Brazil plunged back into a political crisis reminiscent of lastyear's impeachment saga following reports that President MichelTemer was embroiled in an alleged cover-up scheme involving thejailed former speaker of the lower house of Congress.

One of the country's largest newspapers reported Wednesdayevening that a secret recording exists of Temer approving a paymentto Eduardo Cunha, the mastermind behind last year's impeachment offormer president Dilma Rousseff. The tape was submitted to theSupreme Court by two senior executives from meat-packing giant JBSSA as part of a plea bargain deal, in which information is offeredin exchange for reduced sentences, according to O Globo newspaper.The paper provided neither a transcript nor a recording.

The presidential press office vehemently denied the allegations.“President Michel Temer never requested payments to obtain thesilence of ex-deputy Eduardo Cunha,” according to a statement. “Thepresident defends a deep and wide investigation to get to thebottom of the claims put forward in the media.” Both JBS and itsholding company, J&F, declined to comment.

The new crisis calls into question everything from Temer'scrucial pension reform to the presidency itself and could trigger arout in Brazilian markets. Amid growing protests in Brasilia lastnight, lawmakers from five opposition parties called on Temer toresign and at least one has already filed for impeachment hearings.A Brazilian ETF plunged almost 10% in Tokyo trading, its biggestdrop since November. Brazil's 2021 Eurobonds slumped most on recordearly on Thursday. Mauricio Oreng, a strategist at Rabobank, toldBloomberg that the real could fall 6% on Thursday.

Brazilian markets have soared over the past year as Temer'sadministration embarked on an ambitious reform program that cheeredinvestors. Brazilians, however, are overwhelmingly opposed to hisausterity measures and the president's approval rating hovers ataround 10%.

As Brazil's capital fell back into crisis mode, military policemoved into position around the presidential palace and one of thejudges on Brazil's Supreme Court called for calm. “It's a momentfor serenity, moderation and watching the institutions work,” saidMarco Aurelio Mello. Local TV images showed a crowd of protestersgathered in Sao Paulo, Brazil's largest city.

The allegations are the latest development in Operation Carwash,a three-year long corruption investigation that has implicated manyin Brazil's business and political elite, including some in boththe government and the president's own party. Temer has repeatedlydenied any wrongdoing.

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According to the newspaper's report, when the president becameaware that the executives were paying Cunha to keep silent, hesaid, “You've got to keep this up, right?” O Globo did not providea transcript of the conversation, or the question leading up to thepresident's alleged comment. Nor did it explain how it obtained theinformation.

The report also cited Senator Aecio Neves, president of theBrazilian Social Democracy Party, which is Temer's main ally inCongress. O Globo said Neves requested 2 million reais($635,000) from a JBS executive to help pay for the lawyerwho's defending him in the Carwash probe. Neves denied wrongdoingin a statement. On Thursday morning, federal police raided hisapartments in Rio de Janeiro, Brasilia and Belo Horizonte, localmedia reported.

Late on Wednesday, the Globo report caused an immediate stir inCongress, where opposition congressmen started to shoutanti-government slogans. The session was subsequently suspended.Temer went to his official residence after an emergency meetingwith some of his closest aides.

A senior member of the Brazilian government told Bloomberg oncondition of anonymity that the administration's economic team wasworried that the crisis could impact its reform agenda. Thegovernment is on the verge of sending its long-anticipated, andhighly controversial, pension reform proposal to the lower house ofCongress.

“The dramatic political weakening of the government must, at aminimum, delay the timetable for passage of the labor and pensionreforms,” Arko Advice, a political consultancy, said in a note. Itadded that the episode may affect the ruling of Brazil's topelectoral court, which is currently assessing whether to scrap theresults of the 2014 election. Such a decision could eventuallystrip Temer of the presidency, pending possible appeals.

The head of the Brazilian Bar Association, Claudio Lamachia,said in a statement that society needs immediate answers and thatthe alleged recordings need to be made public as soon aspossible.

“Brazilians can no longer live with doubts regarding theirrepresentatives,” Lamachia said.

As the events of last year proved, impeaching a Brazilianpresident is a tortuous affair. In order for Congress to initiateproceedings, Rodrigo Maia, the leader of the lower house andTemer's ally, would have to sign off on the move.

Even then, it would trigger a lengthy process involving severalrounds of voting in both houses that require two-thirds majoritiesto find Temer guilty of wrongdoing. In Rousseff's case, the entireprocess took 8 months. Temer could also file appeals at the SupremeCourt at any stage in the process.

If Temer resigns or is impeached, Congress would elect aninterim president until the next scheduled vote in October of 2018.An early election could only be held with a constitutionalamendment approved by lawmakers.

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