Spanish corruption scandal hits financial markets

The Spanish financial markets were badly hit on Monday by the fallout from the slush fund scandal surrounding Prime Minister Mariano Rajoy and his ruling Popular Party.

The outcome of elections in Italy at the end of February in which former Prime Minister Silvio Berlusconi will stand also caused jitters in the Italian markets with a knock-on effect across the rest of Europe.

The Spanish blue-chip Ibex 35 index shed 3.77 percent to 7,919.60 points, leaving it as the only European bourse to be in the red for this year. That was the benchmark index’s worst session since September.

The FTSE MIB in Milan shed 4.50 percent. In Frankfurt, the DAX declined 2.49 percent, while the CAC 40 in Paris was down 3.01 percent.

After the easing of tensions in the sovereign debt market of late, the spread between the benchmark 10-year government bond and the German equivalent widened notably, with the risk premium up 29 basis points at 382. Italy’s risk premium also rose sharply.

“Spanish yields have blown up in the past hour to their highest levels since December as concerns about the Spanish government mount,” said Ioan Smith, a strategist at Knight Capital Europe in London. “In addition to the growing corruption scandal in Spanish politics, the Italian elections towards the end of the month are also a concern.”

Rajoy on Monday reiterated denials of any impropriety on his part and his close colleagues within the PP, “except for some things” that have been published.

The corruption scandal in Spain has been picked up by the international press including the Financial Times and The Wall Street Journal, prompting investors to take a cautious approach.

“This bombshell could hardly have detonated at a worse time, with a population facing record unemployment and unprecedented austerity, and already infuriated by a string of corruption scandals,” the FT said in an editorial. The paper called for an independent inquiry into the allegations of corruption within the PP.