The European Union is looking to lower interest rates on bailout loans to Greece and Ireland and working on a second rescue for Athens in a chaotic effort to prevent a disorderly debt restructuring.
But ratings agency Standard & Poor's suggested on Monday far more radical measures would be required to make Greece's 327 billion euros ($470.3 billion) debt mountain sustainable, saying Athens may have to reduce the principal by 50 percent or more, implying big losses for investors.
S&P downgraded Greece's credit rating further into junk territory — to B from BB-minus — hitting Greek bank stocks as investors seeking safer assets fled to German debt.
The executive European Commission said it hoped for a decision within weeks on reducing the rate charged to Ireland to make Dublin's debt more sustainable.
"The Commission is clearly in favor of a rate cut," a spokesman for EU Economic and Monetary Affairs Commissioner Olli Rehn said. "The Commission is against debt restructuring."
Irish Prime Minister Enda Kenny told parliament that without a return of strong economic growth, "questions of sustainability will remain" around his country's debt.
"There is no doubt that a reduction in the interest rate on the moneys we are borrowing from Europe would be a meaningful and appreciated measure," he said, predicting it could be delivered at a euro zone finance ministers meeting next week.
The Irish government's bid for lower interest payments has so far been blocked by Germany and France, which want Dublin to drop its veto on harmonizing the corporate tax base in Europe in exchange or raise its own low corporate tax rate. Kenny made clear he would not consent to raise corporation tax.
In Germany, a senior lawmaker in Chancellor Angela Merkel's conservative party said a further cut in the rate on emergency loans to Greece, already reduced by one percentage point in March, would be justified if it carried out further reforms to reduce its debt risk.
Michael Meister, finance policy spokesman of Merkel's Christian Democrats, told German radio he opposed any idea that Athens should restructure its debt or that it should consider leaving the euro zone.
The calls for lower interest rates came after a select group of top euro zone policymakers held not-so-secret talks in Luxembourg on Friday evening on how to stem the currency bloc's deepening sovereign debt crisis.
One of the German government's economic advisers, Peter Bofinger, told Reuters Insider television that unless there was a comprehensive solution for all euro zone debt problems, "I'm not sure whether the euro area will remain intact for the next 12 months.
MERKEL TO MEET EU TOP BRASS
The cost of insuring Greek, Irish and Portuguese debt against default rose further as market worries intensified over the risk that Greece may have to restructure its debt.
European shares fell amid signs the three euro zone states in intensive care are mounting a bidding war for easier terms by pointing to concessions made to each other.
The jitters also followed a report by German magazine Der Spiegel alleging that Greece was considering leaving the euro zone, which drew indignant denials from Athens and EU ministers.
Merkel's spokesman said she would meet European Commission President Jose Manuel Barroso, head of the EU's executive arm, and European Council President Herman van Rompuy, who chairs the bloc's regular summits, on Wednesday to review the situation.
A Greek exit from the euro had never been under discussion and was not now, he told a news conference.
Euro zone and EU finance ministers are due to meet next week to approve a 78 billion euro rescue for Portugal amid lingering uncertainty over whether Finland, which has a caretaker government and has not yet begun talks on a new coalition, will be in a position to give the required agreement.
Pressure is mounting for those meetings to deliver decisions on Ireland and Greece as well, but euro zone sources said no action was likely on Greece until June at the earliest.
Responding to anger in some countries that were not invited to Friday's talks, a German Finance Ministry spokesman insisted there was no attempt to create a two-class euro zone.
Greek Finance Minister George Papaconstantinou, who attended the Luxembourg meeting, said investors did not believe his country could return to capital markets next year as envisaged in its EU/IMF plan, so it might need alternative funding.
Jean-Claude Juncker, chairman of the Eurogroup of finance ministers of the 17-nation euro area, said after Friday's talks there was a consensus that Athens would require a second rescue.
"We think that Greece does need a further adjustment program," he said after meeting with ministers from Germany, France, Italy, Spain, the EU's Rehn and European Central Bank President Jean-Claude Trichet.
He gave no details, but a euro zone source said one idea under consideration was for the European Financial Stability Facility rescue fund to buy Greek bonds in the primary market upon issuance next year, in return for a new form of collateral.
Greece, which has a debt mountain of nearly 150 percent of gross domestic product, is supposed to raise 27 billion euros in the market in 2012, according to the existing rescue plan.
"For now, the most likely outcome is for policymakers to agree to provide Greece with additional funds and perhaps to extend the maturity of its existing bailout loans, effectively pushing back a Greek restructuring," Ben May, European economist at Capital Economics, wrote in a note to clients.
Market analysts are convinced Athens will have to reduce its debt substantially by a mixture of rescheduling maturities, lower interest rates and possibly convincing private investors to take voluntary losses to avoid a disorderly default.
Some also believe Ireland will be unable to repay its debt, set to reach 120 percent of GDP, and will face mounting political pressure to make bank bondholders share the cost.
A senior Irish minister said on Sunday that Dublin was watching to see what concessions it can win on its EU/IMF bailout if Greece is given a new deal to resolve its crisis.
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