A major bank lobby group today cautioned the European Union that there were "limits" to the losses they will accept as part of a deal to make Greece's crippling debt more manageable.
In a push-back against calls for Greek institutional bond holders to take a loss of 50% or more, the Institute of International Finance said too great a reduction would be "tantamount to default."
"We continue to explore options which could contribute to a realistic vision of the Greek economy leading to renewed growth and investment, while also preserving the fundamental essence of a cooperative approach," IIF managing director Charles Dallara said in a statement from Brussels.
"There are limits, however, to what could be considered as voluntary to the investor base and to broader market participants. Any approach that is not based on cooperative discussions and involves unilateral actions would be tantamount to default," he warned.
It added such a move "would isolate the Greek economy from international capital markets for many years, and would impose a harsh burden on the Greek people as well as European taxpayers who have already done a lot to support Greece."
After a weekend of acrimonious talks in Brussels, EU nations are to meet again on Wednesday to thrash a deal that would avoid a fully-blown Greek default and limit contagion within the euro zone.
An earlier EU plan in July only called for a 21% cut in Greek debt held by private creditors, who were to exchange maturing Greek government bonds with longer-term instruments.
Greek banks have already voiced concern at the idea of a 50%+ write-down, but the IIF's comments will raise fears of a broader revolt among international lenders. The EU had earlier said that it thought a deal with the banks was close.
A source close to the negotiations said the EU has asked banks to agree a 60% write-down, but that banks are so far sticking to their offer of a 40% cut.
A negotiator for a major French bank agreed that July's 21% cut turned out to be hugely insufficient, but said "nothing has yet been decided" on a new number.
Deal on Greek writedown "close" - EU
An EU official has said negotiators from the EU and banks are "relatively close" to a deal to write off around half of Greece's €350 billion debt pile. EU economic affairs commissioner Olli Rehn's spokesman, Amadeu Altafaj was speaking to reporters in Brussels after last night's EU summit.
While talks are ongoing, he underlined that the EU's "preference" was "clearly for a voluntary approach".
Greek banks hold about €44 billion in sovereign debt bonds, and pension funds another €8 billion. A former Greek deputy head of the European Central Bank, Lucas Papademos, has warned that a 50% cut equates in reality to a 20% reduction given Greek state requirements to step in and aid Greek banks locked out of inter-bank markets.
European stock markets closed higher this evening as European leaders moved closer to forging a broad plan to contain the euro zone debt crisis.
European leaders last night voiced confidence about their progress towards a resolution of the region's debt worries at a key gathering in Brussels.
Taoiseach Enda Kenny said he was more hopeful that leaders would be able to sign a comprehensive deal on the debt crisis, following lengthy discussions at the summit.
The talks concluded last night, but EU finance ministers and EU leaders will return to Brussels on Wednesday to finalise matters.
The President of the European Commission Jose Manuel Barroso described negotiations as having progressed well.
Following a weekend of tough talking, involving EU finance ministers, foreign ministers and leaders, there is a slightly more optimistic mood in Brussels.
Mr Kenny said that, for the first time, he found the leadership of EU focusing on the fundamentals - from the situation in Greece to the fear of contagion.
That observation was backed by Mr Barroso, who said the talks were "a work in progress and it's progressing well", while IMF chief Christine Lagarde said good progress has been made.
