High-level corruption accusations throw Spain for a loop just as economy stabilizing

MADRID – It's not as though Spain doesn't have enough to worry about — two years of recession, harsh austerity programs, sky-high unemployment and an unstable footing on the world's markets. Now comes a corruption scandal that has shaken the top levels of government.

Prime Minister Mariano Rajoy has steered Spain through the economic turmoil, but some are asking whether he will survive the storm over allegations that he and others benefited from years of slush fund handouts. Here's a look at how the scandal has developed:

THE ALLEGATIONS:

Spain's leading El Pais newspaper published a bombshell report on Jan. 31, laying out ledgers it said were from former Popular Party Treasurer Luis Barcenas, outlining nearly 20 years of alleged secret accounting showing cash payments to leading party members — including Rajoy before he became prime minister.

The money allegedly came from private companies, mostly construction firms doing big business during Spain's property boom stretching from the 1990s until the 2008 financial crisis. According to the documents published by El Pais, Rajoy received €322,231 ($436,494) from 1997 to 2008.

Rajoy and the other party members allegedly involved have denied receiving payments, and the Popular Party said the documents are false — though it has acknowledged that some notations reflect legitimate party payments and notifications to Spain's taxation authority.

THE FALLOUT:

Spaniards struggling under spending cuts and tax hikes are outraged. In the country's bars, the talk about the controversy is more heated than the usual arguments over the Real Madrid and Barcelona football (soccer) teams. Angry protests have been held outside the Popular Party's Madrid headquarters.

The scandal has hit the markets: stocks fell and interest rates on Spanish bonds rose in the days after Rajoy denied the allegations, as investors grew concerned about the stability of the government and its economy.

"It's tough to sell austerity when it seems like you're being robbed," said Jose Antonio Olmeda, a political scientist with Spain's National Distance Education University. "It's a gunshot fired at (Rajoy's) political leadership and it weakens his authority."

THE MAN BEHIND IT:

Barcenas, 55, was the second-in-command of Popular Party's finances starting in 1993 and Rajoy elevated him to the top job in 2008. But Barcenas was expelled a year later when his name surfaced in a court probe alleging irregular financial practices by the party. He re-emerged last month when Spain's National Court reported he had amassed €22 million ($29.7 million) in Swiss bank accounts.

Barcenas' lawyer denied that his client's vast wealth was the result of corruption, saying he made it through business investments outside his party job over the years.

Barcenas has been hounded by the media. In a brief TV interview outside his Madrid apartment, he insisted the documents were false — in spite of claims from experts that they match his handwriting. His unique scrawl has been turned into a new font named "Corrupt Script" by a Barcelona graphic designer.

As he left questioning by anti-corruption prosecutors Wednesday, Barcenas was jeered and insulted by protesters yelling "Thief!" and "Give the money back!"

RAJOY UNDER FIRE:

Rajoy has worked hard over the last year to save Spain from financial ruin by pushing through unpopular austerity measures — including tax hikes, labor reforms that make it easier to fire workers and spending cuts in cherished services such as education and healthcare.

The Popular Party enjoys an absolute majority in Parliament. This means Rajoy is likely to survive unless more evidence emerges linking him to the scandal or he ends up being targeted for investigation by judicial authorities.

So far, only a few low-ranking members of the Popular Party who are local city councilors have abandoned the party. None of Rajoy's colleagues in Parliament have shown any signs of defecting.

WHAT'S NEXT:

The Popular Party has already declared that an internal review showed no evidence of wrongdoing. An external audit is now under way and is expected to be released soon. Prosecutors are investigating the validity of the El Pais documents and will then decide whether to question Rajoy or conduct a wider probe.

Investors are concerned that protests could mushroom or that markets could again start punishing Spain, which saw its interest rate on 10-year government bonds shoot above the 7 percent level last summer. The interest rate had fallen down to 5 percent, but shot back up to 5.3 percent amid the slush fund allegations.

Depending on developments, Rajoy might also choose to reshuffle his cabinet "as the last silver bullet to regain some political momentum," said Antonio Barroso, a London-based analyst for the Eurasia Group political risk consultancy.

But the possibility of an investigation looms over him. Though it could take some time, "calls for his resignation would likely be too strong to ignore," Barroso said.