German government sources told Reuters yesterday in Berlin that they did not believe Greece, which sealed a €110 billion bailout from the EU and IMF a year ago, would make it through the summer without a restructuring.
Representatives of the European Commission, European Central Bank and International Monetary Fund were meeting Portuguese government officials in Lisbon to set the terms for the EU's third rescue in a year following deals for Greece and Ireland.
A stop-start drive by European policymakers to stem the crisis that has raged since 2009 looks increasingly at risk as the threat of a Greek debt restructuring looms, despite repeated denials from Athens that it will happen.
The euro, which has remained strong through the latest bout of turbulence, fell to its lowest level against the dollar in 10 days yesterday and the cost of insuring Greek debt against default shot higher after a report that Athens had spoken with the EU and IMF about extending repayment of its entire debt.
Pressure on other so-called peripheral countries mounted as well, with Spanish 10-year bond yields pushing towards record highs near 5.6% and Portuguese yields hovering near a peak of 9.3%.
European officials have been at pains to stress that Spain can avoid the contagion that has forced Greece, Ireland and Portugal to seek rescues. Its much larger economy could strain the bloc's resources to breaking point if it did succumb.
Data showing a faster fall in Spanish housing prices in the first quarter and a spike in yields in a government treasury bill auction will ring alarm bells.
In an election on Sunday (17 April) in Finland, the anti-euro True Finns party scored big gains and vowed immediately to push for changes to a bailout deal for Portugal that is expected to total 80 billion euros but is unlikely to be sealed before mid-May.
It may take weeks to find out whether the party will become part of a new government in Helsinki and be able to deliver on that threat. But the result underscored the extent of public anger in northern Europe at the seemingly unrelenting series of new aid deals for stricken eurozone countries that mismanaged their economies and finances.
The biggest threat right now, however, appears to be a Greek debt restructuring.
Greece was saddled with €325 billion in debt at the end of last year and by 2013, its burden is expected to approach 160% of its annual output - nearly double the level most economists see as sustainable and far bigger than that of Argentina when it defaulted in late 2001.
Greek daily Eleftherotypia reported that Greece, despite publicly ruling out a restructuring, had told the IMF and EU earlier this month that it wanted to extend repayment of its debt.
Discussions on the matter are expected to start in June, said the report, which Athens again said was not true.
"The government's request was conveyed by Finance Minister George Papaconstantinou at the informal ECOFIN meeting of finance ministers in Hungary earlier in April," the paper said.
A Greek restructuring would be the first by a Western European country in more than half a century and presents European policymakers with a dilemma of epic proportions.
In order to return Greece to a sustainable path, most economists agree that it needs to wipe away roughly half the value of its outstanding debt, hitting private creditors with significant "haircuts" on their holdings.
But EU leaders have promised not to make private debt holders pay before 2013.
Doing so in the near-term, when the bloc remains vulnerable, could set off a contagion tsunami that engulfs Greek, German and French banks, raises pressure on Portugal and Ireland to restructure, and infects bigger eurozone members like Spain.
"It would have catastrophic consequences," Bank of Greece Governor George Provopoulos said on Monday.
In Lisbon, officials from the European Commission, ECB and IMF were beginning nitty-gritty policy discussions with Portugal under extreme time pressure.
Any delay in approving the bailout deal beyond a mid-May target could leave European leaders scrambling to find other means of funding for Portugal, which faces an election on 5 June and has warned it will run out of money to keep the country running around the same time.
(EurActiv with Reuters.)