Reports of a diplomacy slush fund have shaken Taiwan
Allegations that Taiwan set up a secret US$100m slush fund in the 1990s to pay for covert diplomatic operations and spy networks have rocked the island over recent days.
But, perhaps more importantly, the revelations will damage the island's foreign relations and compromise its overseas spying operations.
On the domestic front, the government's heavy-handed attempt to prevent the story being published has also led to claims that it is undermining press freedom.
Media row
Thousands of copies of one publication running the story were confiscated by the government, and a number of senior journalists face prosecution.
The affair broke when Next magazine and the China Times newspaper published reports alleging Lee Teng-hui set up a secret slush fund to pay for covert foreign activities, such as spy networks in China.
The allegations are believed to have been leaked to the media by Colonel Liu Kuan-chun, a former chief cashier at Taiwan's National Security Bureau who had first-hand knowledge of the country's spies and informers.
Colonel Liu is thought to have fled Taiwan in September 2000 amid allegations he embezzled US$5.5m from the slush fund. He is still on the run.
Some analysts believe the colonel is leaking the documents to warn off the Taiwanese security services that are trying to track him down.
Embarrassing
If Lee Teng-hui is shown to have acted improperly in setting up an illegal account to fund secret overseas operations, particularly personal projects, that could prove embarrassing for him and his supporters.
Although he stood down as president two years ago, Lee is still active in politics.
He is currently the "spiritual leader" of the Taiwan Solidarity Union, a pro-independence political party, formed last year, that did well in last December's parliamentary elections.
However, more serious for the current government, headed by Democratic Progressive Party President Chen Shui-bian, is the effect the affair will have on its foreign affairs.
Diplomatic fall-out
Chang Siao-yue, spokeswoman for the Ministry of Foreign Affairs (MOFA), admitted these kind of leaks "affect and damage how we conduct international relations".
Specifically, the revelations, true or not, will make Taiwan's foreign contacts think twice before providing the island with information for fear their names could end up being leaked to the media.
This is more of a problem for Taiwan than for other governments because the island has few official ties with the outside world and relies on personal contacts with its allies to conduct foreign relations.
To show just how seriously the government is taking the revelations, MOFA immediately contacted its friends abroad as soon as they were published to reassure them it was dealing with the situation.
Risking lives
Several key security officials also believe some of the more detailed media reports about spying operations in China could put agents' lives at risk.
Taiwan's security agencies are already reviewing internal security arrangements in the wake of the allegations. They are also reported to be closing down spy networks in China.
Unfortunately for the government, the affair does not appear to be over, with fresh allegations continuing to surface.
Some analysts are pointing the finger at security officials other than Colonel Liu over the leak of classified documents.
According to Professor Wu Yu-shan, of National Taiwan University, there are several individuals in the defence establishment prepared to reveal government secrets for political gains.
He believes the leaks will "go on and on".