Greece is sinking deeper by the day into what has become an unprecedented crisis for Europe's young currency union, its troubles spreading from the government to the financial sector and pushing the country ever closer to seeking emergency aid.
The repeated pounding by international investors, which illustrates how a promised support package from the European Union and International Monetary Fund has failed to calm markets, threatens to force Greece to reluctantly accept outside help to meet its funding needs and may add to fears about unmanageable government debt loads elsewhere in Europe and around the world.
The Greek tragedy roiling markets is casting a cloud over the global recovery and analysts say it may only be averted by Europe's leaders ceding responsibility for resolving the crisis to the IMF.
Such a move would probably do more to calm investors, because of the IMF's track record in turning troubled economies around.
But it is a politically sensitive step European and Greek officials have been at pains to avoid.
European Central Bank president Jean-Claude Trichet tried to calm the waters Thursday, succeeding somewhat.
He asserted that Greece would not default on its debt and that Prime Minister George Papandreou's deficit-cutting plan would be implemented "rigorously."
Still, the debt-burdened country needs to borrow about $15.5-billion by the end of next month, and the premium investors are demanding to hold Greek 10-year bonds spiked Thursday to the steepest in the history of the euro.
Worse, what has so far largely been a government-centred debt issue spread to the country's major banks, their stocks falling sharply after a government announcement on Wednesday that Greek banks will tap funds remaining in a stimulus program to boost their capital levels amid fears they're losing access to financing.
The government's funding problems would only heighten if Greece's banks lost access to funding from the markets and run short of the collateral they would need for a ECB loan.
"Another day, another blowout in Greek bond spreads," David Watt, a currency strategist at RBC Dominion Securities Inc. in Toronto, wrote in a note to clients. He was referring to the near 500-basis-point difference between the premium to hold Greek debt versus German bonds, which serve as the region's benchmark.
Greece's problems selling debt are largely due to a lack of confidence in the vague European plan that Germany and France, along with the IMF, drew up to provide loans to Greece if needed.
All nations in the euro zone would have to approve a rescue, an unlikely prospect given intense opposition among voters in Germany. Plus, Greece could be charged market rates for the emergency loans, raising the possibility that the cure just adds to the disease, and the plan doesn't spell out exactly what role the IMF would play - always a politically dicey topic in a region at pains to be seen as capable of solving its own problems.
"Investors are waking up to the fact that this is not really an agreement, it's like smoke and mirrors," Nariman Behravesh, chief economist with IHS Global Insight of Lexington, Mass., one of the world's largest forecasting firms, said in an interview. "It's a way of Germany trying to appease Greece and some of its European allies without in any way upsetting its own electorate that is not interested in bailing Greece out." The ECB's Mr. Trichet has said loans to Greece would not be subsidized, but on Thursday he suggested to reporters that their interest rates could be a function of the refinancing costs of the issuer, rather than Greece's current market rates.
Greece may manage to plug along for a while without emergency aid, but some time within the next three to six months the country will need some help, Mr. Behravesh said.
Greek officials have repeatedly insisted that they don't need outside aid, while also acknowledging that the country can't keep borrowing at the current high rates for much longer. Deputy finance ministers from the EU and central bank officials are meeting this week in Brussels and that will include some discussion of possible loan terms. Yesterday, Mr. Trichet told reporters the existing package is a ``workable framework," and denied suggestions he had opposed IMF involvement.
But because it's questionable whether the existing plan would work, the EU may need to let the IMF, which has rescued economies from Iceland to Pakistan, come in and take the lead in rescuing one of Europe's own.
"There is a way out, and that is that they swallow their pride and let the IMF come in and do the dirty work," Mr. Behravesh said. "You will see at some point some emergency meeting of the European leaders in which the Germans will get the others to agree to let the IMF be the lead. The sooner they get to that, the better."
The largesse and proven track record of the IMF in executing successful, if unpopular, measures to get troubled countries back in shape could help restore confidence that the crisis won't get worse.
And a light at the end of the tunnel for the Greek mess could be essential to keeping worries about mounting debt loads elsewhere in the world, mainly in richer countries, from spinning out of control.
Credit Derivatives Research said this week that its Government Risk Index - made up of credit default swaps on seven of the largest sovereign debt issuers: France, Germany, Italy, Japan, Spain, the U.K. and the U.S. - jumped almost 40 per cent in the past month to the highest level since February.
With files from Boyd Erman in Toronto, Bloomberg and Reuters