Brazil government worried arrest could hamper spending cap vote

By Anthony Boadle and Lisandra Paraguassu

BRASILIA (Reuters) - Brazil's government fears that fallout from the arrest of the lower house's former speaker could cost it votes needed on Tuesday to convincingly pass a spending cap that is the pillar of its fiscal discipline plan, government aides said.

Aides to President Michel Temer said he was working the phone on Friday to urge lawmakers to return to Brasilia to ensure the spending ceiling wins more than the 366 lower house votes it received in first round vote.

A lower vote could signal to markets that Congress' commitment to plugging the fiscal deficit is faltering and undermine a surge in Brazilian asset prices fueled by confidence that Temer will put government books in order.

The arrest on Wednesday of the speaker Eduardo Cunha on corruption charges, while expected, sent shockwaves through Congress. Sessions came to a halt and Congress emptied when Cunha's arrest was reported.

"At times of confusion like this, many congressmen 'go under' and prefer to stay in their districts," a Temer aide told Reuters on condition of anonymity because of the sensitivity of the matter. "Our job is to guarantee that there will be a quorum on Tuesday."

If lawmakers turn up in force, the constitutional amendment limiting growth in public spending to the inflation rate should sail through the second vote in the House and move on to the Senate, where it is expected to win approval before year-end.

Temer, who replaced impeached leftist President Dilma Rousseff in August, would then face the tougher task of reforming Brazil's costly pensions system, one of the main factors that drove the fiscal deficit above 10 percent of Gross Domestic Product last year.

Congressman Pauderney Avelino, a Temer ally and leader of the center-right Democrats party, which holds the speakership, said Cunha's arrest would not derail the reform agenda.

"There is political stress here due to relations that Cunha had with so many lawmakers but it won't spoil the vote on the spending cap, or the other fiscal measures we have to adopt," he said.

Brazil's economy is expected to pull out of a two-year recession in the first quarter. Inflation is also slowing and the Central Bank lowered interest rates on Wednesday for the first time in four years.

Yet concerns remain that Brazil's biggest ever corruption scandal, surrounding political kickbacks on contracts with state-oil company Petrobras, could reach Temer and undermine confidence in his efforts to revive the economy.

Leonardo Barreto, head of Brasilia-based political consultancy Factual, said Cunha bolstered his influence as speaker by distributing kickbacks among his peers in the lower house but his dealings did not appear to involve members of Temer's inner circle.

Cunha could, however, provide damaging information on possible illegal donations to Rousseff's 2014 election campaign slate, on which Temer ran as vice president, Barreto said.

A bigger risk for Temer is a book Cunha plans to write on the impeachment movement that he led to remove Rousseff.

"If he reveals details of back-room plotting to get rid of Rousseff, that would be very serious for Temer," he said.

(Reporting by Anthony Boadle; Editing by Richard Chang)

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