The head of the International Monetary Fund today raised the possibility that Greece could leave the euro zone in an orderly fashion.
"If the country's budgetary commitments are not honoured, there are appropriate revisions to do, which means either supplementary financing and additional time or mechanisms for an exit, which in this case must be an orderly exit," Christine Lagarde said in an interview with France 24.
Meanwhile, debt-stricken Greece must hold fresh elections after talks on forming a new government broke up today without agreement.
The new polls, expected on June 17, follow inconclusive elections on May 6 when a majority of Greeks voted against the austerity measures which Athens agreed to in return for a massive EU-IMF bailout late last year.
"We are going again towards elections, in a few days, under very bad conditions," socialist Pasok party leader Evangelos Venizelos said, regretting the fact that there was no accord.
"The Greek people must now make the right decisions for the good of the country," said Mr Venizelos, who supported the EU-IMF deal in a technocrat government formed last November.
Panos Kammenos, leader of the Greek Independents party, lashed out at those he claimed would betray the people and who "prefer the creditors to national unity."
A statement from the president's office read on state TV noted simply that efforts to form a government had failed and that he would hold talks tomorrow morning with all political parties on setting up a caretaker administration.
Five of the parties which won seats in the May 6 polls went into the talks to discuss a presidential plan for a technocrat government, aiming to resolve differences over the austerity measures included in the EU-IMF accord, the second after a smaller bail-out in 2010 failed to solve the problem.
President Carolos Papoulias called the meeting after talks yesterday with the conservative New Democracy, Pasok and radical Democratic Left parties failed to reach an accord on a coalition government.
He had suggested that in the absence of any other solution, a government of "distinguished and non-political figures" should be considered to break an impasse over the tough austerity measures agreed to in the EU-IMF bail-out.
Forming such a government would have avoided new polls and helped ease strains over Greece's euro zone future but time was short as parliament was to convene on Thursday and new polls had to be called if there was no government in place by then.
The election on May 6 produced no clear winner and showed a majority of Greeks opposed to the austerity measures, which many feel make the problems worse, reflecting increasing calls across Europe that the focus needs to be on growth.
Figures today showed the Greek economy slumped a massive 6.2% in the first quarter compared
with a year earlier, leaving the country mired deep in recession for a fifth year.
But two tests were at least passed - the government managed to raise €1.3 billion in short-term funds even if it had to offer higher rates to do so, and it repaid €436m in maturing debt.
That repayment covered private creditors who had refused to take part in an unprecedented debt write-down agreed under the EU-IMF bailout and a government source said the moved was aimed at settling the dispute.
In recent months, senior EU officials have more openly raised the prospect of Greece leaving the euro, but yesterday the head of euro zone finance ministers group hit back strongly, insisting that Athens was staying put.
"I don't envisage, not even for one second, Greece leaving," Jean-Claude Juncker said after the 17 euro zone partners unanimously affirmed their "unshakable desire" to keep Greece in the club.
There can be little doubt about the seriousness of the situation both for Greece, if it has to leave the euro zone, and for its partners, who might lose billions in its disorderly withdrawal from the bloc.
France would face a bill of €50 billion if Greece were forced to quit, its outgoing Finance Minister Francois Baroin warned today.
Charles Dallara, who as head of the Institute of International Finance helped negotiate the private creditor write-down, warned that the cost of failure would be too high to bear.
"I believe that the cost to Greece, the cost to Europe and the cost to the entire global economy may still be enough to cause Greek politicians and European politicians to pause before they pull the trigger on a Greek exit."
Greek economy shrinks 6.2% in first quarter
The Greek economy, mired in recession for a fifth year, shrank 6.2% in the first quarter compared with a year earlier, official data showed today.
The country has been bailed out twice by the EU and International Monetary Fund and is struggling to form a government after inconclusive polls.
Its economy contracted by a sharper 7.5% in the last three months of 2011 and remains beset by problems.
The Bank of Greece warned in March that the economy could shrink 4.5% this year as the recession drags on, following a contraction of 6.9% in 2011.
Many Greeks say the austerity measures are making the problems worse, cutting growth in a misguided attempt to stabilise the public finances and that there has to be a change.