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Although Brazil has a history of government corruption, 2014 had seen the imprisonment of the key figures in the Mensalão “Big Monthly” payments scandal in 2003 that enveloped key figures in the Lulu administration. After more than 10 years, powerful politicians and party officials involved were finally serving prison sentences, and the impunity that Brazilian political figures have traditional enjoyed seems to be gone. But the Petrobras scandal is much more serious than the Mensalão, both because of its impact on key sectors of the economy and because it involves foreign bond and shareholders in Petrobras, as well as foreign companies that were allegedly involved in the kickbacks.

The Petrobras scandal is the entirely predictable result of the interventionist economic policies adopted by the Lula-Dilma governments. With regard to the Pre-Sal, these policies mandated Petrobras as the sole operator and imposed a 30 percent local content requirement on equipment and construction associated with the development. This limited competition for contracts to Brazilian suppliers inflated costs and allowed Brazilian companies to form a bidding cartel, enabling the Petrobras directors to demand bribes for awarding contracts.

Petrobras’ problems have come at a time when growth in the Brazilian economy has stalled because of the decline in resource prices. For example, the price of iron ore, a major export, has fallen by 47 percent this year and shares in Vale have declined by over 37 percent. Economic growth over the past decade has been driven by a boom in consumer spending, as lower and middle income classes received higher incomes and a decline in interest rates allowed them to purchase consumer durables. The resulting increase in consumer debt levels combined with a slowing economy has brought the consumer spending boom to an end.