By Jamie McGeever
BRASILIA (Reuters) - Brazilian President Jair Bolsonaro and his economy minister tried to rescue their contentious pension reform bill on Wednesday, as deepening political chaos surrounding the government's signature proposal slammed Brazilian markets.
Bolsonaro again warned that failure to overhaul the creaking social security system would bankrupt the country, while Economy Minister Paulo Guedes said he would quit if the president or Congress chose not to follow his policy recommendations.
Brazilian financial assets tumbled. The real fell to a nearly six-month low against the dollar, while the Bovespa stock market slumped 3.6 percent. Bond yields and market-based interest rates also climbed steeply.
The president, who had come under fire for keeping his distance from Congress, waded into the debate after a bruising 24 hours for his government that highlighted the uphill political battle required to pass an ambitious legislative agenda.
Guedes told a Senate committee that Bolsonaro's government was failing to convince lawmakers of the merits of his plan to save over 1 trillion reais ($250 billion) over the next decade, squandering the political capital won in the elections.
"If the president supports the things that I believe can help Brazil, I will be here. But if neither the president nor the House nor anyone else wants that, I will go back to what I was doing," Guedes told the Senate Economic Affairs Committee.
Guedes had skipped a congressional hearing on the pension proposals on Tuesday, while a bloc of 11 political parties demanded the removal of changes affecting rural, elderly and disabled Brazilians.
A measure on Tuesday by lawmakers to seize more control over the federal budget in coming years also received near-unanimous approval by the lower house of Congress.
Rodrigo Maia, who as speaker of the lower house is in charge of guiding the pension bill through Congress, on Wednesday denied that vote handicapped the government.
Bolsonaro said he would meet with Maia next week to discuss the growing crisis, adding that the powerful lawmaker was shaken by personal matters.
Bolsonaro himself, who nearly died from a stab wound during last year's election campaign, said in a TV interview that his health had impaired his work leading the government.
On Wednesday, after he underwent a medical checkup, the Sao Paulo hospital that operated on him said he was in "excellent clinical condition."
The Brazilian real on Wednesday plunged 2.3 percent to close at 3.9531 per dollar. After spot trading but while Guedes continued his contentious Senate hearing, the currency slipped in the futures market past 4.00 per dollar.
After markets closed, Brazil's central bank stepped in to slow the slide, announcing a Thursday auction to sell $1 billion in the spot market with an agreement for future repurchase.
The benchmark Bovespa stock index nosedived 3.5 percent, and has now shed 8.5 percent in just over a week.
Interest rate futures jumped as investors bet a delay and dilution of fiscal reforms may force the central bank to raise interest rates. The April 2020 contract rose to 6.75 percent, meaning a rate hike within a year is fully discounted.
"We still think 'sausage making' is in full process, where any headlines will lead to volatility in the real, and setbacks like this could continue in the coming months," said Citi strategists in a client note on Wednesday.
"We remain on the sidelines," they said.
