The IMF warned Greece on Wednesday that it would fail to shore up its finances unless it redoubled reform efforts, and euro zone officials dismissed suggestions that a mild debt restructuring might help.
European finance ministers broke a taboo this week by acknowledging for the first time that some form of restructuring might be required to ease Greece's debt burden, which at 150 percent of annual output is among the highest in the world.
Some have said that private creditors could be asked, on a voluntary basis, to accept later repayment of their Greek debt but ministers have also made clear that their first priority is ensuring Prime Minister George Papandreou's government steps up reforms.
"The program will not remain on track without a determined reinvigoration of structural reforms in the coming months," Poul Thomsen, an International Monetary Fund envoy who arrived in Athens last week to assess its progress in meeting fiscal targets linked to its European Union/IMF bailout.
"Unless we see this invigoration, I think the program will run off track," he said, using some of the strongest IMF language since Greece sealed the 110 billion euro ($155 billion) rescue one year ago.
After Thomsen spoke, Greek Finance Minister George Papaconstantinou vowed to press ahead with budget consolidation efforts. He raised the prospect of firing some public sector employees and said the government would seek talks with the opposition to discuss ways out of the crisis.
Facing a third straight year of recession, Papandreou's government is struggling to reduce rampant tax dodging and has come under pressure to sell off tens of billions of euros in state assets to plug gaping budget holes.
Under its rescue terms, Athens was to cut its deficit to 7.6 percent of GDP this year. Without further measures, Thomsen said, Athens would not be able to get it much below 10 percent.
Concerns about Greek debt pushed the euro below $1.42 and sent the risk premiums on Greek 10-year bonds to their highest level in a week. The cost of insuring government debt against default also rose.
COSTS AND BENEFITS
Euro zone ministers have not spelled out how a "reprofiling" of Greek debt, as some have labeled it, would work.
Convincing private holders of Greek bonds to voluntarily accept later repayment could be difficult and require costly guarantees to avoid a hit to banks.
Such a move would buy Greece more time but not reduce its overall debt burden. Many economists believe it would be followed by a more aggressive restructuring involving "haircuts," or forced losses, of 50 percent or more from 2013, when policymakers have said they could opt for radical steps.
Jean-Claude Juncker of Luxembourg, who chairs meetings of euro zone finance ministers, raised the prospect of a "soft restructuring" earlier this week, but European governments do not appear to be united behind the idea.
Jyrki Katainen, prime minister-elect of Finland, said on Wednesday that such a step "would not solve anything." And Greece's Papandreou said Tuesday that the costs would "far outweigh any potential benefits."
The European Central Bank holds up to 50 billion euros in Greek bonds on its own books and has warned that even a mild restructuring would put the stability of the euro zone at risk.
"I'm opposed to soft restructuring because I don't know what it means. Nobody knows what it means," Lorenzo Bini-Smaghi, a member of the bank's executive board, said in Milan.
Speaking in Athens at the same conference as Thomsen, ECB board member Juergen Stark warned policymakers that it was an "illusion" to think such a move would resolve Greece's problems.
European politicians, however, are under pressure from angry taxpayers to share out the burden of their bailouts to include banks that have lent to Greece by buying the country's bonds.
Euro zone countries, together with the IMF, bailed out Greece and Ireland last year, and approved a new 78 billion euro rescue for Portugal Monday.
Governments have pledged not to force any losses on private holders of Greek debt before 2013, when a new anti-crisis facility -- the European Stability Mechanism (ESM) -- is due to take effect. But they say a voluntary debt exchange before then might be an option.
"During the crisis, it was almost exclusively European taxpayers that ultimately bore the risk of investors' decisions. That is inadmissible," German Finance Minister Wolfgang Schaeuble said in a speech in Brussels.
"It was right to stop financial markets from disintegrating in the past but it would be wrong to cushion their losses in the future," he added.
Because Greece is not expected to be able to return to the capital markets next year, as envisioned under its 2010 aid package, it faces a 27 billion euro funding gap next year.
This could be filled by additional money from the EU and IMF, stronger Greek privatization revenues and/or through some form of debt relief -- either looser terms on the EU's loans or debt maturity extensions for private creditors.
Wednesday, Athens appointed advisers for 15 privatization projects including the sale of its 34 percent stake in Europe's biggest betting company OPAP.
(Writing by Noah Barkin, editing by Mike Peacock/Ruth Pitchford)