Euro zone finance ministers are reviewing the size of the private sector's involvement in a second international bailout package for Greece, a move that could undermine the aid programme and hasten the threat of a Greek default.
Ministers also agreed after a meeting in Luxembourg that Greece could wait until mid-November until it receives the next installment from its existing emergency aid programme, piling more pressure on Athens to tackle its debt problems.
Jean-Claude Juncker, the chairman of the Eurogroup ministers, said they were reassessing the extent of the private sector's role in the planned second package for Greece, a centrepiece of the deal struck on July 21 to rescue Athens.
Under that deal, private creditors agreed to take a 21% write-down on their holdings of Greek debt via a plan to lighten the debt burden. Now that Greece's economic growth and deficit situation has worsened, that deal needs to be reviewed.
"As far as the PSI (private sector involvement) is concerned, we have to take into account the fact that we have experienced changes since the decisions we took on the July 21, so we are considering technical revisions, so yes," Juncker told reporters, although he would not elaborate.
Juncker also said the European Central Bank was not the main avenue being explored to increase the firepower of the European Financial Stability Facility, an acknowledgement that is likely to undermine confidence that the bailout fund can be sufficiently scaled up to calm febrile financial markets.
Despite more than six hours of talks, the meeting produced few concrete steps and is likely to provoke more uncertainty among investors, with expectations rising that Greece will end up having to default on its 357 bln euros of debt.
The only immediately positive development was that a months-long dispute over Finnish demands for collateral for new loan guarantees for Greece was resolved.
The next finance ministers' meeting on October 13, when they were expected to sign off on the next, 8 bln euro payment to Greece, has been cancelled, and EU and IMF inspectors will have several weeks in which to report back on Athens' budget cuts.
BUDGET GOALS MISSED
Greece's admission on Sunday that it will miss its deficit target this year despite ever deeper cost-cutting measures provoked a sharp sell-off in stock markets and has raised new doubts over the second, 109 bln euro bailout.
European bank shares suffered the heaviest falls on fears that private sector bondholders may be forced to absorb bigger losses than agreed in a July rescue plan for Greece, which was based on more optimistic growth forecasts.
The worst performing bank was Franco-Belgian group Dexia, whose shares fell 10% on concerns over its heavy Greek exposure and after Moody's said liquidity problems could lead to a downgrade of its credit rating.
Greece's draft budget sent to parliament on Monday showed this year's deficit would be 8.5% of gross domestic product, well above the 7.6% agreed in Greece's EU/IMF bailout programme, the benchmark for future EU aid.
Finance Minister Evangelos Venizelos said the 2012 fiscal targets would be met in absolute terms and Greece would have a primary surplus before debt service for the first time in many years. That may be enough to convince the troika that the next, 8 bln euro tranche of aid to Athens can be paid.
However, next year's deficit is projected to be 6.8% of GDP, rather than the 6.5% of the EU/IMF goal, because the economy is set to shrink by a further 2.5% after a record 5.5% contraction in 2011.
A deeper-than-forecast recession means public debt will be equivalent to 161.8% of GDP this year, rising to 172.7% next year, by far the highest ratio in Europe.
The likelihood that Greece's funding needs next year will be greater than forecast when a second 109 bln euro rescue package was agreed in principle in July reopened a fraught battle over who should pay — taxpayers or financiers.
STEEPER HAIRCUT?
Deutsche Bank chairman Josef Ackermann, head of the International Institute of Finance (IIF), which negotiated a "voluntary" bond-swap by investors as part of the bailout plan, warned at the weekend against changing the terms now.
"If we reopen the voluntary accord of July 21, we will not only lose precious time but quite possibly also private investor support," Ackermann told the Sunday edition of Greek newspaper Kathimerini.
"The impact of such a move will be incalculable. This is why I am warning in the most forceful way against any material revision," he said.
Private bondholders agreed to a 21% write-down on their Greek debt holdings but EU and German officials have suggested the "haircut" may have to be increased — possibly to as much as 40 or 50% — in light of a new funding shortfall and changed market conditions.
FLIGHT TO SAFETY
Uncertainty over the extent of damage to the already fragile European banking sector from a possible Greek default has been driving investors to take refuge in safer assets.
Yields on Spanish and Italian government bonds rose and the cost of insuring their debt against default spiked on the news from Greece, while money poured into safe-haven German Bunds. The euro fell to an eight-month low in Asia.
