LATIN AMERICA : Scandal Charges Sap Reform Efforts of Brazil’s President

As scandal engulfs President Fernando Collor de Mello’s government, doubts are growing about his ability to implement sweeping economic and political reforms designed to pull Brazil out of a decade of recession and runaway inflation.

Collor, who has tried to make the fight against Brazil’s traditionally corrupt politics a cornerstone of his presidency, now faces calls for his resignation or impeachment. A congressional investigation into influence-peddling by Paulo Cesar Farias, his former campaign manager, has turned up evidence of compromising financial links between the two men.

In particular, there is evidence that Farias, accused of using his connection with Collor to secure business deals, has been paying some bills at Collor’s private Brasilia residence.

While the 42-year-old president vehemently denies any wrongdoing and blames political opponents for “fabricating fantasies,” the Brazilian press offers new “revelations” almost daily. Doubts about Collor’s probity, which began soon after he took office in March, 1990, have grown, energizing critics of his free-market reforms.

With no strong political base in Congress, with Collor’s allies wavering and with legislators preoccupied with their investigation, legal changes needed to meet domestic and international commitments are in danger of stalling.

Powerful unionists upset at privatization and industrialists afraid of losing subsidies and privileges have found a common interest in attacking Collor and are sharpening their knives. The Brazilian Workers Party has staged mass rallies and covered walls in major cities with graffiti saying Collor Fora! (Collor Get Out!)

Brazilian economic and political analysts now warn that constitutional amendments needed to help Brazil meet the conditions of structural adjustment plans with the International Monetary Fund could be derailed, especially if key congressional allies desert the president.

J. P. Morgan, the U.S.-based investment bank, has warned its clients to expect “acute political uncertainty.”

Yet at the same time, the cloud hanging over Brazil may have a silver lining, some analysts say. While little good can come from the crisis in the short term, the strangely calm response of the economy, despite warnings of future instability, may suggest that Brazil has experienced some fundamental change.

Inflation is up, from 18.4% a month in April to more than 22% a month today, but it remains well under the 70% a month when Collor took office.

The crisis has not stopped Brazil’s attempts to patch up its problems with foreign creditors. Economy Minister Marcilio Marques Moreira on Thursday completed a deal to restructure the country’s $44-billion commercial bank debt.

The deal gives Brazil a significant break on collateral and interest.

The crisis has not brought the usual threat of military intervention.

“Collor is damaged,” said Everardo Rocha, a Brazilian social anthropologist. “But there’s no rioting in the streets, no instant economic collapse and the army plans to stay put. We may be experiencing a miracle: the first time in Brazilian history where politics have been separated from economics and there’s a chance for reform without fear.”