Greece may have to restructure its debts, the euro zone's chief financial official acknowledged for the first time on Tuesday, a move which could blow Europe's sovereign debt crisis wide open again.
Speaking on the sidelines of an EU finance ministers' meeting, Jean-Claude Juncker, chairman of the 17-country Eurogroup, said there was a need to move towards what he called a "soft restructuring" of Greek debt.
Greece's should first raise €50-billion from privatizations and pay down its debts, which amount almost to 150 per cent of GDP. But in return some form of restructuring of Athens' debt might be considered, he said.
"If Greece makes all these efforts, then we must see if it is possible to make a soft restructuring of Greek debt. I am strictly opposed to a major restructuring," Mr. Juncker said.
Greek officials quickly confirmed the possibility, with both the labour minister and the deputy foreign minister saying Athens was prepared to discuss a "soft restructuring".
"One possible solution can be to extend maturities on a voluntary basis with the participation of all players," Labour Minister Louka Katseli told Reuters.
The euro fell against the dollar and the price of German Bund futures rose slightly after the comments.
Greece and Spain both carried out successful auctions of treasury bills on Tuesday, and the price of short-dated bonds among euro zone periphery countries fell, but the cost of insuring Greek debt against default rose.
For weeks, senior European officials have dismissed the idea of a debt restructuring, concerned about setting a precedent and the knock-on impact on major banks and the European Central Bank, all of which are large holders of Greek debt.
But financial markets have been steadily discounting the likelihood and analysts are largely agreed that in Greece's case it is unavoidable given the size of the debts and the government's growing inability to finance them.
Germany's deputy finance minister, Joerg Asmussen, said signing up private holders of Greek debt for "reprofiling" should only be an option if further reforms from Athens fail to solve the problem. How to persuade creditors to voluntarily alter the terms remains unclear.
While Juncker's pronouncement marked a significant shift in official comment on Greece's predicament, there was apparent disagreement among other senior officials about whether such a move was the right thing to do, although that may have reflected the confusing array of phrases used.
"Restructuring, rescheduling - off the table," French Economy Minister Christine Lagarde said late on Monday, after Mr. Juncker had hinted at a "reprofiling" of Greek debt, a way of extending the maturities on its loans without going through a more fundamental restructuring process.
"A restructuring or a rescheduling, which would constitute a default situation, what we would call a credit event, are off the table for me," she said.
European Central Bank governing council member Ewald Nowotny told Austrian radio that a "soft restructuring" was not on the cards, insisting that Greece needed to shore up its finances.
While all EU officials have rejected the idea of a full-on default, they have now introduced at least three terms to refer to the possibility of some alteration in the repayment schedule of Greek debt: restructuring, rescheduling and reprofiling.
From the financial markets' point of view, there may be little difference among them. The manager of a debt fund in the United States joked that the only time he had heard the word "reprofiling" used was in reference to a nose job.
"Clearly the European finance ministers chose this word as applied to economics because they could not translate 'restructure' into some language," said Mark Grant, head of corporate syndication at Southwest Securities.
But sovereign debt analysts draw a distinction between restructuring, which involves enforced losses, and "reprofiling", when bondholders are asked to exchange short-term debt for longer-dated bonds with a similar coupon, thereby altering the profile of the yield curve and effectively giving the debtor more time to repay the loan.
If a "reprofiling" or "soft restructuring" is done in co-ordination with bondholders, rather than forced upon them, it may not trigger a "credit event" and would therefore avoid the prospect of insurance contracts on debt having to pay out.
But the repercussions would still be widespread. Around 70 per cent of Greek government bonds - worth around €215-billion - are held abroad, mostly by French, German and American banks and by the European Central Bank.
A "reprofiling" would mean a delay in repayment, which may in turn cause knock-on credit problems.
There is also the risk that if Greece's debt are revamped, Ireland and Portugal, both of which have also been bailed out by EU/IMF emergency schemes, may have to re-examine their debts.
Ireland is already pushing for a lower interest rate on its loans from the EU/IMF, saying the current terms are only making its deficit and debt situation worse.
"You can enhance the possibility of the success of the program if you reduce the pricing. The future of the euro zone is connected to that agenda," Irish Finance Minister Michael Noonan told reporters.