German Chancellor Angela Merkel has praised Spanish Prime Minister Mariano Rajoy for his government's economic progress. The comments came amid slush-fund allegations against the premier which have investors worried.
The German chancellor - leader of the eurozone's strongest economy - expressed her confidence in the Spanish premier at a Berlin press conference on Monday as the stockmarket showed signs of distress over Spain's political ructions.
Madrid's main index the IBEX 35 dropped by 3.8 percent, its biggest one-day fall since the end of September.
Germany had "great respect and great admiration" for Madrid's economic reforms, Merkel said. Strict austerity measures and the nationalizations of several of Spain's largest banks had helped put the debt-stricken country back on track. These steps would have a positive effect on Spain's future, she added.
"We have a trustworthy relationship," Merkel said, pledging further support to the eurozone partner.
This followed a call by the leader of Spain's opposition Socialist party, Alfredo Perez Rubalcaba, over the weekend that Prime Minister Rajoy resign over corruption allegations.
The center-left daily newspaper El Pais published details from documents that had belonged to Luis Barcenas, the former treasurer of Rajoy's party, the People's Party (PP). According to El Pais, a party and high-ranking officials had been receiving money from a secret slush fund, mostly paid for by the construction industry and hidden from tax officials.
The report alleged that Rajoy had benefited from the so-called Guertel network and that nearly two-third of the payments breached Spanish law on party financing.
News of the alleged corruption scandal sparked public protesters outside of the PP offices in Madrid on Saturday.
The Spanish prime minister has repeatedly denied the accusations. "I have never received nor distributed undeclared money," Rajoy said.
Spanish politics overshadow economic progress
The International Monetary Fund (IMF) also praised Spain on Monday after completing its second monitoring mission of the country's financial sector.
"This clean-up is a major achievement that should strengthen confidence in the system and improve its ability to support the real economy," a statement issued by the IMF said, referring to the austerity measures taken by Rajoy's government.
A financial expert speaking to Reuters attributed the stockmarket fall to the country's political upheaval.
"The prospect of Rajoy's resignation has roiled the markets," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
"Any fresh political instability in [the] eurozone's most important periphery economy could undermine the sense of investor confidence and send Spanish yields higher, making it much more difficult for the government to implement its austerity measures," he said.
Prior to the revelations of a possible corruption scandal, Rajoy's government had garnered little affection from the public due to its support of measures that have slashed public spending. Unemployment has since soared above 26 percent amid the economic uncertainty, sparking many protests across Spain.
kms/ipj (AFP, Reuters, AP, dpa)