20 May 2011 Last updated at 14:20 ET

Greece default fears rise as reprofiling talk flounders

Fitch said it would cut Greece's rating even further if a credible rescue plan does not materialise

Bond markets are pricing in a growing risk of an outright debt default by Greece, with its 10-year cost of borrowing hitting a new high of 16.7%.

The rising market fears come as European leaders give mixed messages over whether Athens would be allowed to modify repayment terms on its debts in a bid to buy more time for austerity.

The Greek prime minister insisted the country would repay all of its loans.

Meanwhile, the Fitch rating agency has cut its rating of Greek debt yet again.

The agency slashed its credit rating by three notches to B+ - eight notches above default and four below "investment grade" - and warned of further downgrades if the EU and International Monetary Fund fail to come up with a credible rescue plan.

Borrowing costs

An apparent deadlock has arisen among European leaders as to whether Greece should be permitted to ask creditors to modify repayment terms on its debts.

Jean-Claude Juncker, head of the eurogroup, indicated earlier in the week that a "reprofiling" of Greece's debts may be permitted.

This "reprofiling" is understood by market participants to involve a delay in the repayment of debts falling due over the next two years, to be negotiated with the country's private creditors.

The value of these two year debts is already deeply discounted on bond markets, with an implied borrowing cost of almost 25% per year.

However, the French Finance Minister, Christine Lagarde, and the European Central Bank (ECB) have both spoke out against any kind of debt restructuring for the country.

"Debt restructuring would make the continuation of large parts of central bank liquidity provision to the banking system of Greece impossible," threatened Juergen Stark, the ECB's chief economist.

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Euro v US Dollar

Last Updated at 23 Feb 2012, 10:46 ET *Chart shows local time

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With the possibility of reprofiling looking less likely - and Greek hopes of securing additional loans from European partners also looking politically unpalatable - markets appear to be pricing an even higher probability that Greece will be pushed to declare a default on its debts.

The country's 10-year borrowing cost has shot up by one percentage point over the last two days.

Its short-term borrowing cost has also risen steadily in the past two weeks, from 5.4% to 6.4%.

The latest fears also sparked a sharp fall in the euro, which at one point on Friday was down nearly two cents against the dollar, at $1.415.

The Greek prime minister, George Papandreou, played down the risk of a default in comments on Friday.

"Of course, the deficit is the reason... that markets are expressing reservations as to whether we can cope or not," he said.

"It is the reason we are forced to ask for help from our partners... to depend on their help, on their loans. And of course I want to say here that we will pay back these loans."