Palocci faces accusations of participating in a scheme to bribe members of Brazil's National Congress and other politicians in order to buy support for the government's proposals. Markets had feared that the government would increase expenditures ahead of October's presidential election without Palocci, a defender of financial discipline; but his replacement, Guido Mantega, will likely maintain the current policies.

After several weeks of political pressure, Brazil's Finance Minister Antonio Palocci submitted his resignation to President Luis Inacio "Lula" da Silva on March 27. Guido Mantega, president of Brazil's National Development Bank and former minister of planning, budget and administration, has been named to replace Palocci.

Brazil's currency, the real, fell in recent days because of persistent rumors of Palocci's resignation. Palocci, who served as finance minister from the beginning of da Silva's administration, was seen as a sound economic manager committed to stable macroeconomic policies. Increasingly, elements of the ruling Workers' Party (PT) have called for increasing public expenditures ahead of October's presidential and congressional elections; Palocci had resisted those pressures. His replacement, Guido Mantega, will likely maintain Palocci's policies, since the president has publicly backed them.

The PT has faced several corruption scandals, beginning in the summer of 2005 when PT officials were implicated in an alleged scheme to bribe legislators in return for supporting da Silva's policies. Certain parts of the PT have pressured da Silva to increase public expenditures as a way to win back voters' favor. Da Silva, who has not been personally affected in the polls by the corruption scandals, continued to back Palocci. On March 16, a new witness testified that he had seen Palocci enter a house in which bribes were handed to politicians; these charges cast serious doubts over the finance minister's reputation.

Until then, two of Brazil's main parties, the Brazilian Social Democracy Party (PSDB) of former President Fernando Henrique Cardoso and the center-right Liberal Front Party (PLB), supported Palocci's policies. But after the new corruption allegations surfaced, the two opposition parties decided to demand Palocci's resignation -- and even his impeachment and trial. The loss of PSDB and PLB support in part prompted Palocci's resignation.

Mantega, Palocci's replacement, is an economist and sociologist who has been a close advisor to da Silva for at least a decade. Mantega had been in charge of putting together the PT economic program ahead of Brazil's 2002 presidential elections. By choosing a very close associate, da Silva is signaling that he will keep a close watch on the government's economic policy. In fact, da Silva likely will maintain disciplined public finances. The latest polls show da Silva well ahead of his challengers, Geraldo Alckmin of the PSDB and Anthony Garotinho of the Brazilian Democratic Movement. Thus, da Silva need not risk his image as a responsible administrator.