Rato probe casts shadow over Rajoy government

Spain's centre-right government is battling to contain the fallout from a tax investigation against Rodrigo Rato, the former head of the International Monetary Fund and a former senior leader of the ruling Popular party.

Mr Rato was briefly detained last week, and had both his home and office searched by tax investigators, over suspicions that he engaged in tax fraud, asset stripping and money laundering. He has denied any wrongdoing.

The case against the former IMF chief is still at an early stage - but is widely expected to damage the electoral prospects on the government of Mariano Rajoy all the same. Spain's prime minister faces regional and local elections next month, and a general election towards the end of the year.

Analysts say the media frenzy surrounding the Rato case is drowning out upbeat news about Spain's economic recovery, while inflaming voter anger about political corruption inside the ruling party.

"This is a heavy blow for the PP," said Pablo Simon, a political scientist at Madrid's Carlos III University, highlighting that Mr Rato had been a pivotal figure inside the party for many years. "I think there is no doubt that voters will punish the PP [at next month's elections]," he added

Mr Rajoy and his budget minister, Cristobal Montoro, on Wednesday faced a barrage of criticism over the government's role in the Rato affair - and in particular about a controversial 2012 tax amnesty law that is closely linked to the current probe. The measure allowed Mr Rato and 30,000 other wealthy individuals to repatriate a total of €40bn from undeclared accounts held outside Spain, in exchange for a one-off tax payment at a specially reduced rate.

Spain's tax authorities have said they are investigating 700 individuals who may have used the amnesty to launder money. Mr Rato is among those suspects, but most have yet to be named.

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Even before the latest scandal, polls showed that the PP was likely to suffer a sharp fall in support in next month's elections. The party's malaise has given rise to speculation that it could seek a change in leadership ahead of the general election - a prospect that most analysts regard as unlikely.

"The party won't oust him and there will be no internal revolt," said Jose Ignacio Torreblanca, the director of the Madrid office of the European Council on Foreign Relations. "The only way in which there can be a change is if Rajoy himself decides that, for the sake of his own image and his place in history, he can no longer go on."

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