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 As Mariano Rajoy told reporters he would not step down, former Popular Party treasurer Luis Barcenas testified behind closed doors in Madrid, telling a judge investigating the slush fund allegations that he gave tens of thousands of euros in secret cash payments to Rajoy and party secretary general Maria Delores de Cospedal between 2008 and 2010 while they were key opposition leaders.
Rajoy declined to comment on specifics, while Cospedal slammed Barcenas' declarations as "new slander and lies" from a criminal suspect and said she never received cash payments from him. Rajoy insisted after meeting with Poland's premier that he will "see out the mandate the Spanish electorate gave me. This is a stable government that is going to fulfill its obligations."
Rajoy, who says neither he nor other party figures received illegal payments, did not deny exchanging text messages with now jailed former Popular Party treasurer Luis Barcenas. He insisted that the messages demonstrated that the state "was not bowing to blackmail. This is a serious democracy."
But the text messages from 2011-2013, some analysts said, appeared to convey a tone of cronyism among two men who talked to each other like buddies.
"Luis, nothing is easy," one message from Rajoy to Barcenas said. "But we are doing what we can. Cheer up."
Analysts are divided over whether the scandal could prompt an early exit for Rajoy, whose conservative party ousted the ruling Socialists in a 2011 landslide giving his party an absolute majority in Parliament and no requirement to call new elections until late 2015.
If Rajoy's position as leader becomes untenable, his party could theoretically decide he needs to go and select someone else as prime minister. It's unlikely that there would be any changes in Spain's tough austerity measures aimed at helping keep the European debt crisis at bay.
But the ever deepening scandal and its twists and turns have shaken Spaniards who saw their country teeter on the edge of a full-blown public finances bailout last year before Rajoy asked for a 100 billion euro ($130 billion) bailout of the country's hurting banks, raised taxes and cut public services -- all in the name of saving the country from ruin.
And the corruption allegations come on top of unemployment at 27 percent with the rate double that for those under age 25, plus an ill-fated elephant hunting trip by Spain's king last year seen as a shameless sign of royal excess while the economy tanked.
Sitting on a shady park bench on a hot day in downtown Madrid, guide dog trainer Juan Antonio Luna said the corruption allegations on top of the painful cuts Spaniards have had to endure keep on amazing and angering him as details leak out bit by bit .
"They raised our taxes, they cut services like national health care, and they got rid of scholarships for college students," said Luna, 56. "But there are millions (of euros) hidden away in Switzerland. If this happened in the United States, they would fire the president. Not here. They have no shame. They are raising taxes through the roof and swindling us at the same time."
Investors are closely watching the case play out without panicking yet, but Spain's already shaky image abroad is getting hammered, said Javier del Rey, a political science professor at Madrid's Complutense University.
"We're hitting new lows, with the Spanish brand tarnished across Europe," he said. "The question is if Rajoy stays, will it go down more? How is he going to be received in Brussels, London and Paris under these circumstances?"
Rajoy's leadership of his party is strong and party members fear that forcing him to step down could be make matters worse, potentially causing the party itself to implode, said Florentino Portero, a professor of contemporary history at Spain's Open University.
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 "But Barcenas places a question mark over whether Rajoy has the legitimacy to lead the government, particularly at a moment when strong leadership is needed to carry out the reforms Spain needs," Portero said. "At a time when the government is raising taxes to unprecedented limits, threatening the livelihood of the middle classes, that the same party should be found to be hiding its own income from the tax inspectors is morally unacceptable."
The scandal started earlier this year, when allegations of irregular or illegal party member financing emerged in a scheme allegedly orchestrated by Barcenas, a top financial in the Popular Party for nearly two decades until her resigned in 2009 after being named as a suspect for illegal party funding.
Details of the case have dripped out piecemeal for months, but reached a fever pitch on Sunday, when the text messages between Barcenas and Rajoy were printed by the El Mundo newspaper.
Barcenas was jailed last month while awaiting possible trial on tax fraud and money-laundering charges after the National Court found he had held the 47 million euros in secret Swiss bank accounts. Speculation has been rampant since then that he might try to drag the party and the government into the scandal, and TV camera crews film everyone who shows up outside jail to visit him.
While the slush fund probe has rocked the party and the county, Rajoy on Monday boasted that his party's economic reforms were beginning to pay off.
"Let no one think we are going to be distracted from getting Spain out of the crisis," he said.
During his appearance before a judge held behind closed doors, Barcenas gave details of making cash payments directly to Rajoy and Cospedal over a three-year period while Rajoy was Spain's opposition leader, the leading newspaper El Pais reported. The private news agency Europa Press said Barcenas claimed to have given 25,000 euros to Rajoy and Cospedal in 2010 alone but acknowledged there were no receipts.
He also reportedly confirmed the authenticity of ledger sheets handwritten by him and published by El Mundo last week allegedly documenting other under-the-table payments to Rajoy and other party leaders. El Mundo said the documents showed Rajoy received at least 42,000 euros in payments while serving as a government minister between 1997 and 1999.
Other Popular Party members portrayed Barcenas as a liar and a tax cheat who is trying to save himself by falsely implicating Rajoy.
"It's Barcenas who is in jail and it's up to him to explain where he got the money in Switzerland from," said Carlos Floriano, the party's deputy national organizer.
Barcenas initially claimed the money stemmed from private business deals. But last week El Mundo quoted him as saying the Popular Party has long been illegally funded.
Economy Minister Luis de Guindos dismissed suggestions that the scandal was affecting Spain's economic credibility, noting that Spanish stocks rose slightly on Monday and interest rates eased on the nation's benchmark 10-year bond.
"As regards international investors," he said, "nobody has asked me about this."
[Associated
Press; By ALAN CLENDENNING and CIARAN GILES]
Copyright 2013 The Associated
Press. All rights reserved. This material may not be published,
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