The IMF warned Greece on Wednesday that a drive to shore up its troubled finances would fail unless Athens redoubled its reform efforts, and the ECB hit back at suggestions a debt restructuring might be the solution.
European finance ministers broke a taboo this week and acknowledged 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.
They have said they could ask private creditors to agree to extend the maturities of their Greek debt but 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 Greece last week to assess its progress in meeting fiscal targets linked to its EU/IMF bailout.
Unless we see this invigoration, I think the program will run off track, he said, using some of the strongest language since Greece sealed the 110 billion euro 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 rein in 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.
Euro zone ministers have not spelled out how what they refer to as a reprofiling of Greek debt 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.
ECB STANDS FIRM
The European Central Bank, which holds up to 50 billion euros in Greek sovereign bonds on its own books, has warned that even a soft restructuring would put the stability of the euro zone at risk and officials were out in force reiterating that message on Wednesday.
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 broaden out the burden of their bailouts to include banks that have lent to Greece by buying up their 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 on 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 maturity extensions for private creditors.
On Wednesday, Athens appointed advisers for 15 privatization projects including the sale of its 34 percent stake in Europe's biggest betting company OPAP.
Deutsche Bank and National Bank will advise on the sale of the stake, worth about 1.5 billion euros at current market prices.
Although Jean-Claude Juncker raised the prospect of a soft restructuring earlier this week, European governments do not appear to be united behind the idea.
Greece's Papandreou said late on Tuesday that the costs of any restructuring would far outweigh any potential benefits and vowed to launch a full fledged attack against tax evasion to meet the terms of the country's rescue package.
(Writing by Noah Barkin, editing by Mike Peacock)