

Brazil's left-leaning government sought to control the damage from its first significant corruption scandal on Monday, dismissing opposition calls for a congressional investigation and promising to uncover the facts itself.

The so-called "Waldomiro Affair" has rattled investors and brought calls for the dismissal of Jose Dirceu, powerful chief of staff in President Luiz Inacio Lula da Silva's government.

The scandal broke on Friday when the weekly magazine Epoca reported that an adviser to Dirceu had collected campaign funds for Lula's Workers Party in 2002 in return for political favors.

The official, Waldomiro Diniz, was fired the same day.

"The government has reacted, it has launched an investigation," Workers Party head Jose Genoino said on Monday. "A congressional investigation makes no sense."

But opposition figures demanded a probe.

"Waldomiro was in the Planalto Palace, the cathedral of power. Now, are there more Waldomiros in the government? That's what a commission must investigate," said senator Jose Agripinio Maia of the rightist Liberal Front (PFL).

Dirceu told congress that no wrongdoing had been found in the current government, which took power in January last year.

If a congressional investigation is launched, it could hog the political limelight and make it hard for congress to pass the economic reforms that are a keystone of Lula's agenda.

"In Brazil, a congressional investigation is not aimed at investigating but a political instrument to harm the government as much as possible and that can reduce governability and could paralyze important projects to preserve confidence," said Mailson da Nobrega, a former finance minister.

In the financial markets, the currency backtracked slightly and stocks tumbled on Monday on fears that the scandal might force the government's economic agenda to the back burner.

"It's hard to convince foreign investors that this is a serious country and a safe place to invest when stories like this emerge," said Fabio Watanabe, portfolio manager at Fibra Asset Management in Sao Paulo.

So far, the government has won approval from Wall Street for its pragmatic policies in the fight to turn around Latin America's largest economy, but successful reforms are crucial to long-term-stability, analysts say.

However, the timing of the scandal might favor Lula, political analyst David Fleischer said.

Many legislators are already leaving Brasilia for the Carnival holidays, when the country shuts down.

They will not return until the end of the month, by which time the issue could have gone off the boil.

It still could tarnish the clean image of the Workers Party, which in its years in opposition often denounced the corruption which infested Brazilian politics.

Diniz was reported to have received funds from an illegal gambling operation for the Workers' Party campaign.

Brazil's biggest recent scandal was in 1992, when President Fernando Collor was hounded from office amid impeachment proceedings over corruption allegations.

Some minor scandals have hit the Lula government, such as former Social Assistance Minister Benedita da Silva, who used public funds to fly to a religious meeting in Argentina last year.

She was fired in a cabinet reshuffle last month.
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