The European Commission denied on Tuesday a report that Greece had accepted restructuring its debt was inevitable but market fears were undimmed and Athens paid more to sell short-term paper.
Financial markets are increasingly convinced Greece will have to renegotiate the terms of its public debt because its economy will not grow fast enough to service a burden that is set to swell to 160 percent of national output.
German government sources told Reuters on Monday that they did not believe Greece would make it through the summer without a restructuring.
A Greek newspaper quoted a senior European Commission official as saying Athens realized that it could not avoid restructuring its debt, despite repeated official denials by Greek, EU and IMF officials.
"It is a very firm denial on our side," a spokeswoman for the Commission said, in response to the report.
"It's impossible that such a statement can be correct considering that there is not even such discussions taking place between the European authorities and the Greek government." Markets have brushed aside official denials, and the yield spread of 10-year Greek government bonds over German Bunds — the premium markets charge Greece to borrow — has widened to a record high of 1,134 basis points.
On Tuesday, Greece paid a 4.1 percent yield to raise 1.625 billion in 3-month T-bills, more than the 3.85 percent it paid in the previous such auction on February.
Foreigners picked up 36 percent of the issue versus 60 percent in the February auction, which was much smaller, the debt agency said.
"In the last few days, talk about a debt restructuring has weighed on the yield and foreigners' appetite for Greek debt," said a bond trader who declined to be named.
"Foreigners are worried and do not take part in the issues."
"No Other Way"
Greece secured 110 billion euros in emergency funding from its euro zone partners and the IMF last May to cover bond maturities and fiscal shortfalls up to 2013 on condition that it shrinks deficits and implements economic reforms.
It is due to go back to bond markets in 2012 at the latest, but with spreads remaining high on doubts austerity measures can pull it out of the crisis, the prospect looks increasingly doubtful.
The daily Eleftherotypia on Tuesday quoted an anonymous senior European Commission official as saying: "The Greek government has realized that there is no other way and has accepted a mild debt restructuring."
One solution to avoiding a restructuring would be for Greece to get additional loans from the EU and the IMF but this is very unlikely, the official told the paper.
"With such high spreads and with a debt of about 1.5 times (annual) GDP, I think it is a matter of time when a mild restructuring takes place," the official was quoted as saying.
The comments echoed a report in German newspaper Die Welt late on Monday, which cited an unnamed Greek minister as saying that it was only a matter of time until the country moves to restructure the debt.
"The question now is no longer if we restructure but only when," Die Welt quoted the minister as saying.
Greek ministers have consistently denied in public that the government is considering such a move, while EU and ECB officials have continuously rejected the scenario of restructuring, pointing to the negative impact the move would have on markets, banks and pension funds.
European Central Bank Board member Juergen Stark rejected the idea that debt-ridden euro zone states could renegotiate their debt, saying "it would not solve the problem — on the contrary."
"If they really considered restructuring debt, they would have to pay in the future a higher risk premium," he said of restructuring in an interview with Portuguese newspaper Publico.
"It has also an impact on the country's banking sector, which holds a huge part of the government bonds," he said, without referring to any specific country."
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