Brazil's president acts over scandal

Scandals threaten to undermine Cardoso's government

By Tom Gibb in Sao Paulo

The Brazilian President, Fernando Henrique Cardoso, has abolished two government development agencies at the centre of corruption allegations thought to involve more than $1bn.

Federal police found that many of the projects funded by the regional development agencies for the Amazon and the impoverished north-east of Brazil were only fronts set up to steal the cash.

The scandal is one of several threatening to undermine President Cardoso's four-party government alliance, and could force out one of Brazil's top politicians - the newly appointed President of the Senate, Jader Barbalho.

Investigations are centring on several former business associates of the Senate president, and even his wife.

Market nerves

President Cardoso has said that Mr Barbalho is one of several politicians who should be made to leave congress.

He says the national clamour over the case lay behind his decision to abolish the two development agencies.

They will be replaced by smaller, more tightly controlled organisations.

However, the government's image is also suffering badly because of the case.

Government auditors were reporting the fraud in the development agencies five years ago, but nothing was done until this year.

Government opponents now want to set up a special congressional commission to investigate corruption inside President Cardoso's administration.

This is making the markets nervous because it would almost certainly divert attention from passing market reforms.