A public clash between Greece's international lenders over how Athens can bring its debts down to a sustainable level has reignited fears that Europe's troubles could flare up anew.
Euro zone finance ministers suggested Greece, where the euro zone debt crisis began, should be given until 2022 to lower its debt to GDP ratio to 120 percent but International Monetary Fund chief Christine Lagarde insisted the existing target of 2020 should remain, in an unusually public airing of disagreement.
Beneath her sharp exchange with Jean-Claude Juncker, who chairs the Eurogroup of finance ministers, 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 signaled 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-euro 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.
Juncker said a further meeting of the 17-nation Eurogroup would take place on November 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 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 euro later gained some poise after a German government source said the euro zone could decide to bundle several tranches together in a single transfer of roughly 44 billion euros for Greece, to avoid stoking uncertainty with further deliberations in the coming weeks and months.
But that cannot happen until the lenders reach a broader agreement. The delay left Athens scrambling to meet a 5-billion-euro bond repayment deadline on Friday.
Greece sold 4.062 billion euros ($5.14 billion) of one- and three-month treasury bills on Tuesday and while that sale was insufficient to redeem the 5 billion, the debt agency will accept additional non-competitive bids by Thursday, enabling it to raise the full amount.
With Greece's overall debt pile set to hit 190 percent of GDP next year, the IMF has set 120 percent 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," Lagarde said.
NUMBERS GAME
If the IMF, which is concerned to avoid damage to 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 euros, according to a document prepared for the meeting.
A target was set in March for Greece to achieve a primary surplus of 4.5 percent 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 on Sunday, which it hoped would meet conditions for the release of the next tranche of emergency loans under its second bailout programme, 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 is issuing short-term paper to keep itself afloat, although the government owes suppliers increasing amounts. Its debt agency expressed confidence that the 5-billion-euro issue maturing on November 16 will be fully funded.
Three officials told Reuters that the "troika" of international institutions - the EU, IMF and ECB - had concluded that Greece's debt burden will fall only to 144 percent 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 percent of GDP requires lopping the best part of 50 billion euros 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 euros 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 euros, 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," Schaeuble said. "Apart from that, we expect that the problems will be solved within the financial framework of the second programme by allowing more time with additional measures."
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