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Brazil's finance minister falls victim to scandal

Written by: Staff

BRASILIA, Brazil, Mar 27 (Reuters) Brazil's Finance Minister Antonio Palocci, architect of the government's market-friendly economic policies, stepped down today as a corruption scandal swelled around him.

TV Globo reported that Guido Mantega, president of Brazil's national development bank BNDES, will replace Palocci as the country's new finance minister. The government would not comment on the report.

''Minister Antonio Palocci decided to ask the President of the Republic to be relieved of his duties. The minister is forwarding a letter to President Lula explaining his reasons,'' the finance ministry said in statement.

Palocci quit as campaigning heats up for a presidential election in October in Latin America's biggest country.

President Luiz Inacio Lula da Silva is widely expected to run for a second term.

Lula's closest confidant, Palocci is the most important figure to fall victim to a corruption scandal that rocked the government last year but had appeared to have fizzled out.

The former Trotskyite and trained physician has since last August defended himself against allegations he took kickbacks from contractors when he was mayor of Ribeirao Preto, a city in Sao Paulo state, in the mid-1990s.

The allegations, which he has denied and have not been proven, were part of a wider scandal over illegal campaign funding and vote-buying by the ruling Workers' Party.

The issue flared up again two weeks ago when a house caretaker said he repeatedly saw Palocci at a villa in Brasilia suspected of being used by Palocci's former aides to divide up the proceeds of extortion and to meet prostitutes.

Pressure mounted on the government after a senior official in the Caixa Economica Federal, a state-owned bank, was found to have illegally disclosed the caretaker's bank record in an apparent attempt to discredit him.

Speculation that Palocci's demise was imminent had spooked the markets on Monday but the business community appeared confident that the new minister would not bring big changes.

Francois Dossa, president of Societe Generale do Brasil, said: ''I think his departure was inevitable. But I'm not worried by the decision. I don't think this will cause stress for the economy.'' ''The economy is very strong. 0 billion in exports is more powerful than politics.'' Mantega, an economist and former university professor, is also a close confidant of Lula but has criticised Palocci for being too conservative on monetary and fiscal policy.

Reuters PDS VP0328

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