Audit sparks fears of possible new bailout package for Greece

Greece could be looking at a second rescue or restructuring package as experts from the European Union and the International Monetary Fund began an audit of finances and reforms. The audit is routine but leads to recommendations and conditions covering the next slice of a 110 billion euro loan.

Reuters/Alex Domanski

Greece is struggling to meet its deficit-reduction targets because of a deeper than expected recession and the next 12 billion euro loan instalment is crucial to its finances. Senior EU and Greek officials have denied any restructuring is on the agenda, although eurozone officials have begun to admit that Greece is likely to need more aid in some form.

Lorenzo Bini Smaghi who is on the executive board at the European Central Bank said the process of Greek reforms had slowed down.

"We find ourselves one year on having to re-adjust the programme to have more guarantees," he said.

Smaghi also warned a Greek debt default or restructuring would hit the entire eurozone and would put the country's banking system "on its knees".

Smaghi issued his warning a day after credit rating agency Standard & Poor's hit Greek debt with a severe two-notch downgrade, saying there are strongly rising signs that Greece was heading towards a restructuring which woudl mean big losses for investors who had lent them money.

The rescue for Greece, a year ago, was the first of three bailouts, covering also Ireland and now Portugal, and the renewed strain over the Greek debt mountain is seen as another severe challenge for the credibility of the eurozone.

Ireland has said it wants to renegotiate its rescue terms.