SAO PAULO, (AP) - In a big defeat for President Luiz Inacio Lula da Silva, Brazil's Senate has approved a 28 percent minimum wage hike that would heap mountains of debt on the strained coffers of Latin America's largest country.

Silva will probably veto the bill if it is approved by Brazil's lower house of Congress, but analysts said he will be forced to spend precious political capital trying to convince congressmen to reject the measure.

The wage hike passed the Senate late Wednesday night in a vote characterized by analysts as a meltdown of Silva's delicate governing coalition, as he and his Workers Party struggle to fight allegations that the party was engaged in a widespread bribes-for-votes scheme.

The move "indicates that there is panic among the political elites and their voting will reflect their desperate search for voter legitimacy," said Riordan Roett, director of Western Hemisphere studies at John Hopkins University's school of international studies in Washington, DC.

Brazil can't afford the wage hike because it would saddle the government with an annual 15.9 billion real (US$6.9 billion; euro5.6 billion) bill, most for increased government pension payments, analysts say.

Shares on the country's benchmark Bovespa index fell 1.8 percent Thursday as investors fretted about the impact of the Senate's move, and worried about fresh talk in Congress that Silva could face impeachment proceedings.

The real plunged 2.9 percent against the dollar, but most of the decline was attributed to a move by the Central Bank to buy dollars and boost foreign reserves.

While the political scandal has been reverberating throughout Brazil for months, Silva so far has remained largely unscathed and has managed to maintain investor confidence in South America's largest economy - by sticking to orthodox economic policy and his commitment to reduce the country's mammoth debt.

The Senate vote, however, showed that Silva is facing a new congressional threat to his investor-friendly fiscal policy.
Handling the problem will be difficult because his administration is dedicating most of its resources to dealing with the corruption scandal.

"The government is in for a headache," said Christopher Garman, Latin America analyst for the Eurasia Group.

The increase, if enacted, would raise the monthly minimum salary of tens of millions of Brazilians from 300 reals (US$130, euro106) to 384 reals (US$166, euro135).

The minimum wage was boosted 15 percent last year, from the previous level of 260 reals (US$113; euro91) per month.

Trousers in Denim

Cream of the 'Crop'

Cheeky's World