Investors worried about Spain’s political stability have dumped Spanish holdings and pushed up the country’s borrowing costs after the eruption of a corruption scandal involving Prime Minister Mariano Rajoy.

Until now, the government’s durability was one of the few advantages Spain held over fellow euro zone problem case Italy.

In reality, the likelihood that the Rajoy scandal will force the collapse of the current right-of-centre government is slim. But investors are right to be concerned, because political stability involves more than the survival of a country’s government – it also requires the trust of the electorate in the institutions that govern them. Allegations of corruption at the highest level are corroding that trust in Spain.

On January 31, the Spanish newspaper El Pais published copies of what it said were ledgers from secret accounts held by Luis Barcenas, the former treasurer of the ruling People’s Party, which revealed a party slush fund. The newspaper said e7.5 million (R89.1m) in corporate donations were channelled into the fund and allegedly doled out from 1997 to 2009 to senior party members, including Rajoy.

The party has denied wrongdoing, and Rajoy has twice reiterated that position.

The denials failed to kill off the scandal. Opposition leader Alfredo Pérez Rubalcaba, of the Spanish Socialist Workers’ Party, has called for Rajoy’s resignation, which would spark an early election.

Yet it isn’t clear how much good this would do Rubalcaba. According to the latest opinion survey, the socialists and Popular Party are each supported by less than 25 percent of those polled, and Rubalcaba is less popular than Rajoy.

Another potential trigger for the government’s collapse could be external, as was the case for Italy in August 2011, when the European Central Bank (ECB) pulled the plug on then-prime minister Silvio Berlusconi. The same could happen in Spain if bond yields rise high enough to require the ECB to step in and buy bonds, and ECB president Mario Draghi decides that Rajoy and his government have to go. But those are big ifs. A more likely outcome would be a series of resignations as the Rajoy administration cleans house.

That said, the scandal will probably increase voters’ resistance to the unpopular reforms that Rajoy has tried to introduce. With the euro zone’s second-highest level of unemployment, Spain has been one of the countries hit hardest by this crisis. Trying to get the electorate on board for painful reforms and further wage and pension cuts will be an even harder sell for a government perceived to be corrupt.

Even if the scandal doesn’t spark the government’s collapse, it is deeply damaging. It will further erode public trust in Spain’s political leaders and institutions.

According to the Metroscopia poll, 76 percent of Spaniards don’t believe the People’s Party’s denials. Even worse, 58 percent of the party’s supporters think it’s lying. All the Spanish businessmen with whom I discussed the latest scandal expect it to get worse before it gets better.

As trust in Spain’s government erodes, so will the functioning of its wider institutions. If left to worsen, these failures render a country’s business environment unstable and unattractive to investors.

Any such loss of confidence would be especially problematic for Spain, which relies heavily on foreign capital and investment to finance its current-account deficit.

Unless the government can prove the latest allegations wrong or show that it is serious about ending corruption, Spain will take a step for the worse.

Megan Greene is a Bloomberg columnist.