By Anthony Boadle and Alonso Soto
BRASILIA (Reuters) - Vice President Michel Temer is quietly assembling a team of respected economists to revive confidence in Brazil's battered economy with cautious spending cuts and privatizations should leftist President Dilma Rousseff be impeached, insiders say.
Temer could take power as soon as May if the lower house of Congress approves Rousseff's impeachment but party insiders warn the softly-spoken 75-year-old faces a daunting array of obstacles to pursuing the deeper reforms they say are needed to rebalance Latin America's largest economy.
Brazil's worst recession in decades restricts the room for sharp spending cuts to curb a vast budget deficit and differences within Temer's Brazilian Democratic Movement Party (PMDB) will complicate efforts to build a consensus for change on sensitive issues like pension and welfare reform.
"The country is in chaos. It is broke and Brazilians are fed up with the political establishment," said veteran PMDB lawmaker Jarbas Vasconcelos. "We can only change this with a wide coalition. Temer knows it has to include respected figures."
The PMDB, Brazil’s largest party, is a fractious grouping without any clear ideology. It has not fielded a presidential candidate for two decades and has instead used its role as coalition partner to sweep up lucrative government positions.
To complicate matters, several senior PMDB figures are embroiled in Brazil's biggest ever corruption investigation and Temer himself could be ousted if the Supreme Electoral Court finds graft money helped fund the 2014 election campaign when he was Rousseff's running mate.
Aware of the embittered political environment they would inherit if Rousseff is ousted, PMDB insiders close to Temer say he will try to build support in Congress for careful cuts to spending and to red tape that hurts businesses as well as the sale of subsidiaries at state oil firm Petrobras, which lies at the center of the vast corruption scandal.
PMDB officials are considering former central bankers Henrique Meirelles and Arminio Fraga, both widely respected on Wall Street, to lead the future economic team as finance minister, according to a party leader and a political consultant both close to Temer.
A Meirelles spokesman said the banker will not comment on rumors of his possible nomination. Fraga did not respond to an email seeking comments.
Under the guidance of the pro-business Temer, the PMDB published a liberal economic platform in October, widely seen as turning its back on a decade in coalition with the ruling Workers' Party and as an overture to the center-right opposition to form a government if Rousseff fell.
The "Bridge to the Future" plan argued that the Workers' Party model of consumption-driven growth - through state spending and welfare programs - was bankrupt and Brazil`s competitiveness needed a boost from private investment, pension reforms and cuts to public spending.
With Congress now widely expected to impeach the unpopular Rousseff, the opposition is keen to roll back more than a decade of left-wing policies. Aecio Neves, leader of the Brazilian Social Democratic Party (PSDB), pledged on Tuesday to back a transition government led by Temer that balances Brazil's books and restores growth.
Hopes that a new government could tame last year's double-digit inflation and slash a fiscal deficit of nearly 11 percent of GDP have spurred a rally in Brazil's financial markets in recent weeks.
But Temer's point man in coordinating his economic program, Wellington Moreira Franco, told Reuters there would be no cuts in spending on flagship social programs such as the "Bolsa Familia" cash transfer to low-income families, credited with curbing extreme poverty since Rousseff's predecessor and mentor Luiz Inacio Lula da Silva took office in 2003.
Political insiders say the rally in financial markets overestimates Temer's scope to push reforms needed to revive the $2 trillion economy through a Congress packed with 28 parties.
"There is some exaggeration in the market," said Samuel Pessoa, an economist who advised Neves in his 2014 presidential bid against Rousseff. "Many people are overestimating the capacity of a Temer administration to put the house in order."
Temer would take power on a six-month interim basis in May if the lower house recommends putting Rousseff on trial and the Senate accepts the recommendation. Rousseff faces charges of deliberately breaking budget rules to help her 2014 re-election bid.
If she is found guilty, Temer would rule until a new leader is picked at elections in late 2018. He is considered unlikely to run.
Temer has served three times as speaker of Brazil`s turbulent lower house and built a reputation for moderation and consensus building. He is already in talks with opposition parties such as the PSDB and the center-right Democrats party to secure their support.
Yet the PMDB`s own lawmakers in recent years have voted to bolster public spending in health and rejected efforts to revert costly tax breaks to some businesses.
Those who have worked with Temer said the constitutional lawyer will focus on more immediate but moderate measures to revive confidence instead of pushing for ambitious and controversial reforms.
"Temer will try to stabilize the economy, build credibility abroad to reverse our rating downgrades and end the perverse cycle of high inflation and unemployment," said Thiago de Aragao, a political strategist who worked with Temer last year.
An economist who helped draft the "Bridge to the Future" said the PMDB was working on a plan for social programs but would steer clear of specific proposals so as not to anger working-class voters ahead of the next election in 2018.
"It's a very general document. If you are too specific, it will be interpreted as reducing benefits, which is politically sensitive," said the economist, who asked not be named so he could speak freely.
The PMDB won plaudits recently for pushing through changes to liberalize the deep-water oil sector as debt-ridden state firm Petrobras lacked the funds to invest.
The economist said another item that could be included on the PMDB agenda is deepening Petrobras' $15 billion asset sale plan to include the sale of other subsidiaries including its transportation arm Transpetro and its fuel distribution unit BR Distribuidora to avoid a costly government bailout.
That, however, would be likely to enrage unions and the Workers Party, which are already opposed to divestments. Any attempt at broader reforms to labor and pension benefits would also likely spark protests, and tensions could explode if anti-graft investigators arrest Lula on money laundering charges.
"It's going to be rough on the streets, especially if prosecutors move against Lula," said David Fleischer, politics professor emeritus at Brasilia University. "It is almost mission impossible for Temer to turn the economy around."
(Editing by Daniel Flynn and Kieran Murray)