'Secret ledger' at heart of Spanish corruption scandal given to authorities

Spanish authorities are stepping up their investigation into a high-level corruption scandal that is shaking the government of Prime Minister Mariano Rajoy – and threatening Europe’s already fragile credibility that it will be able to drag itself out of years of economic and political crisis.

Today Spain’s biggest daily, El País, which disclosed the scandal, handed authorities perhaps the most damaging evidence threatening Spain’s government and Mr. Rajoy. It’s a 14-page handwritten ledger allegedly tracking how some 7.5 million euros ($10.1 million) in donations, mostly from builders, were funneled for almost two decades to leaders of the now governing Popular Party (PP), including Rajoy.

El País has not disclosed who the whistleblower is or how its source came into possession of what the paper has described as a secret accounting book kept by former PP Treasurer Luis Bárcenas.

Today Mr. Bárcenas, who is currently being investigated separately for corruption in Spanish courts, once again denied he kept a secret accounting book. “This notebook doesn’t exist, nor has it ever existed. That is not my handwriting,” he said Tuesday during a short interview with a minor TV channel.

Denials and recriminations

El País has published excerpts of the book showing the names of Rajoy and most high-ranking PP leaders, including former ministers, members of Parliament, and perhaps former Prime Minister José María Aznar.

Rajoy and the government vehemently deny the accusations and have promised full disclosure. They insist the information is part of a conspiracy to destabilize Spain – the EU's fourth largest economy – and to undermine policies meant to pull the country out of its worst crisis in decades.

But legal and public pressure on the PP is mounting, and fast. The anticorruption unit of the attorney general's office is combing through PP tax returns since 2000 and trying to confirm the authenticity of the parallel accounting book that El País delivered. Markets and global governments are jittery that the scandal could force new elections, even if that remains unlikely for now.

Over the weekend, after an extraordinary meeting of the PP’s barons, Rajoy said that everything that has been published about the ledger is a lie. He said he would publish his tax returns to prove he never received some 25,000 euros ($34,000) annually for 11 years, as the alleged accounting book suggests. He refused to answer questions from the media, though.

On Monday he offered another denial during a press conference in Berlin with Chancellor Angela Merkel. “It’s a difficult moment but we will overcome it because the allegations are absolutely false,” Rajoy said.

“Everything that involves me and my party colleague is a lie. Except for some things that some media has already published,” he added, referring to former and active officials and non-government organizations that have confirmed some of the payments and the existence of the secret accounting.

Infighting in the PP

Perhaps most damaging, at least in public opinion, is the public admission by Jorge Trías, a former PP member of Parliament and reportedly a close friend of Bárcenas, that he saw the secret accounting book. Mr. Trías says that the PP's and government's denials of the ledger are more damaging than the ledger's contents – and are exposing growing infighting within the ruling party.

Bárcenas also suggested Tuesday that enemies of Rajoy from within his party are behind a complex effort to hurt Rajoy. “Someone with access to the accounting could be behind this montage,” he said.

Their intention, Bárcenas argues, is to “topple” Rajoy and his government, to exacerbate internal divisions between hardliners in the conservative party and Rajoy’s more centrist government. He only identified them as “those who have no other way to rise to power.”

The rift in the PP is as political as it is ideological. Hardliners want the PP to stick more to its inflexible anti-abortion, pro-church, and pro-centralization pillars, while the Rajoy centrists are more pragmatic, especially as their top priorities are economic, not political.

But it's also a question of political egos. Rajoy had to overcome stiff opposition within the party to be named its leader, eventually imposing his authority on hardliners who tried to challenge him.

It's unlikely, however, that the PP would be willing to shoot itself in the foot in the way that Bárcenas is suggesting. Many analysts and columnists say that he is just trying to cover his own tracks. In fact, hardliners within the PP are publicly pressuring Rajoy to take legal action against Bárcenas – pressure that Rajoy has so far resisted.

Rajoy and Spain safe for now

The anticorruption unit has summoned Bárcenas and Trías to testify tomorrow as part of its preliminary investigation. But it’s unlikely that Rajoy could be legally implicated, even if the authenticity of the book is confirmed.

“While the scandal will likely generate significant noise, the risk of government instability in the short-term is still low,” said Antonio Barroso, an analyst with political risk bellwether Eurasia Group, in a research note.

Most major parties have now called for Rajoy's resignation and early elections, if not for his alleged involvement, for the damage that Spain will endure if the scandal drags on. In any case, a no-confidence vote in Parliament is also unlikely because the PP holds an absolute majority.

But public opinion and internal political pressure from within the PP could change that. “Rajoy could be forced to resign if senior party leaders launch an internal coup, but this seems unlikely at this stage,” Mr. Barroso wrote.

The scandal no doubt will dominate Spain’s political scene for months, especially as courts and the attorney general’s office investigate. There are also other unrelated corruption cases involving PP officials making their way through courts.

“If markets start punishing Spain and the government is forced to apply for a bailout, Rajoy could come under increased pressure to step down and appoint someone that could manage the new situation,” Barroso said. “Critical statements from important party members such as regional PP leaders or senior government figures should be regarded as a signal that the situation was worsening.”