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Brazil's President Michel Temer attends the launching ceremony for the Plano Safra 2017/2020, a package of actions for the agricultural sector, in Brasilia, Brazil, May 31, 2017. REUTERS/Ueslei Marcelino

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By Anthony Boadle and Alonso Soto

(Reuters) - Brazil's scandal-plagued President Michel Temer has gained some breathing room from an incipient economic recovery and the failure of his allies to agree on a caretaker to keep his fiscal reforms on track if he is ousted.

Temer, who is being investigated for corruption by the Supreme court, went on the offensive this week to convince Brazilians he is their best bet to pull the nation from its worst recession.

But his coalition allies are divided on whether it is best to dump the damaged president quickly, or keep him for the sake of an economic recovery that began to pick up in the first quarter.

At stake is pension reform, crucial for balancing the budget, and which may now have to be further watered down.

"Our commitment at this point is only to back the reforms. If we see that they are not advancing, then we should quickly look for an alternative government," Congressman Eduardo Cury, a vice president of the PSDB party, told Reuters.

The PSDB, the largest party in the governing coalition, is waiting for an electoral court hearing next week about Temer's fate before deciding whether to abandon him and back his replacement by a caretaker president.

Coalition allies have not been able to agree on who that might be since a caretaker would have to be a politician with experience, credibility and not investigated for corruption.

"We do not have too many names that fit that bill," said a lawmaker in the PSDB party who asked not to be named because of the sensitivity of the matter. "This is a hurdle and Michel Temer is benefiting from the lack of consensus."

Owners of the world's biggest meatpacker JBS SA said in plea-bargain testimony that Temer condoned bribing a potential witness in the sprawling "Car Wash" corruption case, and that they had paid him nearly $5 million in bribes in recent years. Temer denies all accusations and has refused to resign.

Temer's hold on power faces a more immediate threat from Brazil's top electoral court, the TSE, when it meets next week to decide whether to annul his 2014 election due to the use of illegal campaign funding. He was the running mate of former President Dilma Rousseff, who was impeached last year.

Analysts say Brazil's political crisis could speed up a TSE decision or encourage the judges to be lenient on Temer to avoid a traumatic second ouster of a president in the space of a year.

BACK ON TRACK?

A bullish Temer said at an investment conference on Tuesday that he was committed to delivering labour law and pension reforms in undiluted shape, and handing over a country back on track when he completes his term at the end of next year.

Inflation has dropped below the government target and Latin America's largest economy grew in the first quarter for the first time in two years, the leader said.

"It's a dilemma. The economy is beginning to show signs of life. Are we going to ruin that?" PSDB lawmaker Betinho Gomes said.

Temer lost political support in congress when the corruption allegations emerged two weeks ago, but if his reforms move forward and the economy continues to brighten he could survive, Gomes said.

A bill that will reduce labour costs for business is awaiting final Senate approval and most politicians agree Temer's landmark fiscal savings measure, reform of the costly pension system, will probably clear Congress this year, though in a substantially weakened form.

Lawmakers have told Reuters the bill could still establish a minimum retirement age but drop other cuts to benefits that were expected to save 600 billion reais over ten years.

The speaker of the lower house and member of the allied Democrats party, Rodrigo Maia, on Tuesday fully endorsed Temer and his reform agenda at the investors forum.

NO REPLACEMENT

Government officials said Temer's allies realize he is not the most attractive option to lead Brazil until the 2018 elections, but at present appears to be the only viable one.

"He represents reform and a return to a normal economy, whereas the allies lack consensus on a name to replace him," a presidential aide told Reuters on the condition of anonymity because he was not authorized to speak on the matter.

"The tide is clearly turning in favour of the president," he said. "The worst of the crisis is over."

The government expects the electoral court to rule in Temer's favour, and is confident he can successfully appeal any decision to unseat him, the aide said.

Brazil's immediate political future is so uncertain few analysts will venture a prediction.

"It's still too early to say if he will survive. There is a lot of backstage negotiation and everyone is waiting for the court decision next week," said Danilo Gennari, with Brasilia-based consultancy Distrito Relações Governamentais.

"Temer has won a breather, but I don't know if the tide is turning or if it is his last breath."

(Reporting by Anthony Boadle, Alonso Soto, Silvio Cascione and Ricardo Brito in Brasilia; Editing by Alistair Bell)

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