BRASILIA (Dispatches) -- Brazilian markets plummeted on Thursday as allegations that President Michel Temer condoned bribes to silence a key witness deflated investor optimism about the prospects for his ambitious pension and labor reform agenda.
Brazil's benchmark Bovespa stock index closed 8.8% lower, its biggest daily decline since the 2008 financial crisis. Trading had been halted for an hour after a 10% drop triggered a circuit-breaker mechanism.
Blue-chip stocks such as lender Itaْ Unibanco Holding SA and state-controlled oil company Petrَleo Brasileiro SA dragged the index lower. The declines slashed $7.7 billion off the market values of Itaْ and Petrobras.
Temer was caught on tape encouraging a prominent executive to pay a monthly fee to keep jailed former House Speaker Eduardo Cunha silent in the country's biggest-ever graft probe, sources said on Wednesday, confirming a report in newspaper O Globo.
The report threatened to torpedo a two-year rally in Brazilian assets as traders quickly reassessed the chances of success for efforts to streamline the country's social security system and reform labor regulations. As a result, policymakers' attempts to curtail the growth of public debt and foster economic growth may also be in doubt.
Strategists at J.P. Morgan Securities and UBS Securities downgraded their recommendations on Brazilian equities to "neutral," citing increased risks to the implementation of structural reforms.