Pressure on financially weak euro zone members rose sharply on Monday amid growing speculation Greece will restructure its debt and after a Finnish vote showed mounting public opposition to more bailouts.
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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 bloc's third rescue in a year following deals for Greece and Ireland.
But 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 destabilizing 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 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 toward record highs near 5.6 percent 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.
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Data on Monday 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 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. The party that won the most votes is pro-European and seems unlikely to compromise its stance even if it does end up in a coalition with True Finns.
But the result underscored the extent of public anger in northern Europe at the seemingly unrelenting series of new aid deals for stricken euro zone countries that mismanaged their economies and finances.
"I do think that the new factor that no one can predict is the impact of public opinion," said Charles Grant, director of the Center for European Reform in London.
"In the core countries resistance to giving any more financial support to the weak countries is extremely high. In the peripheral countries, people will balk at more austerity at some point. We may already be close to that point in Greece and Ireland."
The biggest threat right now, however, appears to be a Greek debt restructuring.
Greece was saddled with 325 billion euros in debt at the end of last year and by 2013, its burden is expected to approach 160 percent 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 on Monday 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 euro zone members like Spain.
ECB Executive Board member Lorenzo Bini-Smaghi has likened the impact of such a move to the Lehman Brothers bankruptcy in 2008.
"It would have catastrophic consequences," Bank of Greece Governor George Provopoulos said on Monday.
Winning creditor agreement for a milder form of restructuring, like a voluntary extension of debt maturities, will be difficult.
And even if it is achieved, it is unlikely to make enough of a dent in Greece's debt burden to ensure sustainability over the longer-term. Markets may view the "restructuring lite" option as merely the first step in a two-stage restructuring, with the real pain yet to come.
"If I had to give one message to officials it would be to use the time well," said Andre Sapir of the Bruegel think tank. "Spend the next months, the next year doing your best to reduce the contagion risks, so when a restructuring does happen, the damage can be contained."
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 June 5 and has warned it will run out of money to keep the country running around the same time.