Damaged by scandal, Spain PM holds on

(MADRID) - Spain's Prime Minister Mariano Rajoy will keep his job despite being named in a corruption scandal, but the affair leaves him weakened as he tries to steer Spain out of a deep economic crisis, analysts say.

Allegations that Rajoy received secret payments from his conservative Popular Party make it harder for him to justify his austere reforms such as cutting salaries and pensioners' spending power.

"There is a high political cost to pay, with a problem of legitimacy" raised by the scandal, said political scientist Anton Losada of Santiago de Compostela University.

"He cannot demand sacrifices and at the same time make money, especially if it is not legal," Losada said.

Speaking alongside German Chancellor Angela Merkel on Monday, Rajoy repeated his denial of the alleged payments.

He has resisted calls to resign by the opposition -- and by angry demonstrators in the street -- saying the allegations are groundless.

Many Spaniards are outraged by reports of corruption emerging as Rajoy's government imposes pay cuts and tax rises during a recession that has driven the jobless rate to 26 percent.

Now he must deal with the damage to his image at home and abroad.

The Spanish leader heads to a key summit with his European Union partners on Thursday and Friday to negotiate the EU budget.

"His position at the European summit is weaker now," said Ferran Requejo, a political scientist at Barcelona's Pompeu Fabra University.

"An accusation of corruption in a governing party is a serious accusation."

The stakes of the summit are high for Rajoy: press reports say Spain could get 20 billion euros ($27 billion) less in EU subsidies in 2014-2020.

"He is not going to be listened to the slightest bit by the European institutions," Requejo said.

"He is not an important player in Europe and will not be one as long as figures such as the Spanish unemployment rate do not get better."

The scandal appeared to rattle investors' confidence in Spain. The Madrid stock market plunged on Monday, with the Ibex-35 share index closing nearly four percent lower. It recovered much of this ground on Tuesday, however, rising 2.2 percent.

The leader of Spain's opposition Socialist Party, Alfredo Perez Rubalcaba, on Sunday called on Rajoy to step down over the corruption scandal.

An online petition for Rajoy to resign at change.org had received more than 900,000 signatures by Tuesday evening.

Despite all this, "the likelihood of Rajoy resigning is very small, if not zero," Requejo said.

"However big the crisis, without a court case and convictions there are no political resignations in Spain."

Losada judged that the source of the scandal "clearly comes from inside the party," from members who consider Rajoy too soft on political issues such as the Catalonia region's push for independence.

"There is a part of the right-wing media, political and economic world that is active in the Popular Party and that has never liked Mariano Rajoy," Losada said.

At home, Rajoy benefits however from the unpopularity of the main opposition Socialist Party.

The Socialists are still mistrusted by voters for having been in charge when the worst of the economic crisis broke out in 2008.

A poll of voting intentions published on Sunday showed support for the Popular Party had fallen to 23.9 percent, but its decline had not helped the Socialists, who were even lower on 23.5 percent.

"Rajoy's future depends on his ability to prevent the party coming apart at the seams, and also on the health of the economy," Losada said.

"People are having a hard time" in the recession, but "if people start having a slightly less hard time, that will have a soothing effect."