Pimco Sees Spain Bond Risk Rising on Rajoy Graft Allegations

Prime Minister Mariano Rajoy’s battle to rebut corruption allegations is adding to the risk of holding Spanish government debt, said Andrew Bosomworth, managing director at Pacific Investment Management Co.

“There is uncertainty as to the continuation of the government’s policies and its leadership,” said Bosomworth in a phone interview yesterday. “At least some questions remain unanswered. That leads to uncertainty in the market.”

The risk premium on Spanish 10-year debt jumped 29 basis points to 382 yesterday, the biggest one-day gain since September, while the country’s benchmark stock index, the Ibex-35, dropped 3.8 percent to the lowest close since Dec. 10.

Rajoy on Feb. 2 denied allegations by El Pais newspaper that he received some 25,000 euros ($34,000) a year from a secret fund run by the former treasurer of the governing People’s Party, Luis Barcenas. El Pais reproduced what it said was Barcenas’s handwritten ledger showing payments to the premier as well as colleagues including former Bankia SA Chairman Rodrigo Rato and party chief Dolores de Cospedal.

“Everything there referring to me and my party colleagues is not correct, except some things that have been published in certain media,” Rajoy said at a joint press conference with German Chancellor Angela Merkel yesterday. “It’s totally and absolutely false.”

Tax Probe

Cospedal denied receiving payments in a press conference last week and Rato’s lawyer, Ignacio Ayala, declined to comment through his assistant when contacted twice by Bloomberg.

Spain’s public prosecutor asked the tax agency to hand over records for the PP going back to 2000, El Pais reported today, citing people involved in the legal process without identifying them. The anticorruption unit of the prosecutor’s office also plans to call Barcenas as a witness, the newspaper said.

German Chancellor Angela Merkel gave Rajoy her backing yesterday at a joint press conference with the Spanish premier in Berlin. The leaders met to discuss their positions before EU budget negotiations scheduled for Feb. 7 and 8 in Brussels.

“I’m convinced that the Spanish government and Mariano Rajoy as prime minister can resolve this task, and Germany will help him with all of our strength,” Merkel said at a press conference in Berlin alongside Rajoy yesterday.

‘Strength and Courage’

El Mundo newspaper first turned the focus on PP funding with a Jan. 18 report that said Barcenas handed out monthly cash payments of as much as 15,000 euros to senior party officials.

The allegations dogging the prime minister have opened up another front for an administration already struggling to rein in its budget deficit, clean up the banking system and restart the economy in the face of mounting push-back from voters.

“I have the same appetite, hope, strength and courage as I had when I took office,” Rajoy said yesterday, repeating his denial of the accusations. “The PP government is stable.”

Rajoy’s popularity has plunged amid mounting reports of party corruption. Support for the PP dropped to 24 percent from 30 percent a month earlier in a poll by Metroscopia published by El Pais on Feb. 3, wiping out the party’s advantage over the main opposition Socialists.

The United Left, the coalition including former communists that polled at 6.9 percent in the 2011 election, had backing of 15 percent in the El Pais survey and the Union for Democratic Progress was at 14 percent. Metroscopia interviewed 1,000 people between Jan. 30 and Feb. 1 and the margin of error was 3.2 percentage points.

“We are not seeing voters move from the center right to the center left -- we are seeing them move from the center right to the extremes,” Bosomworth said. “That does not auger well for political stability.”

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