Former president of the Brazilian central bank arrested

President Fernando Henrique Cardoso expressed disappointment with Lopes after having repeatedly defended the man who engineered a painstaking relaxation of the rigid currency policy during his three weeks at the helm.

"The President of the republic had hoped Francisco Lopes would give the country an account of his acts as a public servant," presidential spokesman Georges Lamaziere said. Cardoso, intent on keeping Brazil on the road to recovery after the crippling currency crisis, also urged the Senate to get at the facts of the case.

The Senate panel responded to Lopes’snub by decreeing a freeze on his assets and authorising scrutiny of his bank accounts, income tax declarations and telephone records.

Ten days ago, police searched Lopes’ Rio de Janeiro home for six hours and seized documents that led to allegations he held $1.6 million in overseas bank accounts.

Lopes’ testimony was widely expected to determine the direction of the 2-week-old probe and its potential to implicate key members of the government, such as Finance Minister Pedro Malan.

Analysts said Lopes’ decision now put the spotlight firmly on him for the next few weeks and took some pressure off the Cardoso government. "In the next chapters, he will be cast as the villain," said Carlos Lopes, political analyst at Brasilia-based consultants Santafe Ideias.

"Lopes’ decision today should not tarnish in any way the Minister (Malan) or the President. What he did was an act of personal defence."

Far from the turmoil in Brasilia, Malan and Central Bank President Arminio Fraga were telling investors inWashington that the devaluation crisis would not be as catastrophic as investors feared. "Clearly, we have moved forward, and there is renewed confidence in Brazil’s ability to overcome the current turbulence," Malan said on the sidelines of the spring meetings of the International Monetary Fund and the World Bank.

Brazil seemed to be turning the corner in its crisis, with a successful $3 billion global bond issue concluded on Monday. The issue marked its return to the international capital markets after a one-year absence.

But local markets have grown jittery about the outcome of the Senate probe after weeks of impressive gains, and Lopes’ arrest sent investors scrambling.

The Sao Paulo Stock Exchange’s Bovespa Index retreated on the news to close 2.1 percent lower. Currency trading closed before Lopes’ brief Senate appearance, but the rial had weakened 0.5 percent as traders fretted over the hearing.