Telecom Scandal Rattles Brazil Market

SAO PAULO, Brazil -- Already weakened by concern over troubling economic developments in neighboring Argentina, Brazilian markets are reeling following new developments in a scandal over the government's handling of the privatization of the country's telecommunications monopoly.

After a nearly 5 percent loss Monday, stocks fell 4.95 percent on Tuesday on the publication of previously unreported telephone conversations between Cabinet ministers and President Fernando Henrique Cardoso. The conversations suggest Cardoso's administration used public institutions and public financing to improperly manipulate the July 1998 auction of pieces of the monopoly, Telebras.

The transcripts, from 46 tapes, were published in Folha de S. Paulo, Brazil's largest newspaper, and the tapes were released on the newspaper's Internet site. Copies quickly spread to radio broadcasts.

They reveal the government apparently worked in conjunction with a Rio de Janeiro-based investment company with close ties to high-ranking officials to enable a consortium led by the company to purchase part of Telebras. The consortium ultimately lost in its bid to buy a prized subsidiary of Telebras, although it succeeded in purchasing other parts of the phone system, which was sold for a total of more than $22 billion.

The allegations are not new, having first been revealed at the end of last year. Yet the tapes released on Tuesday indicate Cardoso, until now untouched by the scandal, may have become personally involved. In one tape Cardoso, asked by a top aide for permission to invoke the president's influence to convince a powerful pension fund to enter one consortium, responded, "Don't have doubt.''

Angry over the tapes, Cardoso released a statement from the presidential palace that said reports about them were "sensationalist'' and "obscured the fundamental facts.'' But the government did not refute the veracity of the conversations and said they were probably recorded illegally. It was unclear Tuesday night how the newspaper obtained the tapes.

"At the very least this damages the dignity of the presidency,'' said Celso Bandeira de Mello, a law professor who has often criticized official economic policies and who was disparaged as a "monkey'' by one government minister in the tapes. "In thesis there is the possibility the president broke the law by not being neutral.''

Others said it was doubtful that Cardoso or his ministers broke any laws. "The possibility of the president personally gaining anything from all of this is quite small,'' said Ives Gandra da Silva Martins, another well-known legal scholar.

The government's position on the scandal since it first began to unfold in November is that its role was in the public's best interest for public institutions to be used to affect the outcome of the privatization auction so the national treasury could collect as much money as possible from the sale of Telebras.

"We did what we could to ensure a successful privatization,'' Jose Pio Borges, the current president of the National Development Bank, told reporters in Rio de Janeiro.

Even though the Cardoso administration has successfully managed the world's most wide-reaching privatization program since 1994, auctioning off everything from railroads to electric utilities, the uproar over the tapes highlights how large a role the government still plays in the economy. Banco do Brasil, the country's largest bank, is still state-controlled, as is the Petrobras oil conglomerate and the pension funds for the two companies, which together with other government-linked pension entities form the largest domestic source of investment capital.