PBR Petroleo Brasileiro ADR

BRASÍ LIA—Former Brazilian President Luiz Iná cio Lula da Silva accepted a position in President Dilma Rousseff's cabinet on Wednesday, in a move that could shield him from pending criminal corruption charges and help Ms. Rousseff in her own fight to stave off impeachment proceedings.

Mr. da Silva, who remains the nation's most controversial and charismatic political figure despite leaving office six years ago, will be the new chief of staff, succeeding Jaques Wagner.

Ms. Rousseff's appointment of her political mentor certifies Mr. da Silva's stunning return to the center of Brazilian politics, even as he faces allegations of money laundering and other misdeeds in connection with the massive scandal centered on state oil company giant Petró leo Brasileiro SA.

Although his approval ratings have fallen dramatically in recent months, Mr. da Silva remains popular enough to again consider running for president in 2018.

Mr. da Silva's official title as chief of staff suggests he'll be an all-purpose adviser to the president, but analysts believe he's effectively replacing Ms. Rousseff in all but name.

"The choice means the transfer of real power…to former President Luiz Iná cio Lula da Silva and the voluntary abandonment of power by Dilma Rousseff," said Paulo Sotero, director of the Brazil Institute of the Woodrow Wilson International Center for Scholars.

The widely anticipated move was interpreted by several analysts as a bid by Ms. Rousseff and her ruling Workers' Party, known as the PT, to shore up her support within Brazil's lower house of Congress and fend off impeachment proceedings that were launched against her in December. Ms. Rousseff has been accused of using loans from state banks to plug a massive budget hole, but she denies the allegations.

Despite his growing legal woes, Mr. da Silva remains a towering figure in Brazilian politics. Some believe his political charisma and deep knowledge of how to pull the levers of Brasí lia's political machinery, by trading ministerial posts and other perks, could persuade enough lawmakers to stand by Ms. Rousseff.

"He has great power to bring people together," said PT Sen. Paulo Paim, one of the founders of the party who said he supports Mr. da Silva's return.

Others say Mr. da Silva's return to government was aimed chiefly at keeping him out of jail. He's under investigation in a massive corruption probe and was recently charged with money laundering, which he denies. Under Brazilian law, government ministers can only be tried by the Supreme Court, raising the bar for federal prosecutors.

"The short-term goal…is to give him a privileged forum" to avoid prosecution in a lower court, said Mr. Sotero of the Woodrow Wilson center.

Financial markets have reacted badly to the possibility that Mr. da Silva could delay or derail the impeachment of Ms. Rousseff, whose interventionist policies many blame for Brazil's current economic woes and for the loss of its hard-won investment-grade credit rating.

Win Thin, global head of emerging markets strategy for Brown Brothers Harriman in New York, said Mr. da Silva's return to power is "a game-changer" that could herald the government's "veering to the left" on economic policy.

"It's very, very negative for Brazil," Mr. Thin said. "I don't think Lula coming back was on anyone's radar outside Brazil until a few days ago…Quite frankly, I'm shocked."

The Ibovespa stocks index was down 1% at 1:28 p.m. local time, while the real was trading at 3.7904 to the dollar, weaker than Tuesday's close of 3.7592.

Other analysts were less certain that Mr. da Silva's appointment signals a leftward tilt to Brazil's economic policy. Similar market fears greeted Mr. da Silva's election as president, and some analysts predicted Brazil would be ruined as massive government spending fueled runaway inflation.

Indeed, during his two terms in office from 2003 to 2010, Mr. da Silva pushed social spending programs that raised millions of Brazilians out of poverty. But he generally allowed his finance minister and senior economic advisers to shape financial policy.

That pattern may well continue with Mr. da Silva's return to power.

"I do not see major changes economically," said Carlos Kawall, chief economist at Banco J. Safra in Sã o Paulo who served as head of the Brazilian Treasury in 2006 under Mr. da Silva's administration. "Lula never intervened in the Treasury in my time working there."

Mr. Kawall said that any shift toward a populist economic policy would endanger Mr. da Silva's main political objective of enlisting support to prevent Ms. Rousseff's impeachment. However, Mr. Kawall said, it is likely that Mr. da Silva will hew to Workers' Party orthodoxy and try to block Ms. Rousseff's attempt to push pension reforms that many analysts believe are needed to help jump-start Brazil's economy.

Mr. da Silva's appointment is sure to galvanize the trade unionists who form the base of the leftist Workers' Party, which he co-founded in 1980. It is also likely to infuriate the millions of Brazilians who turned out in nationwide street protests last Sunday to demand Ms. Rousseff's ouster from office and to denounce Mr. da Silva.

Luciana Magalhaes and Rogerio Jelmayer contributed to this article.

Write to Paulo Trevisani at paulo.trevisani@wsj.com

(END) Dow Jones Newswires

March 16, 2016 17:05 ET (21:05 GMT)

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