What happened

According to a report by Brazilian newspaper O Globo, Brazil's President Michel Temer OK'd a payment to silence a potential witness in the country's bribery inquiry. That report led the country's top court to open a probe into the president's actions. It's news that sent a tidal wave of selling through the Brazilian stock market, taking down both Brazilian-based companies and those with outsized exposure to the country's economy.

At one point an exchange-traded fund that tracks Brazilian stocks plunged 18%, which had it on pace for its worst day since the dawn of the financial crisis in 2008. That sell-off splashed red across sectors. The country's leading iron-ore producer Vale S.A. (NYSE:VALE), for example, plunged as much as 12.5% before ending down 6.3% on the day. Meanwhile, other Latin American companies that have significant Brazilian operations also sank, including McDonald's largest franchisee Arcos Dorados (NYSE:ARCO) and e-commerce giant MercadoLibre (NASDAQ:MELI), which each plunged more than 10% at one point in the day.

Man in Brazilian green and gold, holding the Brazilian flag

Image source: Getty Images.

So what

Driving the market's concern is that Temer, like his predecessor, could get impeached. If that were to happen, it would reignite the country's political turmoil and could negatively impact the country's still-fragile economy. The allegations could affect Temer's economic reform agenda, which is legislation that the country's market had been banking on to restart growth.

If Brazil's economy stalls again, it could have an immediate impact on consumer-facing companies like MercadoLibre and Arcos Dorados. In MercadoLibre's case, 57% of its revenue comes from Brazil. While that country's recent struggles haven't derailed the company's growth over the past few years, investors have been banking on an improving Brazilian economy to add more fuel to the company's growth engine, which is why the stock has more than doubled over the past year. Arcos Dorados, likewise, has seen its stock spike over the past year on hopes that an improving Brazilian economy will bolster its growth prospects, helping it build on last year's 3% improvement in sales.

Meanwhile, energy-related companies in Brazil also plunged due to fears that the economy might head back into a deep recession, which could impact energy demand. For example, fuel distributor Ultrapar Participacoes (NYSE:UGP) closed down more than 11%, while electric utility Companhia Paranaense de Energia (NYSE:ELP) plunged 17%.

Now what

The market clearly took a "sell first and ask questions later" approach to today's allegations that Brazil's president condoned bribing a witness, so today's sell-off could be a buying opportunity if the allegations prove false. That said, if that's not the case, and the country gets dragged into another political crisis that spills over into the economy, there could be more downside ahead.

Matt DiLallo owns shares of MercadoLibre. The Motley Fool owns shares of and recommends MercadoLibre. The Motley Fool owns shares of Arcos Dorados and Vale S.A. The Motley Fool has a disclosure policy.