Brazil president resists calls to resign amid allegations of witness bribery

Brazilian President Michel Temer resisted calls to resign on Thursday after allegations that he condoned the bribery of a potential witness in the massive "Car Wash" graft investigation, news that sent markets tumbling and raised doubts that Congress would pass his austerity measures.

Temer strongly denied the allegations and told allied lawmakers in a morning meeting that he would not be driven from office. He cleared the rest of the day's schedule to react to the crisis and was expected to address the nation on national TV within hours, aides said.

"We need to see what the Supreme Court says and whether it accepts this tape as evidence," one presidential aide said. "The president is absolutely convinced he committed no crime, but that has to be made clear to the eyes of everyone."

Brazilian markets slumped on concerns that the investigation could derail Temer's economic and fiscal agenda. Shares of state-controlled companies, such as Banco do Brasil SA (BBAS3.SA) and Petróleo Brasileiro SA, or Petrobras (PETR4.SA), lost more than 10 percent of their value, and the nation's currency fell 7 percent, wiping out its gains for the year.

Brazil's Treasury and central bank said they stood ready to keep markets liquid and working properly.

Some Temer allies tried to shore up confidence in the president, while others said his party was in disarray.

"The government will continue to work," said Congressman Darcisio Perondi, a leader of Temer's party in the lower house. "We will wait for the release of all those tapes. We are working on a strategy right now to keep the reforms on track."

But a senior aide to party leadership in Congress said lawmakers were in a panic and that "nobody right now knows what to do or what is going to happen."

Federal police, meanwhile, closed in on Temer allies as they intensified their work in the three-year investigation centering on billions in political kickbacks paid by Brazil's biggest construction companies in exchange for contracts at state-run oil producer Petrobras and other government enterprises.

Officers in the southern city of Curitiba searched the home of federal deputy Rodrido Rocha Loures, a longtime confidant of Temer and a member of the president's Brazilian Democratic Movement Party, or PMDB. Loures is accused of receiving bribes on behalf of Temer, which he denies.

The O Globo newspaper reported on Wednesday night that Temer met in March with Joesley Batista, chairman of meat company JBS SA (JBSS3.SA), which grew rapidly under 13 years of leftist Workers Party rule due largely to low-cost loans from Brazil's national development bank.

Batista, who is trying to secure a plea-bargain deal with prosecutors, recorded the conversation in which he and Temer allegedly discussed making illegal payments to jailed former House Speaker Eduardo Cunha, of the PMDB, to keep him from testifying about corruption.

Three people with direct knowledge of the investigation said the O Globo report was accurate.

JBS said on Thursday that it had no comment on the situation.

TEMER IN TROUBLE

More than 90 leading business and political figures have been convicted so far, and dozens of leading lawmakers and a third of Temer's cabinet are under investigation, while still-powerful former president Luiz Inacio Lula da Silva is facing five separate corruption trials.

Temer himself has been named in plea bargain testimony as negotiating millions in illegal campaign funding, which he denies. However, top federal prosecutor Rodrigo Janot has said that under Brazilian law, Temer cannot be investigated for crimes committed before he became president until he leaves office.

But the new allegations refer to an incident that took place after Temer took office, which would open the door to an investigation against him.

If Temer resigns or is impeached, Brazil's constitution calls for Congress to name a successor within 30 days.

But with lawmakers under the cloud of corruption, there are widespread calls in Brazil that the constitution be changed to allow for direct elections now.

Activist groups from across the political spectrum took to social media, calling for protests this weekend. Should large demonstrations occur, pressure on Temer to step aside would increase significantly.     

Also on Thursday, Janot asked the Supreme Court's permission to arrest Senator Aecio Neves, a key government ally who lost the 2014 presidential election against former president Dilma Rousseff. The top court suspended Neves from the Senate.

Local media reported that Neves was recorded asking for 2 million reais ($638,000) from Batista, which the senator denies.

Rousseff was impeached last year for breaking budgetary laws, but she and her supporters have accused Temer, her vice president, of orchestrating her ouster as part of a soft "coup" meant to halt the Car Wash investigation.