A clash between Greece's international lenders over how the stricken country where the euro zone debt crisis began can bring its debts down to a sustainable level reignited fears on Tuesday that the crisis could flare up anew.
Euro zone finance ministers suggested that Athens should be given until 2022 to lower its debt/GDP ratio to 120 per cent but International Monetary Fund chief Christine Lagarde insisted the existing target of 2020 should remain.
"We clearly have different views. What matters at the end of the day is the sustainability of Greek debt so that country can be back on its feet," Ms. Lagarde said late on Monday, in an unusually public airing of disagreement.
Behind her sharp exchange with Eurogroup chairman Jean-Claude Juncker lies a rift over whether euro zone governments need to write off some of Greece's debt to them to make it manageable. IMF officials have pressed for such a "haircut" while Germany, the biggest contributor to euro zone bailout funds, has vehemently rejected it as illegal.
German Finance Minister Wolfgang Schaeuble told reporters on Tuesday that the 2020 deadline was "a little too ambitious."
"There's a debate about a haircut for official creditors. On that I will say and most countries have said so in the past few weeks that that's legally not possible," he added.
Chancellor Angela Merkel has signalled she wants to keep Greece in the euro zone but is determined to avoid losses for German taxpayers before a general election in September 2013.
With so much stake, diplomats remain confident that a deal will be done to release a €31.5-billion ($40-billion U.S.) tranche of bailout money which Athens urgently requires to avert bankruptcy.
But it is a way off yet.
Financial markets, which have been calmed by the European Central Bank's pledge to buy euro zone government bonds to shore up the currency bloc, took a dim view of the failure to agree.
The euro dipped to a two-month low against the dollar and safe-haven German Bund futures rose to two-month highs.
"There seems to be quite a big difference of opinion between the IMF and euro zone finance ministers ... but our view is still that Greece won't leave the euro zone," Rabobank rate strategist Lyn Graham-Taylor said.
Mr. Juncker, who heads the 17-nation group of euro zone finance ministers, said a further Eurogroup meeting would take place on Nov. 20 and officials said more negotiations could be required the week after that to nail down a new deal.
French Finance Minister Pierre Moscovici told reporters on Tuesday that bailout money should flow by the end of the month.
"Our objective is to reach an agreement in principle on November 20 so that we can ... proceed to the disbursement of funds by the end of this month," he said.
The delay leaves Athens scrambling to meet a 5 billion euro bond repayment deadline on Friday, but EU officials were confident that it would not default.
With Greece's overall debt pile set to hit 190 per cent of GDP next year, the IMF has set 120 per cent as the target, saying that anything much above that is not sustainable given Greece's low growth prospects and high external borrowing requirements.
"All avenues in order to reduce debt on Greece are being explored and will continue to be explored in the coming days," Ms. Lagarde said.
If the IMF, which is concerned about its own integrity, were to walk away from the Greek bailout, the euro zone would have to contribute extra funds and its reputation in financial markets could be severely damaged.
Equally, if the IMF were to back down, its authority would be diminished.
The euro zone ministers did agree on Monday to give Greece two more years to make the spending cuts demanded of it but by doing so they face an extra funding bill of around €33-billion, according to a document prepared for the meeting.
A target was set in March for Greece to achieve a primary surplus of 4.5 per cent of GDP in 2014. That will now be moved to 2016 giving Athens some breathing space to temper a deep recession that is to all intents and purposes a depression.
Despite Greece approving a tough 2013 budget last week, which it hoped would meet conditions for the release of the next tranche of emergency loans under its second bailout program, Ms. Lagarde said more work was needed to cement the budget measures.
"There will be a few, only a few additional prior actions to be verified in the coming days," she said.
Loans have been held up since Athens, which has received two bailout packages from the euro zone and IMF, went off-track with promised reforms and budget cuts, partly as a result of holding two elections in the space of three months earlier this year.
Until the bailout money flows, Greece will issue more short-term paper to keep itself afloat. Athens will sell one– and three-month T-bills later on Tuesday to refinance the €5-billion issue maturing on Nov. 16. Its debt agency expressed confidence the issue will be fully funded.
Three officials told Reuters that the troika had concluded that Greece's debt burden will fall only to 144 per cent of gross domestic product in 2020 and roughly 10 percentage points lower two years later if current policies do not change.
To get the higher figure down to 120 per cent of GDP requires lopping the best part of €50-billion of Greece's debt pile.
Among the new instruments under consideration to reduce Greek debt are the removal of the 150-basis-point interest above financing costs on €53-billion of bilateral government loans to Greece, and lengthening the maturity of the loans.
Greece may also borrow from the euro zone bailout fund to buy back its privately held debt, of which there is €50-€60-billion, taking advantage of the deep discount it trades at to save money on redemptions and interest payments.
"It may be that we take some measures to reduce interest rates that will have an immediate effect on the budget," Mr. Schaeuble said. "Apart from that we expect that the problems will be solved within the financial framework of the second program by allowing more time with additional measures."