The I.M.F.'s acting managing director, John Lipsky, warned that the European Union must be prepared to underwrite the finances of the Greek state for the next year — a much tougher position than European officials expected — in order for the I.M.F. to release its portion of the aid.
“That needs to be done before we can move forward and we are hopeful that those conditions will be met with alacrity,” Mr. Lipsky said.
If Greece's economic emergency is not dealt with quickly, the I.M.F. said in a report, there is a risk of contagion to other countries, starting with Ireland and Portugal, but possibly spreading to Spain, Italy and even Belgium.
“With deeply intertwined fiscal and financial problems, failure to undertake decisive action could rapidly spread the tensions to the core of the euro areas and result in large global spillovers,” the I.M.F. said.
Greece needed a 110 billion euro bailout last year from European governments and the I.M.F. The hope was that the country's economy would be growing by now and that it could start selling bonds in the markets to raise money. But still in the grip of its economic crisis, it is short on cash to pay interest to private investors that have lent it money through the years in the form of government bonds.
As a result, Greece is seeking a second bailout from the rest of Europe and the I.M.F., possibly as much as 100 billion euros.
At stake in the negotiations is the degree to which Greece's bondholders would agree to take a hit on their investments.
One aggressive option, proposed by Germany, was for banks to be forced to exchange all of their Greek debt for bonds of a longer maturity.
But such forced restructuring would have constituted a default and appears to have been ruled out, at least for now, after Germany backed down last week.
The other option is a voluntary rollover of maturing debt. Investors agree to buy their bonds again when they come due.
“The real question is what their incentive will be for all of the banks to roll over their short term bonds,” said William Rhodes, a former senior vice chairman of Citigroup who has been involved with several emerging market debt crises. “How do you do a voluntary deal and get everyone on board that does not trigger a default?”
If there is a delay in payment, even if voluntary, that could be considered a technical default. Analysts say that would spook markets, potentially leading to downgrades of the banks that own much of the debt, initiating payment clauses in insurance contracts written on Greek debt, and leading to questions being raised about the creditworthiness of other highly indebted European nations.
Stocks slipped on Monday in Europe, with the Dax in Germany down 0.2 percent, and the CAC 40 in France down 0.6 percent.
According to Moody's, the credit rating agency , a delay in bond payments would not necessarily be considered a default if investors did not feel pressured into taking part in a plan to delay bond payments owed them.
But according to Nicolas Véron, a senior fellow at Bruegel, a research institute in Brussels, the definition of what is a default is deeply uncertain, and even a voluntary debt exchange could be challenged by holders of credit-default swaps , in a court of law.
“Part of the problem is there are different judges,” he said. “There are the rating agencies. There is the E.C.B., and what debt it will accept, and the International Swaps and Derivatives Association and its views on credit-default swaps. You may have three different opinions.”
Already, concerns are mounting about Greek banks, which are among the biggest holders of Greek government debt. There are worries about their ability to lend if they are swept up in a general default, crushing the Greek economy even further.
There are also worries about the exposure of American money market funds, which have large holdings of debt issued by European banks. Another uncertainty is the exposure banks have in insurance written on the debt of Greece, Ireland and Portugal.
To get buy-in from the banks and other private debtholders, Greece must find someone who can go out to persuade the private investors to get on board.
The spotlight is falling on Jean-Claude Trichet, president of the European Central Bank, who appears to be one of the few people who could credibly make the argument that private sector banks should join in the sacrifice.
But Mr. Trichet is in an increasingly uncomfortable position, having already led the central bank deep into uncertain territory at the center of efforts to bail out the euro zone's troubled economies. Without him making the arguments, it is unclear how Greece's bondholders are going to be won over.
“There is every possibility that at the end of this Greece is going to default anyway,” said Kenneth S. Rogoff, a former chief economist at the I.M.F. who is now a Harvard professor.
The European ministers plan to revisit the aid to Greece on July 3 following the Greek Parliament's vote of confidence in the reshuffled government led by Prime Minister George Papandreou. The ministers also insist that Athens make a firm commitment to raise cash by selling assets and cutting spending. Mr. Papandreou faces a trial of strength both with opposition deputies in Parliament and with protesters on the streets.
Source: New York Times