Spain’s tarnished brand

A recent spate of corruption scandals has hit politicians and business figures The news could put pressure on the risk premium and slam the brakes on investment

Miguel Ángel García Vega
Repair work on one of Spain's iconic roadside bull signs.
Repair work on one of Spain's iconic roadside bull signs.CORDON PRESS

The slew of recent corruption scandals in Spain, which has drawn intense interest from the media both domestically and overseas of late, has besmirched the image of the country. The consequences of this remain uncertain, but the Gürtel kickbacks-for-contracts case, as well as allegations of illegal donations by companies to the ruling Popular Party (PP) and dubious cash payments to PP officials detailed in the secret ledgers supposedly compiled by the party's former treasurer, Luis Bárcenas, throw up a number of possible scenarios, none of which are exactly heartening.

Some observers have pointed out the threat this could pose to Spain's risk premium, to the extreme of pushing up the spread between the yield on the Spanish 10-year government bond and the German equivalent to such levels that the full bailout the government of Prime Minister Mariano Rajoy has so far managed to avoid becomes inevitable. That, however, remains to be seen. What analysts have pointed out is that decisions on investment are on hold as investors await the denouement on events on the political front arising from the scandals, while Spain's image in Latin America has deteriorated.

The times when Spain was being heralded as a dynamic newcomer to the developed world on the back of an extended economic boom are now long gone. The country has lost its air of vitality and freshness, with Spain becoming a source of concern for its European partners, who have seen political worries added to those about the state of the economy.

The last batch of scandals has come at a time when things were starting to look up. In the wake of European Central Bank President Mario Draghi's now-famous pledge in July of last year to do everything within his powers to guarantee the future of the euro, the pressure on Spanish government bonds eased. However, the progress has been halted and alarm bells are starting to ring once more.

Companies that offer bribes to win contracts are not the most efficient

"The big problem is that the political risk could produce an increase in pressure on Spain's debt to the extent that could even oblige it to seek a bailout," warns Stephanie Hare, of the think-tank Oxford Analytica. "Corruption could derail the reform processes that the economy needs to improve."

According to Alina Mungiu-Pippidi, the director of the influential European Center of Anticorruption Research at the Hertie School of Governance in Berlin, corruption is the biggest challenge facing democracy. "Can you have political parties without clientelism or corruption?" she asks.

In general terms, Mungiu-Pippidi argues that "greater levels of corruption lead to a drop in competitiveness, and this translates into fewer jobs," explaining that companies that offer bribes to win contracts are not necessarily the most efficient.

According to Juan Rosell, the president of the Spanish Confederation of Business Organizations (CEOE), the impact of recent cases of corruption in Spain has had a "catastrophic" effect on the image of Spain. The CEOE has had its own headaches of late in this regard. Rosell's predecessor, Gerardo Díaz Ferrán, continues to languish in jail as he faces a number of charges including money laundering and tax fraud in connection with the bankruptcy of his travel business Marsans, while the current number two at the CEOE, Arturo Fernández, has been accused by workers at his Madrid catering business Grupo Arturo Cantoblanco of paying them overtime wages under the table, in what could constitute a case of tax and social security fraud.

The big problem would be if investors thought that this didn't bother us"

The adjectives that come to mind in the case of other experts such as Javier Noya, the chief researcher on Spain's image overseas at the Real Instituto Elcano think-tank, to describe the impact of financial shenanigans by politicians and businessmen include "brutal" and "very serious."

Emilio Ontiveros, the head of the AFI financial think-tank, speaks of an "erosion" of Spain's image abroad. According to Ontiveros, recent corruption cases have put foreign investors "on hold mode when it comes to making their investment decisions." The questions being asked are if the sleaze will create a crisis in the government that forces Rajoy to step down, and if there will be an explosion of social unrest.

"Foreign investors know that if Mariano Rajoy does not fall now, this scandal will transform itself into a long process that will take years to resolve; and they are factoring this in," Elcano's Noya says.

International Transparency's index for last year places Spain 30th on the table after Cyprus and Botswana - but then again, Spain has never been noted for the transparency of its institutions, and there have been cases of corruption in the past. Paradoxically, a number of experts argue that precisely because of its track record, the impact of the current spate of scandals has limited the fallout. "It has acted as a cushion," Noya argues. "Coming as it does from a Mediterranean country, sadly it's not something that surprises people abroad. If this had happened in England or the United States, the impact would have been tremendous."

That perception offers scant consolation for Carlos Espinosa de los Monteros, the government's high commissioner for Brand Spain. "In the short run it won't have an impact on the economy or companies," he says. "It would be another thing if it festers, and there is a trickle of scandals throughout a year," he adds. "The big problem would be if we transmit to investors and the rest of the world the impression that this doesn't bother us." Nonetheless, Espinosa del los Monteros remains relatively sanguine. "Perceptions of a country-brand, either good or bad, take time to change," he says

José Carlos Díez, chief economist at InterMoney, believes that "investor greed is more powerful than memory; everybody forgets everything." However, he acknowledges the impact the scandals could have on the risk premium, as well as investment decisions regarding the stock and debt markets. Cristina Manzano, the director of the online publication esGlobal, says the markets and Spain's European allies have put the country "on the list of questionable partners."

Deterioration of a country's brand particularly affects companies that rely on public works contracts or utilities that depend on securing state concessions in regulated sectors of an economy. This could have a serious effect on Spanish companies that operate in Latin America.

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