The International Monetary Fund pressed Europe on Friday for stronger steps to tackle the region's debt crisis, saying countries needed access to more funding to stay afloat.
But in a statement suggesting divisions between policymakers over how to handle the crisis, a European Central Bank official said it was mainly up to Greece to rescue itself -- and that Athens could be cut off from aid if it did not act.
Ajai Chopra, head of the IMF mission in Ireland, said the European Union needed to adopt a more comprehensive and consistent approach to the crisis and urgently strengthen its bailout fund, the European Financial Stability Facility.
"The countries cannot do it alone and putting a disproportionate burden of the cost of adjustment on the country may not be economically or politically feasible," Chopra said in a conference call dealing with Ireland's progress under its 85 billion euro (74.2 billion pound) bailout from the EU and the IMF.
"The magnitude and terms of the financing need to be such that private creditors are convinced that the debt burden will be sustainable even in adverse scenarios and hence debt restructuring is off the table."
But ECB policymaker Jens Weidmann, the new head of Germany's central bank, struck a very different tone. He warned Greece, which last year signed up to a 110 billion euro bailout, that it could be left out in the cold if, as EU officials fear, it fails to meet targets for reforming its finances.
"It is first and foremost up to Greece itself to take appropriate additional steps," Weidmann said in his first public comments on the Greek crisis.
"If a country fails to do so, further support should no longer be taken for granted and the country should be prepared to bear the severe consequences that are likely to ensue once financial assistance is withdrawn."
DOWNGRADE
Fitch ratings agency sharply downgraded Greece's sovereign debt by three notches to B+ on Friday, pushing it further into junk territory. It said there was a rising risk that political opposition to further austerity in Greece would prevent Athens from undertaking fresh fiscal reforms.
The agency also warned it would downgrade Greece further if the EU and the IMF were unable to come up with a convincing plan for Greece's recovery.
"In the absence of a fully funded and credible EU/IMF programme, the rating would likely fall into the 'CCC' category indicating that a Greek sovereign debt default was highly likely," Fitch said.
The euro fell slightly in response to the downgrade. Earlier, the spread between 10-year Greek and German government bond yields, a measure of the risk of holding Greek debt, jumped by more than half a percentage point to a record 13.73 percent.
Fitch also said that even a soft restructuring of Greek debt, through an extension of debt maturities, would constitute a default -- an event which could shake European financial markets by raising speculation about other countries defaulting.
Euro zone official sources told Reuters on Thursday that a different approach was being explored; governments are considering a plan under which private investors would be asked to maintain their exposure to Greek debt while Athens would receive a new package of EU/IMF aid in return for more austerity measures.
But the IMF, EU governments and the ECB appear to be divided over some important aspects of bailouts. For example, Chopra said on Friday that Irish banks needed to have more confidence in the availability of medium-term funding from the ECB.
The ECB has considered creating a new lending facility to provide such funding but the plan was shelved amid internal disagreements over how much aid the central bank should provide.
"BANKS MAY NEED TO CLOSE"
Chopra said all euro zone countries needed to accelerate "repair and reform" of their financial sectors through rigorous tests of banks' health.
"Stress tests need to be followed, where appropriate, with bank recapitalisation and in some cases banks may need to be restructured or closed down," he said.
He also signalled IMF disapproval at French demands that Ireland raise its low rate of corporation tax in exchange for a cut in the cost of its European bailout loans.
"An increase in the corporate income tax is not a part of the EU-IMF supported programme because we did not see such a tax increase as consistent with the overall goals of the programme in restoring growth."
It is unclear how new leadership at the IMF may change its stance towards cooperation with Europe after the resignation this week of IMF chief Dominique Strauss-Kahn over his indictment for attempted rape, which he denies. French economy minister Christine Lagarde is believed to be the top candidate to succeed him.
Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels, said the most likely outcome was that international policymakers would find some sort of solution for Greece, allowing it to avoid a default.
"However, the political uncertainty remains high," he added.
Norway announced on Friday that it had suspended payment of a $42 million grant to Greece because Athens did not fulfil commitments and may have broken rules related to the aid.
The suspended grant, part of an aid programme to reduce social and economic inequalities in central and southern Europe, is not related to the EU-IMF bailout of Greece. Norway, which is not a member of the EU, said it had asked Greek authorities to document how aid funds had been spent.
REUTERS
