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Last Updated: Friday, 12 August 2005, 20:33 GMT 21:33 UK
Vote scandal hits Brazil markets
Brazilian President Luiz Inacio Lula da Silva
The scandals are tarnishing the clean image of Lula's party
Brazilian finance markets went on a rollercoaster ride on Friday amid fears a corruption scandal could engulf President Luiz Inacio Lula da Silva.

Brazil's real ended 1% down versus the dollar a day after sliding 3%.

And the Bovespa stock market index sank almost 3%, before regaining ground as Lula apologised for any wrongdoing.

It followed a 2% fall on Thursday when his presidential campaign manager admitted that he failed to declare political funding from abroad.

Duda Mendonca said the money had come from the man at the heart of the corruption scandal now tainting Lula's Workers' Party (PT).

He alleged that the payments had been channelled through the Bahamas by Marcos Valerio, an advertising executive with lucrative federal government contracts who has loaned millions of reais to the PT during the election campaign.

The money had not been used to fund the president's own campaign, he insisted.


In a televised address on Friday, Lula apologised to the nation, but said he "did not know" about the alleged corruption and that he felt betrayed. He insisted that those responsible would be punished.

His PT party came to power by claiming to represent a break with Brazil's traditional of dirty politics.

Brazil's national currency - the Real. File photo

But the constant drip of revelations - involving bribery of legislators as well as campaign finance irregularities - has been eating into its reputation, and the latest developments have brought the scandal to Lula's door.

"There was a consensus among investors that economic policy and the president would not be involved in the scandal," said Alexandre Sant'Ana, analyst at Arx Capital Management in Sao Paulo.

"But now you have new factors adding uncertainty to the market."

Lula's former cabinet chief, Jose Dirceu, and four PT leaders have already been forced to resign by the allegations. Congress began impeachment proceedings against Mr Dirceu on Thursday.

Reform programme

Lula had already seen his popularity wane amid perceptions that his expansive plans to create jobs and revitalise the economy have moved slower than many hoped.

However, he has won plaudits from the international financial community - including the IMF - for his tough stance on inflation and deficit reduction.

But members of the PT have grown restless with the lack of progress at tackling poverty, and on Thursday, the Senate voted for a higher minimum wage than proposed by the government.

Lula now faces a test within his own party over the direction of policy, ahead of the run-up to his bid for re-election in October 2006.

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