Brazilian corruption trial dims Lula's aura

BRASILIA (Reuters) - Until a few weeks ago, Brazil's most popular politician and two-time president, Luiz Inacio Lula da Silva, could seemingly do no wrong.

Yet a corruption trial involving many of his closest former aides, plus new evidence that he was not the economic wizard some took him for, has tarnished Lula's reputation - and cooled speculation that he might try to return as president in 2014.

Mesmerized Brazilians have watched for two months on live TV as several of Lula's former confidants stand trial on charges that they bribed legislators in Congress during his 2003-10 presidency. Convictions could come as soon as this week.

While Lula himself is not implicated, the massive scope of the corruption detailed during the trial has made many Brazilians wonder how he could possibly have not known about it.

Jose Chrispiniano, a spokesman for Lula, said the former president does not believe the vote-buying scheme existed, but he will accept the Supreme Court's ruling on the case.

At stake is his legacy.

He was Brazil's first working-class president, a gravelly-voiced former metalworker and labour union leader who, despite never finishing high school, won the confidence of Wall Street and became a powerful symbol of the social mobility that his government fostered.

Under Lula's watch, growth averaged better than 4 percent a year while income inequality fell, lifting 30 million people out of poverty and into a modern consumer market. He left office with an astronomical 88 percent popularity rating.

"That created an aura around Lula as an untouchable figure who was beyond good and evil. This trial has put that into question and will tarnish his image," said political consultant Andre Cesar.

"Even though Lula is not in the dock, it his government and his political machine that are there on trial," Cesar said.

The scandal originally blew up in 2005 when local media alleged that Lula's operatives were paying a monthly bribe - known as a "mensalao" - of about $10,000 to legislators in return for their votes.

Lula survived the ensuing scandal and he was re-elected a year later, but his trusted deputy and chief of staff Jose Dirceu was forced to resign. Dirceu, the most high-profile former official now on trial, faces a possible jail sentence of up to 12 years as alleged mastermind of the bribery scheme.

The then president and treasurer of the ruling Workers' Party, or PT, are also on trial for corruption and conspiracy.

Two dozen people, including ten legislators, bank executives and business intermediaries have already been convicted on corruption, fraud, money laundering or conspiracy charges for diverting public funds to buy support for the PT in Congress.

The trial at the Supreme Court reawakened public interest in the high-profile case because Brazil's highest court has never convicted a Brazilian politician for corruption, let alone using millions of dollars in public money to bribe legislators.

OVERHEATED ECONOMY

Even Lula's stewardship of the economy is being re-examined in the current global slowdown that has seen Brazil's economic growth fall from 7.5 percent in 2010, Lula's final year in office, to a meagre 1.6 percent expected this year.

The boom under Lula was fuelled in part by soaring world prices for Brazil's iron ore, soy and other commodities, driven up by demand from China. In retrospect, critics say his economic policies relied too much on expanding consumer spending and overlooked investment to reduce costs and make the world's sixth largest economy more efficient.

"He was surfing an international wave of good times," said David Fleischer, a politics professor at Brasilia University.

"The growth rate in 2010 was really off the wall, and we are still paying the bill, because this was pumped up artificially with a lot of public spending," Fleischer said.

While the fast growth of 2010 helped sweep Lula's hand-picked successor President Dilma Rousseff into office, opponents say he injected too much money into the economy to help her.

Those resources - they argue - should have been used to upgrade roads, ports and other dilapidated infrastructure that have become serious bottlenecks for the economy and may limit growth in coming years.

MAGIC TOUCH FADING

Lula still has strong pull in Brazilian politics - one PT leader, Marta Suplicy, called him "God" - and would probably beat any candidate the opposition could field today in a presidential race. The scandal hurt Lula's image among the middle class but he still has solid support among 30 percent of voters who would back him no matter what, polls show.

Yet his magic touch as a kingmaker whose candidates were bound to win election appears to be wearing off.

In Sunday's municipal elections, Lula's chosen candidate for mayor of Sao Paulo, Fernando Haddad, scraped through to a second-round vote after trailing in the polls for most of the campaign. It was the worst PT showing for mayor of Brazil's largest city since 1996.

Polls prior to the vote showed that Haddad's support may have fallen by around 10 percent due to the "mensalao" scandal, which rival Jose Serra of the centrist PSDB used against him.

Lula turned out to campaign for PT mayoral candidates in key races, but the 67-year-old leader who is recovering from throat cancer was a shadow of his former self.

Gone was the rousing speaker who could rally thousands of workers in a soccer stadium without a microphone. Instead a beardless Lula spoke to smaller crowds with a fragile voice in his first campaign speeches in two years.

"He is still the big name in Brazilian politics and continues to be politically active, but he no longer has the weight he had two years ago. He is not the political force he used to be," said Cesar, the political consultant.

After 12 years in power, Lula's party is facing voter fatigue in Brazil's larger cities and competition from parties within its governing coalition that are breaking away to field their own candidates in local elections.

Speculation about Lula running again - and that he picked his former chief of staff Rousseff to succeed him to keep the presidential seat warm for his return - is losing steam.

Cesar said Lula is physically not up for it after having chemotherapy and radiation for a tumour in his larynx.

Besides, Rousseff has established her own style of governing, filled her cabinet with her own people and distanced herself from Lula's faction within the Workers' Party.

She has not been hurt by the "mensalao" scandal and her approval ratings after almost two years in office are higher than Lula's at the same juncture.

"Rousseff is the party's 'A' plan at this point. Her popularity is high, the opposition is weak and the economy could rebound to give her more bounce," said Joao Augusto Castro Neves of Eurasia Group, a think-tank.

Chrispiniano, the former president's spokesman, said Lula currently has "no plans" for 2014.

(Editing by Kieran Murray and Claudia Parsons)