Greece is coming under increasingly intense pressure from her international creditors and bond markets, with a decision expected later this week on whether Athens will receive the latest tranche of aid from the International Monetary Fund (IMF), a €12bn (£10bn) credit due within weeks.
A "troika" of officials from the IMF, the EU Commission and the European Central Bank (ECB), the three bodies overseeing the continuing rescue, are now in Athens reviewing the options. They are expected to make their recommendations later this week. If these fail to gain support internationally or in the Greek cabinet, a disorderly default may become inevitable.
The latest injection of cash, agreed last May as part of a €110bn rescue, is said to be under threat as IMF officials are dissatisfied with the progress Greece is making to fixing her public finances. In particular, Fund officials are unhappy about the speed and ambition of a proposed privatisation programme. They are also worried about the reliability of the country's economic data.
One way out for Greece is apparently to grant the IMF, the EU Commission and the ECB unprecedented powers over the nation's economy. Such a loss of sovereignty would be difficult for any nation to bear. Yet even that may not be enough to stabilise the situation, with Greek debt predicted to reach 160 per cent of GDP over the next few years, even with the current austerity regime. Crucially, however, the plan would also require private bond holders to accept a "rescheduling" of the bonds they hold, arguably a technical default as it would impose a cost on the holders of Greek debt. Such a "credit event" is also unprecedented in the history of the European Union and the single currency area, but seen as necessary in order to carry increasingly hostile public opinion in the nations that usually have to foot the bill – Germany, Finland and the Netherlands. Chancellor Angela Merkel has made little secret of her desire that private investors should "share the pain" in any restructuring or "reprofiling".
Last week the chair of the eurozone group of finance ministers, Jean-Claude Juncker, suggested that a "soft restructuring" of Greek debt could form part of a new deal.
However, such a move could still prove highly destabilising to Greece's partners in the eurozone. It would require a further bailout of the Greek banks; it could trigger a credit crunch across the continent, as many banks have significant exposure to Greek debt and banks; and it would hit the ECB with a loss of around €35bn on its holdings of €200bn of Greek bonds. These are collateral for loans to Greek private banks, and, in turn for the Greek government who borrowed money from those banks because they were all locked out of private capital markets and the ECB could not lend directly to Greece.
Worse still, there is also the fear of another round of "contagion" to Portugal, Ireland, Spain and even Italy. The latter two face government bond auctions this week.