Judge orders Lula’s imprisonment and markets jump

Judge orders Lula’s imprisonment and markets jump

In a historic decision, the Brazilian Federal Supreme Court may have ended almost any chance for Lula to run for President in Brazil’s October presidential election. Two days after the decision and violating Judge Sergio Moro’s timeline for arrest, Lula turned himself in to the Federal Police. Markets reacted positively to the news, but the court’s decision will divide an already polarized country and lead to even more uncertainty ahead of the Presidential election.

The vote

On 5 April, the Brazilian Federal Supreme Court (STF) decided, by 6 votes to 5, to reject the habeas corpus petition of former President Lula in a trial that lasted almost 11 hours. Lula’s defense team filed a petition for habeas corpus so that he could avoid jail while appealing to the Superior Court of Justice (STJ) and STF.

Ministers Edson Fachin, Alexandre de Moraes, Luis Roberto Barroso, Rosa Weber, Luiz Fux and Carmen Lúcia voted against the habeas corpus, while ministers Gilmar Mendes, Dias Toffoli, Ricardo Lewandowski, Marco Aurélio Mello and Celso de Mello were in favor of the habeas corpus.

While the STF’s decision was deemed controversial, Raquel Dodge, the Prosecutor General of Brazil, commended the decision, stating that the significance of the case could potentially end impunity in Brazil. In a 2016 ruling, the STF decided that defendants convicted at the appeals court level could begin serving their sentence even if there was still an appeal left in the higher courts.

Lula’s defense has the right to one last appeal with the Federal Regional Court of the 4th Region (TRF-4), but the appeal cannot reverse the conviction and acquit the former president. The deadline to file the appeal is 10 April. In almost all circumstances, the court rejects this type of appeal because it is meant to delay the execution of the sentence.

On 5 April, the TRF-4 gave Judge Sérgio Moro the authorization to execute the sentence of former president Lula—sentenced to 12 years and one month in prison for passive corruption and money laundering.

Later that day, Judge Moro ordered the imprisonment of the former president. Lula had until 5pm on 6 April, to voluntarily turn himself in at the headquarters of the Federal Police in Curitiba. After missing the initial deadline and spending two nights in the metallurgical union in Sao Paulo, and continuing negotiations with the Federal Police, Lula finally turned himself in on 7 April.

After sentencing, Lula’s lawyers filed another petition with the STJ to request habeas corpus, claiming that there are still appeals left in the TRF-4 and therefore he should not be required to begin serving his sentence. The STJ denied the habeas corpus petition. After the denial, Lula’s team filed another habeas corpus with the STF which was also denied.

Presidential candidacy

The Workers’ Party (PT) acknowledges that, at this point, Lula’s candidacy is highly unlikely given that there are already talks that suggest that the Superior Electoral Court (TSE) will rule him ineligible under the Clean Slate Law. However, the PT stated they will register Lula’s name as a candidate even if he is in prison.

Political parties have until 15 August, to file the name of their Presidential candidates and the TSE has until 17 September, to accept or reject candidates.

Lula can also request a preliminary injunction to the TSE or a higher court that would allow him to run in the 2018 election. The Clean Slate Law provides someone the possibility of continuing to run for public office if there are still pending case appeals – for Lula that would be the STJ or STF.

PT’s goal is to maintain Lula’s candidacy, under any circumstance, until the TSE rules him ineligible. Only at that point will they begin to consider alternate options. Lula would likely support another PT candidate in the hopes that he can transfer his votes. At this moment, Fernando Haddad appears to be PT’s second choice.

It is unclear how Lula would be able to campaign behind bars. The party’s strategy is to show Lula as the victim of persecution in order to secure sympathizers. However, it would be more difficult for Lula to transfer his votes to Haddad from prison.

Market reaction

The day after the STF decision, the Ibovespa—Brazil’s main stock index—was up close to 2%. The previous day, the index closed down 0.31% due to investors’ concerns over the case. In addition, the dollar fell 0.63% against the real (R$ 3,31) after the decision. In the previous day, it hit a high of R$ 3,3678.

Lula’s prison decision caused these economic indicators to fall—mostly due to the impending political chaos. These political decisions tend to increase market volatility in the short term; however, in the medium term the economy remains at the level of recovery; and, most importantly, in the long term such decisions show the market and investors that Brazilian institutions are working, boosting foreign investment.

A race without Lula is preferable for the market, as he brings uncertainty for the economic future of Brazil given his populist background and the likelihood that he could reverse ongoing reform efforts, especially labor and pension, deemed crucial for fiscal adjustments and balance of public accounts. Lula could have reversed the recent regulation of Petrobras, which can no longer pursue exclusivity over pre-salt exploration and allow for an increase in foreign investment in the sector. Petrobras stock increased over 4% after the ruling.

Lula’s absence will also decrease the polarization that gave Jair Bolsonaro so much popularity. Without Lula, Bolsonaro will lose some support and the race will become wide open again, creating more opportunity for a centrist candidate.


Categories: Latin America, Politics

About Author

Lorena Valente

Lorena Valente is an Associate at Promontory Financial Group, an IBM company. Previously, she was a Consultant for the World Bank Macroeconomics and Fiscal Management Brazil Team. She has also held positions at the Inter-American Development Bank, Albright Stonebridge Group, and McLarty Associates where she performed political and economic risk analysis for Latin America, with a special focus on Brazil. She earned her MA in International Economics and Latin American Studies from Johns Hopkins SAIS, and her BA summa cum laude in Political Sciences from the George Washington University. Originally from Brazil, she speaks Portuguese, Spanish, and English. *Views and opinions expressed are the sole responsibility of the author and are not endorsed by Promontory.