ATHENS, Greece — Investors increasingly expect Greece will not pull itself out of its financial hole and will have to renege on some debt payments, despite spending a year on bailout loans making painful austerity reforms.
The concern that bailouts and austerity, once Europe's hailed recipe for the crisis, are insufficient and that debt jitters are particularly difficult to control once unleashed has resonated globally. Even the U.S., whose debt investors have huge faith in, was warned by a ratings agency this week about its heavy borrowings.
Despite repeated insistence from Greek and EU officials that there are no thoughts of restructuring Greece's debt, markets are predicting that will happen eventually, that the €110 billion ($157 billion) international plan to save the country's finances is failing despite sweeping government reforms.
"It's not the fault of the markets," said economic analyst Vangelis Agapitos. "Its the fact that 18 months since the very beginning of this crisis, we still have vague plans as to how we're going to counter the beast, which is a huge government, a difficult to tame deficit and a very large debt."
The government imposed broad and painful reforms to overhaul the economy. It has cut public sector salaries and pensions, hiked sales and income taxes and tried to crack down on widespread tax evasion and open up protected professions to more competition.
But while the measures have helped keep the deficit from growing too quickly, they have also hindered growth, keeping the country in recession. Shops and boutiques in popular shopping districts have closed down at an alarming rate, their shuttered windows plastered with "for rent" signs as Greeks curb their spending.
While unemployment spirals to 15.1 percent, the streets of Athens are hit by repeated demonstrations, and all sectors — from lawyers to port workers, doctors to taxi drivers — have staged frequent strikes. The country faces yet another general strike on May 11.
The question hanging over Greece — and the 17-nation eurozone — is whether the country's debts are so big that they cannot ever be paid back. The European Union and the government say that Greece, in financial terminology, is not insolvent but only illiquid — that it can pay its loans back, just not now.
Investors, however, are not convinced. Market prices show they are ready for Greece to restructure some of its €340 billion ($486 billion) in outstanding debts — by extending debt repayments or paying back less than the full amount it borrowed.
Economists say the government's strenuous efforts, even with a bailout, are bumping up against the limits of what taxing and spending can do.
Such strict austerity may reduce deficits, but it hurts growth by adding tax burdens and reducing the stimulus effect of government outlays. Lower growth, in turn, reduces the tax revenues needed to start paying down debt. Markets can see that, and demand higher interest rates, which make things worse.
"If something is unsustainable the only question is one of timing, whether it is this year, next year or 2013," said Zsolt Darva, an economist at the Breugel research institute in Brussels who thinks a restructuring could be managed so as not to damage the euro currency.
Some analysts argue that despite all the noise, a restructuring now is ill-advised.
"We believe that a near term restructuring of Greek market debt makes little sense and that there is a misunderstanding in some of the press about what the issues on the table are," said David Mackie, head of Western European Economic Research at J.P. Morgan, noting that there are various kinds of debt which can be restructured in a variety of ways.
It is reasonable for the government to be discussing a restructuring with the IMF and EU, Mackie said. "However, we doubt very much that the Greek government is trying to get an agreement to restructure its market debt in the near term."
He said forcing losses on investors would be very damaging, both for Greece and the rest of the eurozone's markets.
While Greece has managed to slash its budget deficit from 15.4 percent of gross domestic product in 2009 to an estimated 10 percent in 2010, it is still missing some targets. It had initially estimated last year's deficit would stand at 9.4 percent.
The uncertainty over whether Greece can make it has spooked the market. The interest rates demanded for Greek 10-year bonds — one indication of investor confidence — have spiked to dizzying heights, more than 11 percentage points higher than those of Germany's benchmark 10-year bonds on Tuesday.
The country also had to pay a higher rate in a treasury bill auction Tuesday, raising €1.65 billion ($2.36 billion) in three-month bills at a yield of 4.1 percent — up from the 3.85 percent in February.
Despite often bold steps, the government has found it hard to implement certain measures — for example not being as successful as it would like on widespread tax evasion, and seeing its revenues fall short of what it had hoped as the country struggles through a recession.
"We need to save time, we need to act more promptly on things. I'm afraid that there's a lot of talk, but very little action so far," Agapitos said. "I think Greek politicians need to realize that this is economic war that's taking place and they need to be drastic in what they decide to do."
Investor jitters have been fueled by a series of recent media reports, often quoting anonymous officials, that Greece has either asked for or is discussing a restructuring.
The latest came in the form of a story in the German newspaper Die Welt, which quoted an anonymous serving Greek government ministry as saying that "the question not longer is if we will restructure, but rather, when."
The government denied it had any such thoughts.
"We remain true to our work, without being sidetracked by daily or even hourly danger-mongering about alleged restructuring, about decisions allegedly already taken," said government spokesman Giorgos Petalotis.
David McHugh in Frankfurt contributed.