Greece and the eurozone caught in a race against time

(ATHENS) - Greece could be heading towards a default on its public debt, under pressure from fed up EU-IMF creditors and caught in a race against time to remain in the eurozone.

On the eve of European Commission President Jose Manuel Barroso's first visit to Athens since the beginning of the debt crisis, tensions in the eurozone ran higher than ever Wednesday between the German-centered north and the southern "Mediterranean club," where Greece continues to be a problem child.

Over the past few days, numerous German high-ranking officials publicly talked about Greece's possible default and exit from the eurozone, without being contradicted.

A conservative German MP on Monday even suggested that the country should start paying half of its pensions and public salaries in drachmas, as part of a gradual exit from the eurozone.

Many analysts see these comments as a way of putting more pressure on Greece and not as an immediate threat of the country exiting the eurozone.

In the meantime, international auditors from the EU, International Monetary Fund and European Central Bank arrived in Athens to report on Greece's progress in implementting its structural reform programme, sidetracked after a three-month political deadlock following two elections.

The report is expected to be made public at the end of August or early September.

But in Brussels as in Athens most agree that Greece will not be able to reach the goals included in the second bailout package that it signed with its creditors last winter.

"There are two sides to this problem. The country does not respect its obligations, be it because of lack of political will or because of inability, and it is in need of money," said a downbeat diplomatic source in Brussels.

"There is no solution: even if the Greek government and the troika agree on the reforms, (the country) could not reach the goals," the source added.

With this possibility in mind, Greeks have been asking for a two-year extension to implementing the programme ever since the victory of conservative leader Antonis Samaras at the June 17 elections.

But time is money and analysts of macro economic research consultancy Capital Economics estimate that a possible extension would equal an additional help of 40 billion euros ($48.4 billion) for Greece, from overburdened European rescue funds.

Analysts from French bank Societe Generale believe this sum to be around 60 billion euros.

For European countries that have already asked their parliaments twice, in 2010 and 2012, to provide their Greek partners with emergency loans, a third rescue would be too much, especially at a time of recession.

And in any new rescue, Greece would likely have to negotiate yet another restructuring of its public debt, as it did earlier this year resulting in heavy losses for private investors especially Greek banks.

A second writedown is a "possible solution, but it would be an expensive one," said German Christian democratic party CDU MP Norbert Barthle on Austrian television.

A possible new extension "is also a form of restructuring," admitted Greek government spokesperson Simos Kedikoglou on Wednesday, but added that negotiation is "in progress" and "linked to European developments."

For months, former socialist finance minister Evangelos Venizelos has been calling for a restructuring, already called OSI (official sector involvement) because it would include public holders of Greek debt unlike the PSI (private sector involvement) deal earlier this year.

On Thursday morning, Finance Minister Yannis Stournaras is scheduled to meet the troika auditors. Barroso will meet Prime Minister Antonis Samaras at 1500 GMT.

These meetings are part of the race against the clock, with Greece expected to pay off a 3.2 billion euro bond held by the European Central Bank, that expires on August 20.

The European Commission in Brussels seems reassuring in this respect, with spokespersons regularly repeating a comment made by Eurogroup president Jean-Claude Juncker that a "technical" solution is possible.

But financial markets remain unstable, as was made evident by a huge slump in world stocks on Monday and Tuesday triggered by fears over Spain, whose borrowing levels have reached those that pushed Greece over the brink.

"The only player able to counteract these market tensions in the short term remains the ECB," said Peter Vanden Houte, economist at ING.