* Portuguese crisis underlines shakiness of euro zone
* Greece and Cyprus also face challenges to meet bailout
* Officials quietly concerned about return of full-blown
By Luke Baker
BRUSSELS, July 3 A teetering Portuguese
government has underlined the threat that the euro zone debt
crisis, in hibernation for almost a year, may be about to
From Greece to Cyprus, Slovenia to Spain and Italy, and now
most pressingly Portugal, where the finance and foreign
ministers resigned in the space of two days, a host of problems
is stirring after 10 months of relative calm imposed by the
European Central Bank.
Portuguese Prime Minister Pedro Passos Coelho told the
nation in an address late on Tuesday that he did not accept the
foreign minister's resignation and would try to go on governing.
If his government does end up collapsing, as is now more
likely, it will raise immediate questions about Lisbon's ability
to meet the terms of the 78-billion-euro bailout it agreed with
the EU and International Monetary Fund in 2011.
Portugal had been held up as an example of a bailout country
doing all the right things to get its economy back in shape.
That reputation is now harder to sustain and even before this
latest crisis, the International Monetary Fund reported last
month that Lisbon's debt position was "very fragile".
Coming soon after the near-collapse of the Greek government,
which has been given until Monday to show it can meet the
demands of its own EU-IMF bailout, the euro zone may be on the
brink of falling back into full-on crisis.
EU officials have been at pains to talk down any unrest,
buoyed by the tranquility in financial markets since European
Central Bank President Mario Draghi made good on his pledge last
summer to do whatever it takes to protect the euro via a
European Commission President Jose Manuel Barroso has spoken
of the worst of the crisis being over, and the economic affairs
commissioner, Olli Rehn, has often dismissed "doomsayers" who
once predicted the euro would collapse.
But despite the desire to project calm, EU officials quietly
acknowledge that all is not well and that any number of problems
could throw the region back into turmoil.
"There are always issues simmering under the surface," said
an EU diplomat who has been dealing first hand with the crisis
since it erupted in Greece in early 2010.
"It's far from over. The immediacy may have ebbed away, but
I think we're all aware that under the surface, there's still a
lot of stuff than can come back to bite us."
During a meeting of finance officials from the 17 euro
countries on Tuesday, there was agreement that the "optimism in
the euro zone is not justified, that we are in worse shape than
it seems," according to one source at the meeting.
The situation in Portugal was a particular concern, said JP
Morgan economist Alex White.
"The announcement this afternoon that Paulo Portas, the
foreign minister, has resigned significantly escalates our
near-term concerns," he said in a note to clients. "At the
moment risks appear elevated."
All that is coming against a backdrop of rising euro zone
borrowing costs once again after the U.S. Federal Reserve's
announcement of an exit strategy from its money-printing
programme put world markets back into a spin.
Portuguese 10-year bond yields spiked up to eight percent on
Wednesday with reports of further ministerial resignations
throwing the coalition government's future into peril.
Portas has to decide whether to stay in his post or pull his
rightist CDS-PP party out of the coalition, robbing the
government of its majority.
Greece, which has resumed talks with its EU and IMF lenders,
is every bit as alarming.
A privatization process, which was supposed to help cut into
Greece's debt mountain down, has stalled and progress on public
sector reform is faltering.
Prime Minister Antonis Samaras has ruled out a fresh round
of cuts, his government is seeking to lower its privatization
revenue target after failing to sell its natural gas operation
and there is a 1 billion euros black hole in the state-run
health insurer, so its lenders may demand measures to fill that.
There are some suggestions that the EU and IMF may refuse to
pay at least some of the 8.1 billion euros bailout tranche on
offer and dribble it out instead in order to focus minds in
Athens. Anything more dramatic would be risky since Greece faces
big bond redemptions next month and nobody wants a default.
With German elections looming in September, Angela Merkel's
government is determined not to rock the boat beforehand.
CRISIS AWAKENS FROM SLUMBER
Spain and Italy, two far larger economies, also major risks,
as do banking sector problems in Slovenia, slow reforms in
Cyprus and a scandal in Ireland that has shaken confidence.
In a note to clients late last month, Italy's Mediobanca
warned that the country would "inevitably end up in an EU
bailout request" in the next six months unless borrowing costs
could be kept low and the economy found some traction.
Prime Minister Enrico Letta, in office only since April,
faces instability in his coalition, with former prime minister
Mario Monti threatening to withdraw support because of the slow
pace of desperately needed economic reforms.
While Spain may have avoided a full bailout so far, its
banks - which received 40 billion euros from the euro zone
rescue fund in 2012 - face a long road to rehabilitation, as do
those in Ireland. The IMF praised both countries for their
efforts last month, but also warned of risks ahead.
"There are so many negatives outside of Greece as well. On
the rest of them, we just want them postponed until after the
summer," said one senior euro zone source.
In Ireland, which has performed best of the rescued
countries and is expected to emerge from its assistance
programme later this year, the problems are more of reputation
Transcripts of telephone conversations from 2008 have
revealed how bankers at Anglo Irish Bank made light of the Irish
government's decision to guarantee their liabilities, a move
that ultimately saddled the nation with vast debts.
The bankers also ridiculed Germany - the chief underwriter
of all the rescue loans in Europe - singing "Deutschland ueber
alles" on the tapes, which has infuriated German officials, the
very people the Irish government needs to keep happy.
German Finance Minister Wolfgang Schaeuble described the
bankers as contemptuous.
While Ireland's problems are likely to blow over, those in
Portugal, Greece and Cyprus, which also has tough bailout
conditions to meet, are clear and present, and those in Italy
and Spain show few signs of disappearing.
EU institutions effectively shut down in August. but that
might not prevent a restless summer as the slumbering crisis
(Additional reporting by Annika Breidthardt, editing by Mike