Spain Scandal Returns, as Markets Brace for More Pain

Mariano Rajoy, Prime Minister of Spain.
Radolpho Saenz | AFP | Getty Images
Mariano Rajoy, Prime Minister of Spain.

The corruption scandal surrounding Spanish Prime Minister Mariano Rajoy erupted once more on Tuesday, and one analyst warned that the possibility of early elections meant financial markets could be in for more pain.

Spain's El Mundo newspaper reported on Tuesday that it had presented the Spanish High Court with documents that showed payments were made from an illicit "slush fund" to leading members of the ruling People's Party, including Rajoy. The scandal first came to the fore in January, when another Spanish newspaper, El Pais, published similar documents, alleging that Rajoy had received regular cash payments from the fund, which distributed donations from construction magnates to party leaders.

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Alistair Newton, a senior political analyst at Nomura said the renewed allegations significantly increased the pressure on the Spanish government and could possibly spur further civil unrest.

"We cannot rule out early elections which could unsettle markets again," Newton said, in a research note on Tuesday. "Especially in the light of market reaction to recent political turbulence in both Greece and Portugal, we wouldn't be at all surprised to see Spanish equity and bond markets reacting, if there is further momentum behind these latest allegations."

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If Rajoy were to resign as a result of the accusations, Newton warned that new elections would result in neither of Spain's main political parties gaining a clear majority. This would point to a coalition government and "significant political uncertainty", like that seen in Italy earlier this year.

Spanish borrowing rates on its 10-year benchmark debt ticked marginally higher on Tuesday, from 4.654 to 4.729 percent. But euro zone yields have remained subdued across the board since European Central Bank President Mario Draghi calmed markets last summer, when Spanish yields spiked above 7 percent.

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Rajoy has fiercely denied the corruption allegations and has promised more transparency, publishing his tax returns for the last ten years on Saturday. His party remains adamant that none if its members have been in receipt illicit payments.

By's Matt Clinch. Follow him on Twitter @mattclinch81.