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How the political corruption scandal in Spain mirrors one in Germany under Kohl

Europe seems to have reached the nadir economically, judging from the last few economic data points. But there is still a long way to go. In my view, Spain remains the most important country in Europe’s sovereign debt crisis because of its large size and the potential for economic under-performance.

I have a slew of Spanish articles that provide more colour on the situation that I want to review here in the context of my overall thesis that Spain will need to apply for an OMT program by year end.

The latest problem is one of political corruption rather than poor economics. Spain is in an uproar over this scandal, particularly as Spanish Prime Minister Mariano Rajoy waited two full days before coming clean. The scandal revolves around papers of Luis Bárcenas, the ex-Treasury secretary of the ruling Partido Popular, obtained by Spanish daily El Pais which detail pay-offs to various operatives within the Partido Popular fro the period between 1990 and 2008.

For me, this Spanish scandal is reminiscent of a secret political payments scandal that rocked Germany over a decade ago. [private_gold]In 1999, a secret slush fund for the governing party CDU was uncovered in the German state of Hesse which allowed wealthy individuals and companies to secretly contribute to the party’s coffers during the entire period Helmut Kohl was Chancellor of Germany and therefore potentially influence policy. The scandal began when CDU Treasurer Walther Kiep was accused of receiving 1 million Deutsche Marks from the German arms dealer Karlheinz Schreiber without correctly recording it for taxing purposes or as a political donation.

It was later found out that the 1 million Deutsche Marks were an instalment payment toward 1.3 million DM that the German industrial firm Thyssen (now ThyssenKrupp) was making and that this particular slush fund was one of many secret slush funds operated by the CDU that used Swiss bank accounts. After repeated denials, former Chancellor Kohl took responsibility for the Treasurer’s actions and admitted that 2.1 million DM had gone through the CDU’s hidden and illegal slush fund. Controversial at the time was that Kohl refused to name the political donors because he gave them his word he would not do so. Kohl was forced to resign his position as honorary Chairman of the CDU and other former CDU officials went to trial. But Kohl was able to escape any legal sanction after paying 300,000 DM to the government and to charity. Top CDU officials including Present German Finance Minister Wolfgang Schäuble, Max Strauß, Roland Koch, and Manfred Kanther were implicated, Schäuble admitting to having received 100,000 DM of cash from arms dealer Schreiber in 1994.  Former Interior Minister and Hesse state CDU party leader Manfred Kanther was sentenced to 18 months probation for his involvement. Present Chancellor Angela Merkel was not implicated and as party Secretary General actually wrote an FAZ (Frankfurter Allgemeine Zeitung) opinion piece saying her party should sever all ties with Kohl . See the German-language Wikipedia entry of the ‘CDU-Spendenaffäre‘ for the full blow by blow.

Similarly, Mariano Rajoy now claims to have no connection to the secret payments. However, he was head of the party during the time payments went out as Kohl was during his own party contributions scandal. I believe we will find out that Rajoy, if not involved directly, had knowledge about the secret payments. This will fatally compromise his position as Prime Minister and he will be forced to resign. If this occurs, the question is at what point does it happen during the sovereign debt crisis and what are the implications of the Spanish government falling.

At this point, all of this is pure speculation. However, I do believe it will contribute to Spain’s decision to apply for an OMT program because of the nexus of missed economic targets, continued banking and state government problems and the government’s instability. Spain will need a formal program in place when these pressures converge upon sentiment in the sovereign bond market.

Below are the recent articles in both Spanish and English which I believe give a well-rounded view of the economic and political situation.

La red Gürtel también pagó viajes de familia a Mariano Rajoy | Intereconomía | 937033

According to La Gaceta, Spanish Prime Minister Mariano Rajoy paid for family trips with money received through the Partido Popular’s secret slush funds. They show what they believe is docmentary evidence. This directly contradicts his public statements of having no involvement.

El PP encargará un peritaje de los supuestos «papeles» de Bárcenas – La Razón digital

This is an article showing that the media do not believe the Partido Popular’s statements and want to see originals of all the documents in question to better understand who wrote what and when.

La tensión política en España impulsa la prima de riesgo sobre los 380 puntos | Economía | EL PAÍS

This article simply points out that yesterday’s stock meltdown was due to the politcal tension in Spain and has caused the premium for Spanish credit default swaps to rise to over 380 basis points. The Spanish stock market also fell 3.8% yesterday on the news.

´El mundo no se va a caer si Andalucía no cumple el déficit´ – La Opinión de Málaga

Here the vice President of the Partido Popular in Andalusia says “the world won’t end if Andalusia misses its deficit target”. Spanish state governments are under severe pressure to cut deficits to help the Spanish government debt to GDP numbers reach deficit targets and this has caused significant hardship in places like Andalusia. Even in Catalonia, the deficit target will be missed, and Diego Valderas, the Andalusian official here, pointed this out in making his remarks. The pshot is that the Spanish government is going to have to fight the states tooth and nail to get them to hit deficit targets.

EL PAÍS entrega a la fiscalía los papeles secretos de Bárcenas | Política | EL PAÍS

This morning, El Pais head Javier Moreno turned over the documents detailing Partido Popular’s secret money dealings to the police. The documents are copies of 14 pages of manuscripts by ex-Partido Popular Treasurer Luis Barcenas detaling the whom what, where, and how much of the slush fund activities. They were originally published in El Pais on 27 January.

Caso Bárcenas en EL PAÍS

This is the page on El Pais of articles tagged for the Bárcenas case. If you are looking for the latest information on this scandal, EL Pais is the place to go.

La crisis y la corrupción llevan al PP a sus expectativas más bajas | Política | EL PAÍS

The ruling Partido Popular in Spain is at its lowest ebb ever with only 23.9% of the voters supporting them after a corruption scandal has hit headlines there. As I have said before, the Spanish have no one to blame here but themselves because it was clear from the outset that Rajoy’s policy would be a failure. Now they have turned on him. If he is found to have taken funds, his government will fall and we will get new elections and the socialists will return to power. Markets will not like this, making an OMT request that much more likely. Of course, the socialists will have to keep up with the terms of the OMT if they want ECB support. That means more of the same.

Anger rises as scandal rocks Rajoy – FT.com

“Mariano Rajoy waited more than two days to comment on the slush fund scandal threatening to engulf both the Spanish prime minister and his Popular party. When the denial finally came, it was firm and unequivocal. “Never, I repeat never, did I receive or hand out black money, not in this party nor anywhere else,” Mr Rajoy declared over the weekend.
Until recently, many of his countrymen would have been inclined to believe him.”

Twin crises in Italy and Spain stalk markets as political unrest prevails – Telegraph

I don’t buy this thesis that the ECB would back away from the OMT on Spain or Italy but here it is.

“The escalating political crises in Italy and Spain are being watched with growing concern by bond investors, fearful that both countries could slide into paralysis and lose the crucial backing of the European Central Bank.”

More bad debts loom for cleaned-up Spanish banks | Reuters

“Spanish banks face rising bad loans in a deep recession that shows no sign of easing after getting through the worst of a deep clean of rotten property assets that gutted profits last year.”

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About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.