A senior European finance official acknowledged for the first time on Tuesday that Greece may have to restructure its debts, a move which could blow Europe's sovereign debt crisis wide open again.
Speaking at a seminar on the sidelines of an EU finance ministers' meeting, Jean-Claude Juncker, the chairman of the 17-country Eurogroup, said there was a need to move towards what he called a "soft restructuring" of Greek debt.
He said Greece's first priority had to be to raise 50 billion euros from the privatisation of state assets and use the money to pay down its debts, which are almost equal to 150 percent of GDP. In return, Juncker said, some form of restructuring of Athens' debt might be considered.
"If Greece makes all these efforts, then we must see if it is possible to make a soft restructuring of Greek debt. I am strictly opposed to a major restructuring of Greek debt," he said, the first time the prospect has been acknowledged since the debt crisis began 18 months ago.
The euro fell against the dollar and the price of German Bund futures rose slightly after the comments.
Greece and Spain both carried out successful auctions of treasury bills on Tuesday but perhaps most tellingly, the cost of insuring Greek debt against default rose.
For weeks, senior European officials have dismissed the idea of a debt restructuring, concerned about setting a precedent and the knock-on impact on major European banks and the European Central Bank, all of which are large holders of Greek debt.
But financial markets have been steadily discounting the likelihood and sovereign debt analysts are largely agreed that in Greece's case it is unavoidable given the size of the debts and the government's inability to finance them.
BABBLE OF PHRASES
While Juncker's pronouncement marks a significant shift in official comment on Greece's situation, there was disagreement among others about whether such a move was the right thing to do or was even possible.
"Restructuring, rescheduling -- off the table," French Economy Minister Christine Lagarde said late on Monday, after Juncker had hinted at a "reprofiling" of Greek debt, a way of extending the maturities on its loans without going through a more fundamental restructuring process.
"A restructuring or a rescheduling, which would constitute a default situation, what we would call a credit event, are off the table for me," she said.
European Central Bank governing council member Ewald Nowotny told Austrian radio that a "soft restructuring" was not on the cards, insisting that Greece needed to shore up its finances.
Confusion has mounted as, while all EU officials have rejected the prospect of a full-on default, they have now introduced at least three terms to refer to the possibility of some alteration in the repayment schedule of Greek debt: restructuring, rescheduling and reprofiling.
Now Juncker has thrown "soft restructuring" into the ring.
From the financial markets' point of view, there may be little difference among them. But sovereign debt analysts draw a distinction between restructuring, which involves enforced losses, and "reprofiling", when bondholders are asked to exchange short-term debt for longer-dated bonds with a similar coupon, thereby altering the profile of the yield curve and effectively giving the debtor more time to repay the loan.
If a "reprofiling" or "soft restructuring" is done in coordination with bondholders, rather than forced upon them, it would not trigger what is called a "credit event" and would therefore avoid the prospect of insurance contracts on debt having to pay out, analysts say.
But the repercussions may still be widespread. Around 70 percent of Greek government bonds -- worth around 215 billion euros -- are held abroad, mostly by French, German and American banks and by the European Central Bank.
A "reprofiling" would probably mean a delay in repayment, which may in turn cause credit problems for them.
There is also the risk that if Greece's debt are revamped, Ireland and Portugal, both of which have also been bailed out by EU/IMF emergency schemes, may have to re-examine their debts.
Greece's debt-to-GDP ratio, which the European Commission forecasts to rise to 166 percent next year, is by far the worst, but Ireland's is set to increase to nearly 120 percent and Portugal's is on target to hit 100 percent, while at the same time growth prospects in all three countries are dim.
Credit Suisse said in a research note it now expected a voluntary restructuring of Greek debt, and said that should not cause a credit event although it would have repercussions.
"We believe that a principle writedown needs to be part of the solution for Greece. This is likely to put more pressure on German yields than on Spain or Italy, due to the exposure of the German banking system to Greece, and more importantly to Ireland," it said. (Additional reporting by William James in London, writing by Luke Baker, editing by Mike Peacock)