Rajoy, facing opposition calls to resign amid contested reports about illegal payments, will travel to Berlin Monday as euro-area leaders schedule a flurry of meetings this week ahead of a Feb. 7-8 European Union summit. Last week’s nationalization of the Netherlands’ fourth-largest bank and a 2.17 billion-euro ($3 billion) loss at Deutsche Bank AG underscore the fragile economic health in the region.

“The euro crisis is not over,” German Finance Minister Wolfgang Schaeuble said Feb. 1 at the Munich Security Conference where fellow panelists included Deutsche Bank AG co-Chief Executive Officer Anshu Jain. Still, “we’re in a much better position than we were a year ago,” the minister said.

A sluggish economy, uncertainty over the outcome of this month’s Italian election and Rajoy’s new troubles threaten to curtail the time won by politicians with the central-bank bond buying. For now, European policy makers have room to maneuver as borrowing costs for indebted nations have fallen and investor confidence returns.

Bond Yields

Italy’s 10-year bond yields climbed to a four-week high last week after a report showed consumer confidence unexpectedly declined to the lowest in at least 17 years. The euro continued its climb to the highest levels since November 2011, cresting above $1.37 on Feb. 1 before closing the week at $1.364.

In Madrid, opposition leader Alfredo Perez Rubalcaba said Rajoy should resign after reports in El Pais newspaper that he or members of his People’s Party received illegal payments. Rajoy said yesterday that the allegations are unfounded and stem from unknown people trying to damage his party.

“It’s false, I have never received or shared out illegal payments within the party or anywhere else,” Rajoy told reporters in the Spanish capital. El Pais had reproduced what it said were handwritten extracts from ledgers detailing payments to party officials, including the prime minister.

Rajoy has been overseeing the harshest austerity measures in Spain’s democratic history in an effort to scale back the country’s budget deficit and lower borrowing costs.

In Italy, a Feb. 1 poll showed billionaire media magnate Berlusconi narrowing the gap with front-runner Pier Luigi Bersani to 5 percentage points, as he undertook a media blitz.

Austerity Measures

The surge by Italy’s former premier, who was pressured to resign in 2011 amid soaring bond yields, could threaten Bersani’s ability to win a majority even if he remains ahead in the polls. Berlusconi has pledged to upend the overhaul measures of his successor, Prime Minister Mario Monti, and blames Germany for overseeing destructive austerity measures in Europe.

“The markets have saluted” developments in the euro area, French President Francois Hollande said before a meeting with Monti in Paris today. He also said that the conditions were not yet right for an agreement on the European Union’s budget “but we have several days and nights to work” before the Brussels summit starting on Feb. 7.

Deutsche Bank’s Jain lauded Germany’s pro-austerity policies and the European Central Bank’s commitment to limitless bond purchases as catalysts for bringing the 17-member currency past the “acute” stage of the crisis.

Default Probabilities

“Thank God the acute phase of the crisis is over, because we were flirting with the edge of the precipice for entirely too long,” Jain said at the Munich conference. Still, implied default probabilities in Italy and Spain that were at 50 percent last July are still as high as 20 percent, he said.

Those levels “on countries which owe the world 2 trillion euros is still very much a worry,” Jain said.

Frankfurt-based Deutsche Bank, Europe’s biggest lender by assets, reported a fourth-quarter loss on Jan. 31 that exceeded estimates after it eliminated more than 1,400 jobs and set aside 1 billion euros for legal expenses. The next day, Credit Agricole SA, France’s No. 3 bank by market value, said it’ll book 2.68 billion euros in goodwill writedowns to reflect stricter rules and a worsening economy in the region.

The European banking landscape dimmed further when the Dutch government took control of SNS Reaal NV for 3.7 billion euros after real-estate losses brought the lender to the brink of collapse. The lender had been left struggling to repay a government bailout before next year’s deadline.

Cypriot Bailout

The rescue, which will widen the country’s budget deficit this year, was the only way to protect savers and the banking system, Dutch Prime Minister Mark Rutte told reporters in The Hague Feb. 1. “We needed to intervene,” he said.

Teetering banks are also the central issue in a bailout for Cyprus, which will be the euro-area’s fifth. As European leaders hold off on a rescue agreement for the Mediterranean island nation, a report cited by Nicosia-based broadcaster Sigma placed the worst-case scenario for recapitalizing Cyprus’s lenders at 9.2 billion euros.

That would make the country’s debt unsustainable, Sigma reported today, citing a Pimco report.

Joachim Fels, chief economist at Morgan Stanley in London, cited concerns over a Cyprus bailout and possible debt writedowns that could again roil markets.

“I worry about a resurfacing of worries about bail-ins for bank creditors in Cyprus and even about euro exit, which could easily lead to another bout of the euro crisis,” Fels wrote in a note to clients Sunday.