Euro jitters return on Spanish graft allegations

Spain was yanked back closer to the danger zone as financial markets reacted badly to accusations of corruption made at the weekend against Mariano Rajoy's ruling Popular Party.

Madrid's 10-year borrowing yields jumped 22 points to 5.44 per cent as traders digested Mr Rajoy's rejection of claims he took money from a slush fund paid into by construction companies.

Spanish 10-year bond yields touched 7.6 per cent last summer as fears mounted that the country could crash out of the single currency, but rates fell after Mario Draghi, president of the European Central Bank, promised to come to the rescue if necessary, and Madrid accepted an official bailout for its bombed-out financial sector.

But the latest corruption allegations have rekindled fears Spain might not be able to turn itself around. "The market is looking at the political tension and asking whether this could be the catalyst for a change in direction," Jamie Searle of Citigroup said. The German Chancellor, Angela Merkel, backed Mr Rajoy yesterday, saying that she has "full trust" in the Spanish government.

Meanwhile, Mr Draghi became embroiled in the Monte dei Paschi scandal as a source at the Bank of Italy told Reuters the ECB boss was told of doubts about the health of the Siena bank when he was chief of Italy's central bank between 2006 and 2001. The BoI is accused of failing properly to supervise Monte dei Paschi, which required a state bailout last month.