EU and IMF rescue auditors launched a new probe in Greece today amid a rising eurozone crisis over talk of debt restructuring and a second bailout.
Experts from the European Union and International Monetary Fund will decide if Greece merits a critical new slice of rescue funding, just as a top official at the European Central Bank (ECB) warned that debt default or restructuring would hit the entire eurozone.
A restructuring of debt would put Greece's banking system "on its knees," the head of the Italian central bank Lorenzo Bini Smaghi told Italian daily La Stampa.
Smaghi, who sits on the ECB governing council and is seen as a leading contender to be the next head of the European bank, warned of "the contagion that a Greek disaster would inflict on the rest of the eurozone."
The bailout for Greece, put in place a year ago as the result of a deep rethink by EU policy makers and some U-turns by the ECB, involves loans of 110 billion euros ($157 billion) over three years.
Smaghi issued his warning the day after credit rating agency Standard & Poor's hit Greek debt with a severe two-notch downgrade, saying there were strongly rising signs that Greece could not escape a restructuring which would mean big losses for those who had lent it money.
Senior EU and Greek officials have denied that any restructuring is on the agenda.
The rescue for Greece, a year ago, was the first of three bailouts, covering also Ireland and now Portugal, and the renewed strain over the Greek debt mountain is seen as another severe challenge for the credibility of the eurozone. Ireland has said it wants to renegotiate its rescue terms.
The finance ministry in Athens said that the team from the EU, ECB and IMF would stay for at least a week. It would meet Greek Finance Minister George Papaconstantinou, Health Minister Andreas Loverdos and Employment Minister Louka Katseli.
At the time of the last such regular audit in February, experts said that Greece had to accelerate a programme of privatisation, worth 50 billion euros by 2015, to raise cash.
On Monday, the governor of the Greek central bank, George Provopoulos, urged the government to accelerate privatisation to correct "deviations and delays" which lay behind negative comment about Greece.
At the weekend the head of the Eurogroup of eurozone finance ministers Jean-Claude Juncker said that "we think that Greece does need a further adjustment programme".
And an EU source, who declined to be identified, told AFP on Monday that eurozone ministers were considering a need for extra help next year because it seemed unlikely that Greece would be able to return to borrow on markets as intended.
But the source said that any idea of restructuring had been ruled out.
The extent of uncertainty and tension was indicated by remarks by the chief economist at the ECB, Juergen Stark, who told regional German radio Bayerischer Rundfunk: "I think that what we have set in place a year ago with the International Monetary Fund is a realistic programme that must be applied."
Cheap money from the ECB, in large quantities, has been keeping the Greek and Irish banking systems afloat for months.
"Greece has a lot of debts, but Greece is not insolvent," Stark said, adding that a "restructuring is not the solution."