The Spanish political crisis continues to evolve and is now threatening the country’s political stability:
Spain’s opposition Socialist Party called yesterday for the resignation of the Prime Minister, Mariano Rajoy, over a corruption scandal as a poll showed the lowest support on record for his centre-right People’s Party (PP).
Media reports over the past two weeks have alleged that at least a dozen senior PP officials, including Mr Rajoy, received payments from a slush fund operated by its former treasurer. Mr Rajoy denies wrongdoing, but the scandal has provoked fury among Spaniards already disenchanted by deep recession and high unemployment.
The Socialist leader, Alfredo Perez Rubalcaba, who was the Deputy Prime Minister until the 2011 election, told a news conference: “Rather than the solution for this country, Rajoy has become yet another problem.”
An opinion poll published in El Pais yesterday showed that neither of the two big parties would win a clear majority if an election were held today. The Metroscopia poll showed 23.9 per cent support for the PP – the lowest on record. The Socialists were little changed at 23.5 per cent.
In response to the allegations Mariano Rajoy has gone on the offensive over the last few days with a national television appearance denying the allocations and offering up his tax and financial records for scrutiny. How exactly tax records are supposed to help provide evidence against hidden payments is anyone’s guess, but Rajoy’s party has little choice to act as ever-more evidence is published in the national papers showing excerpts of accounting books supposedly used by former PP treasurer, Luis Bárcenas.
Financial markets now appear to becoming concerned about the instability with Spanish bond yields back on the rise, although they obviously remain well below their July 2012 peak:
Spanish government bond yields climbed to their highest levels so far this year early Monday, a sign that the country’s growing political scandal is undermining renewed confidence in its debt.
Italy’s bond yields also rose sharply as the Spanish uncertainty overshadowed other lower-rated euro-zone bonds.
Spain’s 10-year benchmark yield climbed 0.11 percentage point to 5.30%, the highest since mid-December, according to Tradeweb. The equivalent Italian yield was 0.07 percentage point higher at 4.39%.
The impact was also felt in currency markets, with the euro trading as low as $1.3592 against the dollar, over a cent weaker from Friday’s high of $1.3711, the strongest in more than 14 months.
Whether or not this crisis does evolve to a point where the government comes under threat is yet to be seen, but what is of concern to financial markets is the question of whether they now have enough political capital left in Spain to continue with the program of austerity in the hope of meeting deficit targets.
Speaking of targets that are at risk of being met, the EU budget is up for discussion this week and not much is certain:
German Chancellor Angela Merkel urged her EU partners on Saturday to work together to get a deal on the 27-member bloc’s budget at a summit this week, warning that agreement was far from certain.
EU leaders meet in Brussels on Thursday and Friday to try to clinch a deal on its 1 trillion euro budget for 2014-2020 after they failed to do so in November.
In her weekly podcast, Merkel said she expected very difficult negotiations.
“Germany will try to contribute to a result. We will only be able to see at the end of next week whether it succeeds,” she said.
“But it is worth trying,” she said, adding that at a time when many European countries are struggling with economic growth, an EU budget deal would give certainty for financial planning.
This will be the second summit held in order to get some agreement on the budget and there looks to be at least another €30bn in more cuts in order. The commission had originally asked for €1.047trn for the 6 year budget ending 2020, but many nations, including Britain, were unsatisfied and demanded major cuts in the budget.
At this point it doesn’t appear that any of the major players are on the same page so there is a possibility that no agreement will be reached. If that does occur then budget will fall back to the previous budget plus inflation and many new EU projects will be put on hold. That may not be a particularly terrible outcome in terms of economics, but it will demonstrate that there remains significant political differences in terms of European integration, something that is a concern given the on-going discussions over topics such as the banking union.