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Brazil markets plunge as Temer scandal threatens reforms

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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 .BVSP closed 8.8 percent lower, its biggest daily decline since the 2008 financial crisis. Trading had been halted for an hour after a 10 percent drop triggered a circuit-breaker mechanism.

Blue-chip stocks such as lender Itaú Unibanco Holding SA (ITUB4.SA) and state-controlled oil company Petróleo Brasileiro SA (PETR4.SA) dragged the index lower.

The declines slashed 26 billion reais ($7.7 billion) off the market values of Itaú and Petrobras.

The Sao Paulo stock exchange saw 3.1 million transactions, breaking a previous record set in October 2014, the day former President Dilma Rousseff won a narrow runoff election, according to exchange operator B3 Bolsa Balcão Brasil SA (BVMF3.SA).

“Brazilian stocks and assets and their currency have rallied very strongly up until really today. It’s a big pullback and … it at least brings the risk up to the surface again,” Alliance Bernstein Managing Director of Equity Product Management Eric Sprow said.

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 JPMorgan Securities and UBS Securities downgraded their recommendations on Brazilian equities to “neutral,” citing increased risks to the implementation of structural reforms.