(A daily view of what's eye-catching in Europe from EMEA Economics Editor Mike Peacock. The views expressed are his own.)
July 2 (Reuters) - More causes for concern in the euro zone.
Portuguese Finance Minister Vitor Gaspar resigned late yesterday, citing dwindling public support for his austerity drive. Gaspar was a genuine believer that the path back to growth is paved with debt-cutting measures, and has pushed through eye-watering tax rises and wage cuts over the past two years.
The departure of the technocrat minister puts a question mark over the country's timetable for exiting its bailout although he will be replaced by Treasury Secretary Maria Luis de Albuquerque, who presided over Portugal's tentative return to bond markets earlier this year.
Gaspar had become a target for the junior partner in the ruling coalition so his assertion that this will create a more cohesive government could hold true although the timing looks odd, coming two weeks before the next bailout review by European Union and International Monetary Fund officials.
That could well be pushed back now, and if Gaspar is right and public opinion turns more hostile, given the grip of a deep recession looks unrelenting, things will get much more difficult. Prime Minister Pedro Passos Coelho has already said he may seek a further easing of debt-cutting goals for next year if the economic outlook worsens.
All this is happening against a backdrop of euro zone borrowing costs on the periphery firmly on the rise again. Watch the secondary bond market today. Having said that (it's a day for ifs and buts and caveats. No one said this story was simple) PMI surveys from Italy and Spain surprised on the upside yesterday and offered glimmers of hope, pushing their yields lower.
If anything, the mood music coming out of Greece is even more worrying although the addition of two independent lawmakers to the ruling coalition has bolstered its thin parliamentary majority a little.
Talks have resumed with the EU/IMF/ECB troika with some suggestions that the lenders may refuse to pay at least some of the 8.1 billion euro tranche on offer and dribble it out month by month instead in order to focus minds in Athens. Anything more dramatic is unlikely since Greece faces big bond redemptions next month and nobody wants a default.
But the facts are that the privatisation process which was supposed to help bring 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 but his government is seeking to lower its privatisation revenue target after failing to sell its natural gas operation and there is a 1 billion euro black hole in the state-run health insurer, so its lenders may demand measures to fill that.
There is little chance of the euro zone pulling the plug - for reasons of self-preservation - but if the talks fail, the International Monetary Fund might have to withdraw from Greece's rescue to avoid violating its own rules. For that reason, the working assumption is the talks won't be allowed to fail.
It looks like we're back to the diplomatic dance of 'extend and pretend' but after months of complacent assumptions (helped by the European Central Bank's backstopping of the currency bloc) that Athens was on the right track, it is now clear that everything is far from well. EU finance officials held a long session on Greece last night.
Italy is back in the spotlight too with some analysts saying its numbers mean it will have to seek help from the euro zone rescue fund sooner or later. Prime Minister Enrico Letta has called a government meeting for Thursday after a coalition partner threatened to withdraw support, citing frustration with the slow pace of reform. The Civic Choice group has too few parliamentary seats to bring the government down but it is led by former technocrat premier Mario Monti so its voice will resonate.
The centre-left PD and centre-right PDL are already at odds over the latter's insistence on scrapping a housing tax introduced by Monti, which will require cuts or tax rises elsewhere to keep within EU borrowing limits.
In terms of events today, the ECB issues a report on the international role of the euro, Irish Prime Minister Enda Kenny talks to the European Parliament about Ireland's six-month presidency of the EU which has just ended and Spanish Economy Minister Luis de Guindos is speaking.
Egypt has shot back to the top of the emerging market worry list after President Mohamed Mursi rebuffed an army ultimatum to force a resolution to Egypt's political crisis. Even before that, the cost of insuring Egyptian debt against default surged to record highs on Monday.
In the deeper markets, German Bund futures have barely budged with Thursday's ECB meeting and Friday's key U.S. jobs report already looming large. European stock futures are pointing to a flat open as well.
(Editing by Catherine Evans) Keywords: EUROPE/VIEW
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