European finance ministers are considering making banks take bigger losses on Greek debt and have postponed a vital aid payment to Athens until mid-November, setting up a crunch point in the euro zone's sovereign debt crisis.
Greek Finance Minister Evangelos Venizelos said the country had enough cash to cope until then and insisted that euro zone ministers were not preparing for a Greek default, despite the ominous delay.
There is no discussion of default, Venizelos told a news conference on returning to Athens on Tuesday.
Bank shares took a sharp tumble, leading a broader stock market retreat, after the 17 finance ministers, meeting in Luxembourg, called for a review of a July 21 debt swap agreement with private holders of Greek bonds.
The euro hit a nine-month low against the dollar and a 10-year low against the yen. Investors sought refuge in German government bonds, but the cost of insuring even those safe-haven Bunds against default hit another record.
Analysts said the delay in disbursing an 8 billion euro loan installment and the reopening of the private sector deal raised the chances of a default as soon as the currency area has its new financial firefighting tools in place. Greece had previously said it needed the money to pay October salaries.
If they are having problems getting the sixth tranche of funding, what's going to happen to the seventh tranche of funding in three months' time? The situation is going to be even worse then. So Greece is on the brink, said Nick Stamenkovic, bond strategist at RIA Capital Markets.
Investor confidence was also hit by deepening trouble at Franco-Belgian bank Dexia, a municipal lender with big holdings of Greek and other peripheral euro zone debt, whose shares plunged by more than 20 percent on Tuesday after losing 10 percent on Monday.
The French and Belgian finance ministers said in a joint statement that Paris and Brussels and their central banks would take all necessary measures to safeguard Dexia account holders and creditors.
Jean-Claude Juncker, chairman of the 17-nation Eurogroup, said ministers were reassessing the extent of private sector involvement in a planned 109 billion euro second rescue package for Greece which may now prove insufficient after Athens admitted it would miss key deficit targets.
Under the July deal, private creditors agreed to a 21 percent write-down on their Greek holdings via a plan to lighten and stretch the debt burden, with euro zone governments funding credit enhancements to attract voluntary participation.
Now that Greece's economic growth and deficit situation has worsened, that deal needed to be reviewed, Juncker said.
As far as the PSI (private sector involvement) is concerned, we have to take into account the fact that we have experienced changes since the decisions we took on the July 21, so we are considering technical revisions, so yes, Juncker told reporters. He declined to elaborate.
MID-NOVEMBER CRUNCH TIME
France, whose shaky banks stand to lose most from a Greek default, urged all sides to stick to the initial deal.
We have the July 21 agreement. We have to implement it, we have to keep working on it. Today Greece needs to make an effort, needs to keep moving, government spokeswoman Valerie Pecresse said on i>Tele.
Juncker also disappointed analysts by saying the European Central Bank was not the main avenue being explored to increase the firepower of the euro zone's rescue fund.
His comment, reflecting strong German opposition to using the ECB to leverage the European Financial Stability Facility, raised doubts that the bailout fund can be sufficiently scaled up to calm febrile markets.
The United States has urged the euro zone to leverage the 440 billion euro rescue fund to buy government bonds from the market, recapitalize banks and extend precautionary credit to sovereigns, but political resistance to pouring more public money into bailouts is growing across northern Europe.
In Athens, striking public sector workers blockaded the entrance to several ministries on the second anniversary of the ruling Socialist party's election victory, disrupting talks with EU and IMF inspectors on the next aid tranche.
Despite more than six hours of talks, the euro zone meeting produced few concrete steps to tackle the deepening sovereign debt crisis, raising expectations that Greece will end up having to default on its 357 billion euros of debts.
The only minor advance was a deal resolving a dispute over Finnish demands for collateral from Greece in return for new loan guarantees. The convoluted arrangement seemed designed to deter other countries from seeking similar special terms.
A tentatively planned October 13 finance ministers' meeting, due to have signed off on the next payment to Greece, was scrapped, giving the EU and IMF inspectors several more weeks to report back on Athens' austerity measures, lagging economic reforms and privatizations.
Venizelos said Greece's partners saw the structural reforms as more important than fiscal austerity measures.
All roads now point to mid-November.
Euro zone parliaments are expected to complete approval of new powers for the EFSF rescue fund by mid-October, giving it scope to intervene on bond markets and help recapitalize banks.
Greece's admission on Sunday that it will miss its deficit target this year despite ever deeper cost-cutting measures provoked a sharp sell-off in stock markets and raised new doubts over the proposed second bailout.
Economists and market analysts have long said the July deal was insufficient to make Greece solvent and forecast that Athens would have to default within months.
Greece's draft budget sent to parliament on Monday showed this year's deficit would be 8.5 percent of gross domestic product, well above the 7.6 percent agreed in Greece's EU/IMF bailout program, the benchmark for future EU aid.
Compounding the debt problem, the economy is set to shrink by a further 2.5 percent next year after a record 5.5 percent contraction this year.
The deeper-than-forecast recession means public debt will be equivalent to 161.8 percent of GDP this year, rising to 172.7 percent next year, by far the highest ratio in Europe.
The likelihood that Greece's funding needs next year will be greater than forecast when the second rescue package was agreed in principle in July has reopened a fraught battle over who should pay -- taxpayers or financiers.
EU and German officials have suggested the creditors' haircut may have to be increased to as much as 40 or 50 percent.