Europe's policy options to avert a Greek default are narrowing fast after the ECB and ratings agencies warned against even voluntary debt rescheduling and Athens highlighted its urgent need for more EU cash.
Moody's became the latest agency on Tuesday to warn of a chain reaction of severe consequences for the 17-nation euro area if Greece were allowed to default next month, when it faces a 13.4 billion euro ($18.9 billion) funding crunch.
Greece kick-started a stalled privatization program on Monday and promised tougher austerity measures and tax hikes to meet EU/IMF conditions for the release of a 12 billion euro loan tranche in June, vital to keep Athens afloat.
Dutch Finance Minister Jan Kees de Jager told Reuters in an interview that Greece should set up a privatization authority along the lines of the Treuhand agency that sold off state companies in the former East Germany after unification in 1990.
We could package their state companies into a fund, with independent advisers or IMF oversight, he said, adding that state assets could be used as collateral for loans.
The leader of Greece's conservative opposition, Antonis Samaras, rejected the new package of fiscal measures, rebuffing a key condition for extra European Union financial assistance -- a cross-party consensus to support reforms.
I am not going to agree to this recipe, which has been proven wrong, Samaras said after talks with Socialist Prime Minister George Papandreou, adding that planned tax rises would deepen the recession, not cut the deficit.
Underlining public hostility to further austerity, Greece's public sector union called another 24-hour strike for June.
Moody's chief credit officer for Europe, Middle East and Africa, Alastair Wilson, told Reuters in an interview that a Greek default would be highly destabilizing and would have implications for the creditworthiness of issuers across Europe.
Other stressed sovereigns could be downgraded from investment grade to junk as a result, he said, widening the gap with the currency bloc's strongest borrowers. Portugal and Ireland would be first in the firing line.
Crucially, the ECB and ratings agencies have told politicians that options they are exploring to lengthen the maturities on privately held Greek debt would be interpreted as a default-like credit event, triggering further downgrades and disqualifying Greek bonds as collateral.
Even voluntary changes in the terms and conditions of sovereign bonds or a selective reprofiling of Greek debt would be considered a default, Moody's said.
That would appear to leave the EU only the option of lengthening maturities on official loans to Greece and lowering the interest rate further, while giving Athens a supplementary aid package to cover its 2012/13 borrowing needs in return for additional deficit reduction and privatization commitments.
Political sources said European conservatives, including Germany's Angela Merkel, would pressure Samaras to back such a new IMF/EU program, as Portugal's center-right party has done.
Reflecting hardening public opinion in creditor countries, a panel in Merkel's Christian Democratic Union said debt-laden euro zone states should only receive further financial aid if they cut social benefits such as pensions.
Finance Minister George Papaconstantinou raised the stakes on Monday, saying the International Monetary Fund would not release its share of the June aid payment unless the EU undertook to cover Athens' 2012 funding needs.
Asked what would happen if Greece did not get the next bailout tranche, he said: The country will halt payments ... wages, pensions -- all the state's expenses will not be paid.
An IMF official declined comment but the chairman of euro zone finance ministers, Jean-Claude Juncker, confirmed that the IMF was demanding a guarantee of EU funding for the next year.
Against this background, the cost of insuring Greek debt against default continued to rise.
Greece's public debt stood at 327 billion euros, nearly 150 percent of gross domestic product, at the end of 2010 and is projected to reach more than 160 percent in 2013 -- a level that market analysts view as utterly unsustainable.
The ECB stepped up its campaign against any restructuring, which became more shrill after Juncker said last week the EU was exploring some form of soft restructuring.
A restructuring is a horror scenario, ECB governing council member Christian Noyer told reporters in Paris.
Greece must apply its (EU/IMF) program entirely and completely ... there is no alternative.
ECB policymakers have warned that Greek bonds would no longer be accepted as collateral in central bank refinancing operations, driving Greek banks and insurers to the wall and causing huge liabilities for European lenders to Greek firms.
Ratings agency Standard & Poor's said this month it would define as a default anything that would have a negative impact on the net present value of a bond. Fitch Ratings said: An extension of the maturity of existing bonds would be considered by Fitch to be a default event.
Despite such statements, EU policymakers have continued to talk of the possibility of some form of voluntary reprofiling of Greek debt as a viable policy option that would not incur the definition of a credit event.
Juncker said that as part of a second bailout program for Greece, which could be agreed by the end of June, loan repayment periods could be lengthened.
The Dutch newspaper Het Financieele Dagblad reported on Tuesday that euro zone states had secretly started preparing for an extension of the maturity of Greek debt, and creating an independent trustee to sell Greek state assets.
The paper said the plan would entail a voluntary extension of debt maturities by a maximum of three years.
EU leaders declared they had adopted a comprehensive package to resolve the euro zone debt crisis in March, but that has not prevented contagion, with Portugal requiring a bailout and markets piling pressure on Greece, Spain, Italy and Belgium.
Fresh jitters hit bond markets on Monday after S&P lowered Italy's outlook to negative and Fitch threatened Belgium with a rating cut, saying the lack of a government was undermining its budget consolidation efforts.
(Additional reporting by Andreas Rinke in Berlin, Andrew Torchia and Marius Zaharia in London, Aaron Gray-Block in Amsterdam, Jan Strupczewski in Brussels; writing by Paul Taylor; Editing by Kevin Liffey)