The Real Threat from Spain’s Corruption Scandal

Investors worried about Spain’s political stability have been dumping their Spanish holdings and pushing up the country’s borrowing costs after the eruption late last week of a corruption scandal involving Prime Minister Mariano Rajoy.

Until now, the government’s durability had been one of the few advantages that Spain held over fellow euro-area problem- case Italy, a country that has seen almost as many elections as Christmases over the past few decades and is about to stage another.

In reality, the likelihood that the Rajoy scandal will force the collapse of the current right-of-center government is slim. But investors are right to be concerned, because political stability involves more than the survival of a country’s government — it also requires the trust of the electorate in the institutions that govern them. Allegations of corruption at the highest level are corroding that trust in Spain.

On Jan. 31, the Spanish newspaper El Pais published copies of what it said were ledgers from secret accounts held by Luis Barcenas, the former treasurer of the ruling People’s Party, which revealed the existence of a party slush fund. The newspaper said 7.5 million euros in corporate donations were channeled into the fund and allegedly doled out from 1997 to 2009 to senior party members, including Rajoy.

The party has denied wrongdoing in a statement, and Rajoy reiterated that position over the weekend and again on Feb. 4, during a news conference with German Chancellor Angela Merkel.

Resignation Request
The denials failed to kill off the scandal. Opposition leader Alfredo Perez Rubalcaba, of the Spanish Socialist Workers’ Party, has called for Rajoy’s resignation, which would spark an early election. Yet it isn’t clear how much good this would do Rubalcaba or his party.

To read the rest of this article, please see the original piece posted on Bloomberg View.

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