Brazilian police plan to question former president Luiz Inácio Lula da Silva over a widening kickback scandal at the state-run oil company Petrobras that has ensnared politicians, damaged the economy and shaken the confidence of a nation.



The popular Workers party figurehead, who is best known by his nickname Lula, is the most senior leader yet to be dragged into the “Lava Jato” corruption investigation.



The probe is a fresh blow to his successor as president, Dilma Rousseff, who is fighting off impeachment threats from Congress, recession and the news this week that Brazil’s credit rating has been cut to junk status.

According to a motion filed with the supreme court, federal police suspect Lula may have benefited from the scheme to channel billions of dollars from overinflated Petrobras contracts to individuals and political campaign coffers over at least 10 years.

Lula may have “gained advantages for himself, for his party … or for his government by sustaining a base of political support through illicit business”, investigators wrote in their request.

They cited testimony provided in a plea bargain by Paulo Roberto Costa, a former Petrobras executive, who told police it was “very unlikely” that Lula and Rousseff were unaware of the kickbacks.

Lula, who was president from 2003 to 2011 has denied wrongdoing. Neither he nor the president have been charged with any crime, but the Petrobras scandal is on such a scale that it has tainted the entire political establishment and trapped several close associates – as well as political enemies.

Last month, police arrested Lula’s former chief of staff José Dirceu – a founder of the Workers party – along with his brother and six others. In March, the Worker party treasurer, João Vaccari Neto, was charged with corruption and money laundering.

Polls suggest Lula remains Brazil’s most popular politician, but his reputation has come under unprecedented attack. In addition to the latest investigation related to Petrobras, the federal prosecutor’s office announced in May that it was opening a criminal investigation against him for influence peddling on behalf of the construction firm Odebrecht for projects financed by Brazil’s state development bank.

The allegations highlight a wider crisis of confidence in Brazil, which until recently could do no wrong, but now seems unable to put a foot right.

Under Lula’s presidency, Brazil was the envy of the world. Thanks to a global commodities boom, its economy was surging forward at clip of 7.5% in 2010. Income redistribution policies were helping millions to move out of poverty.

Ratings agencies upgraded the country’s credit to investor-level – a move that Lula declared as the mark of a “serious country”.

Brazil also won the right to host the World Cup and the Olympics. Polls suggested Lula was the most admired politician in the world.

Today, however, the former “emerging giant” appears to be submerging. A decline in demand from China has punctured the economy, which deflated by 1.9% during the second quarter – the country’s worst downturn in 25 years.

On Wednesday this week, the rating’s agency Standard & Poor stripped Brazil of its investment-grade status, prompting a fresh fall in the real – which was already one of the worst performing currencies in the world this year.

Soon after, Petrobras – Brazil’s biggest company and the world’s most indebted firm – was also declared unworthy of investment.

The political outlook is similarly bleak: congress is splintered; hundreds of thousands of protesters have taken to the streets to express their frustration. Rousseff is the most unpopular president since the end of the military dictatorship in 1985.

The ratings downgrade could make things worse as it may add to the pressure on the finance minister, Joaquim Levy, to introduce tighter austerity measures. That would be dangerous, according to Mauro Osorio, a professor at the Federal University of Rio de Janeiro.

“There is a huge crisis in the country, which is more political than economic. That creates enormous uncertainty. In this scenario, the private sector does not invest and people tend to restrict consumption. Should the government cut spending heavily, that could widen the vicious circle,” he warned.

While Rousseff huddled with ministers to draw up new economic policies, Lula took a combative public role. He declared the ratings downgrade “means nothing” and slammed Standard & Poor for their double standards.

That, however, was before police said they wanted to question him as part of the Lava Jato investigation. Now, it seems, he and the president are in the midst of a perfect storm of political, economic and judicial challenges.