BRUSSELS (Reuters) – A teetering Portuguese government has underlined the threat that the euro zone debt crisis, in hibernation for almost a year, may be about to reawaken.
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 bond-buying program.
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 program 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 program later this year, the problems are more of reputation than implementation.
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 reawakens agitated.
(Additional reporting by Annika Breidthardt, editing by Mike Peacock)