The temperature is rising in Portugal

Last week everyone was clamoring about Italy.

In the aftermath of the UK's EU referendum, markets started worrying about what a Brexit would mean for one of the euro area's sore spots - Italian banks.

But this week, attention has started to shift over to Portugal - and not just because of its victory over France in the Euro 2016 final.

Rather, markets are once again feeling antsy about the Iberian nation's banking problems as macroeconomic conditions start to deteriorate.

"The UK referendum hit an already vulnerable banking system in the eurozone. Italian banks are on the front burner, but the temperature is rising in Portugal," wrote Marc Chandler, the global head of currency strategy at Brown Brothers Harriman in a Monday note to clients.

"The country is struggling with a systemic banking crisis, the lack of a convincing medium-term fiscal plan and excessive public and private sector leverage," observed a Barclays team led by Antonio Garcia Pascual in a note to clients.

"This brings into question whether Portugal can address all of these issues without the help of another programme."

Regarding Portugal's financial system, its banks are loaded with bad debts and are starved for capital.

"The Portuguese banking system continues to operate in a challenging environment," the IMF wrote in a June 30 report.

"Banks remain liquid, but weak asset quality, low interest margins, and sluggish lending growth remain a drag on their profitability. The process of balance sheet repair has moved slowly, with a large share of banking assets still tied up in low-productivity firms, thereby constraining economic activity."

Portugal's largest deposit taker, Caixa Geral de Depositos, needs a cash injection of €5 billion ($5.53 billion), while its largest private bank, BCP, is facing similar issues and may potentially need an estimated €2.5 billion ($2.76 billion), according to Barclays estimates, which exclude any positive effect the repayment of CoCos could have.

Moreover, Portugal also has other issues simmering in the background, which are unlikely to make things easier for them:

• Public debt is around 130% of GDP, and some analysts think it could remain above 130% through 2020. Additionally, private sector debt is much higher than some of its European peers, which you can see in the chart below.
• Barclays thinks Portugal needs a more "realistic" medium-term fiscal plan that is "consistent with solvency." For what it's worth, the IMF recently forecast that Portugal's budget deficit will be around 3% in 2016 - compared to the 2.2% target - if the country doesn't take more spending-cut measures.
• The government's going to have to face difficult choices on fiscal policies and bank recapitalization. Barclays notes that there is a "non-negligible chance that some of [the government's] MPs could oppose some of the fiscal adjustment that the European Commission is demanding."

"All of these factors would require a particularly strong policy response to boost confidence. However, the financial markets are concerned about the government's ability to meet all of these challenges," Pascual's team wrote.

Notably, Portugal's economic performance has been less-than-stellar ever since the government exited its bail-out program in 2014. Even a trio of tailwinds - cheaper oil, accommodative monetary policy, and stronger euro area growth (including in Spain - its main trade partner) - could not lift Portuguese growth higher than 1.5% in 2015.

And things aren't looking super great going forward, amid higher oil prices and the overall sense of uncertainty in post-Brexit Europe.

Barclays forecasts that growth with fall below 1% in 2016, while a Citi Research team led by Ronit Ghose, noted that the negative growth effects from the Brexit are likely to hit periphery countries - i.e. Portugal, Spain, Italy, and Greece - harder.