A political bombshell in Spain spooked investors this week. Allegations that the governing Partido Popular (PP) party ran a slush fund have engulfed Prime Minister Mariano Rajoy. He is accused of receiving over €277,000 from the secret fund. Rajoy and the PP, says Economist.com, “seem determined to bluster their way past the growing weight of evidence” that they ran a double accounting system.
“In a recession of this magnitude, the worst thing that could happen is a political scandal,” says Jose Carlos Diaz of Intermoney.com. With unemployment at 26% and no end to tough times in sight, the last thing the population wants to hear about is politicians raking it in.
As its moral authority dwindles, the government could find it increasingly difficult to push through the austerity and structural reforms needed to reduce the deficit and bolster future growth. That in turn could undermine investor confidence, send yields further up and make it ever harder for Spain to fund itself. The country could end up needing a bail-out.
Investors would probably be even more rattled if this scandal brings down the government. That “would be a real shocker for the market”, says Michael Leister of Commerzbank, given the uncertainty over the result and whether Spain’s reform programme could survive a campaign.
Elections aren’t due for three years and the opposition Socialists are still struggling. But if the pressure on Rajoy mounts, says Tobias Blattner of Daiwa Capital, Spain could soon be “back at the forefront of the [euro] crisis”.