The eurozone could come under more pressure after a relatively calm spell

By Economics Correspondent Sean Whelan

Apart from the Cyprus upheaval (and, OK, it was a pretty big upheaval), things have been fairly quiet on the old “eurozone crisis” front for about a year.

But now it looks like that calm period may be in danger of coming to an end.

The proximate cause is the political crisis that has broken out in Portugal.

On Monday, Portuguese ten year debt was yielding just over 6%. Two days and two cabinet resignations later, the yield had burst through the 8% level.

Oh yes, the dreaded yields are rising again. And not just in Portugal.

There has been a general retreat from government bonds as an investment class since mid-May, a trend that accelerated with recent comments from US Fed chairman Ben Bernanke, which were taken by investors as signalling a possible end to bond buying by the USA’s Central Bank.

So investors are quietly moving money out of bonds, causing prices to fall, and yields to rise.

Yields have been edging up in many countries, including the US and Germany. In Ireland the ten year yield has gone from a low of 3.5% in mid May, to 4.1% this morning – about 60 basis points.

But in Portugal the rise has been alarming, moving – over the same period of time – from a low of 5.2% to 8% on Wednesday morning; some 280 basis points. Clearly something is going wrong in Portugal, and it’s being manifested in the political resignations that have spooked an already skittish market.

First to go was the Finance minister Vitor Gaspar, a former head of research at the ECB, and later head of the bureau of advisors the President of the European Commission. You could say he was the Troika’s dream candidate for the job of being finance minster in a bailout country.

Only problems was that he underestimated – severely – how bad the downturn would hit Portugal as a result of austerity budgeting. The resulting recession was much deeper and longer lasting, and the rate of unemployment much higher (17.5%), despite a surge in exports.

Not surprisingly, he wasn’t the most popular man in Portuguese politics. When he left his deputy was appointed to fill the post of finance minister but this didn’t go down well with Foreign Minister Paulo Portas, who tendered his resignation.

What makes this particularly significant is the fact that – as well as being foreign minister – Mr Portas is also the leader of the smaller party in Portugal’s coalition government. His party holds its annual congress at the weekend, and markets are rife with speculation that they may pull out of government, leading to an early general election.

The Portuguese crisis is being summed up with two words – austerity fatigue.

They are about two-thirds of the way through their Troika programme and have been very diligent in doing what they have agreed to. Problem is, there is little sign of light at the end of the tunnel.

While life is getting harder and harder for ordinary Portuguese (who were never the richest in the eurozone to begin with), there has been little sign of the economy coming right either, which might at least provide encouragement to the people to stick with it.

After a brave and determined effort, it looks like the Portuguese may be running into the sand. Their next Troika review starts on 15 July.

Ours starts next Monday, 9t July. Meanwhile Greece is involved in its traditional three-monthly row with its Troika team – this time over some 12,500 civil servants that were supposed to be moved off the main payroll and onto a “general reserve”, a sort of low paid waiting room prior to reassignment or more probably redundancy.

Having missed the deadline, they have until Friday to sort something out.

Meanwhile Cyprus is going back to the Troika to look for a modification of the terms of its bailout programme too.

But Cyprus is more frequently mentioned in terms of the EU finance ministers agreement last week to more or less institutionalise a Cyprus-style solution for banks that run into problems from now on.

Bondholders and depositors will be bailed-in (or burned if you prefer) before any taxpayers money is used to shore them up.

This decision has set off its own round of nerves among corporate treasurers and those fortunate souls who have more than €100,000 in cash – they’re wondering ‘where do I put my money now? Is it more or less safe after last week’s EU decision?’

This certainly won’t help weaker banks looking for deposits.

Then there is the upcoming review of banks asset quality to be carried out by the ECB and the European Banking Authority in the autumn. Its findings have the potential to further unsettle investors in European banks.

Closer to home we have the potential gap between the valuation of IBRC assets that are now offered for sale and the actual price achieved at sale – if any.

That gap will likely have to be filled by the State and any unsold assets will end up in NAMA, further inflating the contingent liability on the State from that quarter.

While the State’s finances are looking to be in pretty good shape after the June Exchequer figures, and while there is even a suggestion that if things go on as they are the Government could end up with around €500m to play with on Budget day, it wouldn’t take much to eat up that sum.

Using the cash to fill in another Anglo pothole would easily do the job. Another overspend in health would do it as well.

But the biggest danger of all is an absence of growth. With the eurozone in recession, nobody can export their way out of trouble, not even Germany (their growth forecast was halved by the IMF to 0.3%).

The fall in exports has also pulled Ireland back into recession.

Without growth Portugal cannot recover either. Without serious moves towards banking union, the European banking crisis will fester, denying firms the credit they need to grow and increasing the pressure on Spain and Italy.

The political time that Mario Draghi bought for political action with his “we will do whatever it takes” speech last year is running out.

All of which suggests that conditions are ripe for another outburst of market led panic over the eurozone debt crisis.