LONDON – European authorities have conceded they may need to do more to help Greece with its massive debts more than a year after it was first bailed out, but robustly denied the country wanted to leave the common currency.
Experts from the European Union and the International Monetary Fund are in Greece to check up on economic reforms promised in return for $160 billion in rescue loans last year. They will also examine whether the current program will be enough to allow Athens to stand on its own feet again when the loans run out in 2013 — a scenario most investors think unlikely.
After a top European official said over the weekend that Greece needs another program, the experts' conclusions may give the green light to another rescue loan or an easing in its current terms.
That view was endorsed by credit rating agency Standard & Poor's, which on Monday cut Greece's bond grade further into junk status. It said it was increasingly likely that Greece would be given more time to repay its bailout loans and that it would negotiate a similar deal on bonds held by commercial investors.
S&P, which downgraded the long-term bonds to B from BB-, said Greece might eventually have to resort to a partial default, reneging on as much as 50 percent of its debt. As a result, the agency said it could downgrade Greece again in coming months.
Though the country has enacted stringent austerity measures, started reforming the economy and announced a $73 billion privatization program, improvements to public finances are slowing down.
In particular, the government is having trouble raising revenue through tax receipts as the country remains in recession. The upshot is a financial shortfall estimated at some $44 billion over the coming years.
In recent weeks it has become apparent that it will be difficult for Greece to raise money again on financial markets next year as its borrowing rates remain prohibitively high.
As a result, investors and policymakers say more needs to be done — the trigger to further action will likely be June, when the EU/IMF appraisal is recounted.
"Then we will evaluate those results," Martin Kotthaus, spokesman for German Finance Minister Wolfgang Schaeuble, said when asked about additional help for Greece.
The latest bout of market jitters were stoked Friday when Schaeuble discussed the situation with his Greek, French and Italian counterparts, as well as European Central Bank President Jean-Claude Trichet and the EU's Monetary Affairs Commissioner Olli Rehn at a meeting convened by Luxembourg Prime Minister Jean-Claude Juncker Friday.
"We think that Greece does need a further adjustment program," said Juncker, who also chairs the regular meetings of eurozone finance ministers. Trichet on Monday expressed muted agreement with that position.
Still, an EU official said Monday that more help or easier bailout terms for Greece were far from a done deal. The official was speaking on condition of anonymity because of the sensitivity of the matter.
At the meeting, Greece's Finance Minister George Papaconstantinou was told his government needed to "step up" efforts to deliver on the reforms promised in the bailout, the EU official said.
If Greece wanted to borrow money over ten years right now, it would have to pay a staggeringly high interest rate of more than 15 percent to get investors to part with their cash. For two-year bonds, interest rates are even higher — above 25 percent.
That's unsustainable and compares with the 2 percent to 3 percent rates that Germany would have to pay — an incredible difference between two countries that use the same currency and operate under the same monetary policy.
Papaconstantinou has already urged his country's international creditors to ease the terms of its bailout by lowering the loans' interest rates and extending the repayment period.
On Saturday, he said one way to allow Greece to return to financial markets would be to get the eurozone's bailout fund — the European Financial Stability Facility — to buy up some of its bonds at auctions.
Though that would effectively give it more bailout money, Greece does not have an EFSF program — as is required to get the fund to buy up bonds — since it received its bailout directly from eurozone countries before the facility was set up.
"It had already become apparent that Greece probably cannot meet its debt obligations over the next couple of years without further assistance," said Jane Foley, senior currency strategist at Rabobank International.
"Rather than return to the market next year as the original bailout has assumed, it now seems fairly likely that Greece will instead ask for more funds from the EU," she said.
Most analysts believe that another bailout would just be another short-term solution. A debt restructuring could be more efficient. It would involve bondholders giving Greece more time to repay or accepting that their bonds don't have the same value when buying them. It could be voluntary or involuntary.
So far, European officials have vehemently denied that a restructuring is on the cards, let alone being discussed.
However, investors are skeptical of such denials after EU officials made stunning U-turns during the past year's crisis.
The markets are clearly of the view that Greece will have to restructure its debts in some form or another — the yield on the 10-year bond was up another 0.11 percentage points at a staggering 15.62 percent on Monday.
At present, the eurozone rules don't allow for a restructuring until 2013 at the earliest.
"The chain of events is increasingly proving the limits of the EU's muddle-through strategy," said Christian Carrillo, an analyst at Societe Generale.
By early afternoon London time, the euro was flat at $1.44. In late European trading Friday, the single currency slid to a low of $1.4306 from around $1.45 before the euro exit speculation mushroomed.