The international bank lobbying group that has been leading negotiations on giving debt-ridden Greece easier terms for its bonds on Sunday rejected calls to impose larger losses on private investors.
Forcing private creditors to write down their Greek bond holdings by more than the 21 percent tentatively agreed to in a July deal would quickly cause a "domino effect" that would see the crisis spread to other parts of Europe, warned Josef Ackermann, the outgoing chairman of the Institute of International Finance.
Such a move would ultimately cost taxpayers much more than just bailing out Greece and erode confidence in the euro, said Ackermann, who is also the CEO of Germany's Deutsche Bank, a major lender to Greece.
Germany and other rich eurozone nations have been pushing for a re-negotiation of the July deal, arguing that the economic situation in Greece has significantly deteriorated since then and may require a steeper cut in the country's debt load.
However, Ackermann quickly rejected that push, saying that the agreement was fair and already placed a heavy burden on banks at a time of major market turmoil.
"If we now start reopening this Pandora's box we will lose a lot of time and I'm not sure people would be willing to participate," Ackermann told a news conference on the sidelines of the annual meeting of the International Monetary Fund.
Under the July deal, Greece is asking banks and other large private investors to swap their existing Greek bonds for ones with longer repayment deadlines, a lower face value or lower interest rates. The IIF says the deal would save Greece some euro54 billion by 2014 and euro135 billion by 2020.
However, most analysts say that those savings are far too small to make Greece's massive debts _ which amount to some 160 percent of economic output _ sustainable again. At the same time, there have been growing doubts that investors will agree to swap 90 percent of their bond holdings, a minimum threshold that Athens set to make the deal worthwhile.
Getting private creditors to agree to the deal comes at a heavy cost for Greece. Apart from temporarily being rated in "selective default" _ a first for a eurozone nation _ the country has to spend some euro42 billion on setting up a collateral fund that would secure the remaining value of the bonds.
If at some point Athens decides that a steeper cut in its debt was necessary, that money would go to the bondholders.
"If the July deal goes ahead, Greece would be locked into this perpetually," said Sony Kapoor, managing director of Re-Define, a Brussels-based economic think tank.
Greece has been relying on euro110 billion in rescue loans from other eurozone countries and the International Monetary Fund since May 2010. In July, when it became clear that Athens needed more help, eurozone leaders agreed on a second, euro109 billion bailout, although several aspects of that deal still need to be finalized.
To make the second aid package acceptable for their taxpayers, several rich countries led by Germany pushed for banks and big insurance companies to share some of the pain of bailing out Greece _ despite opposition from the European Union and the European Central Bank, the central bank for the 17 nations that use the euro as a common currency.
But since July, the eurozone's debt crisis has significantly worsened, partly because investors now fear that they may also face losses on bonds from already bailed-out Portugal and Ireland as well as struggling Italy and Spain. The Greek economy is now set to shrink 5.3 percent this year, up from a June estimate of a 3.8 percent decline, followed by a further contraction in 2012.