When a world-renowned banker and a congressman were busted last week as part of the biggest corruption scandal in Brazil’s history, the international spotlight naturally fell on the young tycoon, Andre Esteves.

Yet to long-time Brazil watchers, it was the detention of the legislator — a ruling party dealmaker named Delcidio Amaral — that marked a far more worrisome development for a country desperately seeking to contain a deepening financial and political crisis. His arrest not only delayed government efforts to resolve this year’s budget dispute, but it also dispelled a long-held belief that sitting lawmakers are all but untouchable because of a quirk in Brazilian law that affords politicians special treatment in criminal investigations.

Delcidio Amaral
Delcidio Amaral
Photographer: Evaristo Sa/Getty Images

While that can be seen as a true silver lining in the scandal — a sign that a legislative branch rife with alleged corruption will no longer be tolerated — it also injects a wild card into the crisis: Who will fall next and where will it all end? With the heads of both houses being investigated, it raises the possibility that Brazil’s political apparatus could unravel before ever passing the spending cuts and tax increases needed to restore investor confidence and ward off a new round of credit-rating downgrades.

“The idea that the political leaders have a plan to pull the country out of this crisis died because their very own future is at stake,” Gabriel Petrus, a political analyst at business consulting firm Barral M Jorge, said from Brasilia. “Never before in history have we had so little certainty about tomorrow.”

Pay-to-Play

Though the probe into a pay-to-play scheme between Brazil’s biggest builders and the state-run oil giant Petrobras has already led to the jailing of former politicians, Amaral became the first sitting federal lawmaker to be arrested since Brazil’s return to democracy in the 1980s. Brazilian law prohibits politicians from being investigated or arrested without Supreme Court approval. Amaral, like Esteves, has denied any wrongdoing.

When the news broke early on Nov. 25, it was Esteves’s arrest on suspicion he and the legislator tried to interfere with the testimony of a jailed Petrobras executive that caught the world’s attention. Within hours, shares of Esteves’s BTG Pactual, Latin America’s biggest independent investment bank, were down as much as 39 percent as his image was being splashed on TV broadcasts across the globe. The stock partially recovered by the time trading closed. Esteves resigned as CEO and chairman of BTG late Sunday after the Supreme Court ruled he’d be kept in jail indefinitely. On Monday, shares fell 9.5 percent to 20.69 reais as of 10:45 a.m. in Sao Paulo trading.

Widely regarded as one of Brazil’s most-talented bankers, the 47-year-old billionaire’s involvement for the first time raises the “earnest prospect of financial contagion,” political consulting firm Eurasia Group said. BTG clients withdrew 4.2 billion reais ($1.1 billion) from some of the bank’s most-liquid fixed-income funds on Nov. 25-26, data on the securities regulator’s website shows.

Brazil Nosedive

But it’s the 60-year-old, silver-haired politician who was key to helping Brazil pull out of its nosedive. Caught in a grinding cycle of recession and slumping tax revenues, Brazil’s government is grappling with a budget deficit that has soared to more than 9 percent of its gross domestic product, the widest in at least two decades. The real, meanwhile, is the worst-performing major currency in the world this year. Brazil hasn’t issued dollar debt for almost 15 months, as its borrowing costs have surged. Yields on the government’s benchmark 10-year bonds have jumped to 6.03 percent from 3.8 percent in September 2014, the date of the last dollar-debt sale.

Amaral, a former Petrobras executive known as a pragmatic straight-talker with a knack for dealmaking across party lines, has played a crucial part in some of President Dilma Rousseff’s most important policy victories this year. It’s that role that lies at the heart of insiders’ concerns: With no heir apparent to take over as the government’s chief negotiator in the Senate, the chances of passing new fiscal measures grow slimmer by the day.

‘No One is Listening’

“Everyone in Congress now is worried about saving themselves and not ending up like Delcidio, instead of focusing on whatever economic measure the government wants to pass,” said Fausto Gouveia, a money manager in Sao Paulo who helps oversee 850 million reais in assets at AZ Legan. It leaves Finance Minister Joaquim Levy, the key figure behind Brazil’s austerity push, “more and more isolated. He’s now the only one talking about fiscal measures, but no one is listening.”

Already, the decision on a crucial piece of legislation has been delayed. Voting on a new fiscal target that would allow the government to end 2015 with a wider deficit was pushed back to Tuesday. If Congress doesn’t pass the measure, the government risks breaching budget rules. That could spark a new round of requests to impeach Rousseff.

More than a quarter of the deputies in the lower house are facing criminal lawsuits or probes before the Supreme Court, according to Congresso Em Foco, an online
publication that specializes in legislative news. Among politicians being investigated by prosecutors for allegedly receiving kickbacks related to Petrobras contracts are the chiefs of both houses of Congress — Eduardo Cunha and Renan Calheiros. Cunha is the gatekeeper in charge of green-lighting the start of impeachment proceedings against Rousseff. Cunha and Calheiros have denied wrongdoing.

Ronaldo Caiado, the Senate leader for the opposition Democrats party, captured the mood in Brasilia after Amaral’s arrest when he addressed reporters last week. The country’s political leadership has become so discredited, he said, that “we should all just have the courage to resign and call for new elections.”

There was scant mention in the 10-minute press conference of fiscal austerity.