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Guest Commentary: Corruption Is Latest Threat to Spain, Eurozone

Guest Commentary: Corruption Is Latest Threat to Spain, Eurozone

Yohay Elam, ForexCrunch,

Recent bond market stabilityis now being overshadowed bya corruption scandal within Spain’s ruling party that could destabilize the government and initiate another wave of crisis in the Eurozone.

Spain is ruled by the center-right Partido Popular (PP). The party won a landslide victory in November 2011 and returned to power after more than 7 years in opposition. Allegedly, corruption has been common among the party ranks for around 20 years, regardless of the group’s political situation.

Bribes ranging from EUR 5,000 to EUR 15,000 have been commonplace, even among the highest ranks, and it has been alleged that even top politicians may have been aware of these “under-the-table” transactions and perhaps even approved them. Luis Bárcenas, who managed the party’s finances, is thought to have EUR 22 million stashed away in a Swiss bank account.

However, this squirreled money is just the tip of the iceberg, according to various articles in the Spanish press. Coverage of corruption hasn’t been limited to the left-leaning papers, either. It was also reported by the right-leaning El Mundo.

Spaniards are not too keen on the left-wing Spanish Socialist Workers’ Party (PSOE), the former ruling party that is already mired in trouble. Spain suffers from an inconceivable unemployment rate of 26.6%, with youth unemployment already reaching 56%. In addition, the banking system is struggling, with money being poured into it like a black hole. The nation’s real estate bust is already very painful, but some estimate that housing prices have an additional 25% left to fall.

Spain’s regions are also struggling with their finances, and some regions are thinking about leaving Spanish rule. The rich northeastern region of Catalonia is moving slowly towards a referendum for independence in 2014, with or without the government’s consent. Essentially, Spain is suffering from an ongoing recession, and there is no light at the end of the tunnel.

So how have Spaniards managed to get by so far? First, despite its fiscal problems, Spain remains a welfare state that helps the unemployed. In addition, there is a strong net of family ties, meaning that family members help each other, although the recent cut in pensions could limit the degree of help available for struggling families.

This outbreak of corruption could well be the straw that breaks the camel’s back, sparking a renewal of the large-scale public protests that took place in Spain in May 2011.

So far, Spain has not asked for a bailout. The European Central Bank (ECB) has offered conditional bond buying if Spain asks and receives a bailout. This so-called Outright Monetary Transaction (OMT) program has served as a “bazooka” so far; its mere existence has restored confidence and brought funding costs down.

However, political instability could shake investor confidence and raise funding costs once again. It remains to be seen, however, whether cases of corruption will be uncovered among the highest ranks of the Spanish government.

(For more insights and commentary about the Euro, see the EUR/USD weekly outlook on Forex Crunch.)

By Yohay Elam of Forex Crunch

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.