THE DECISION of EU finance ministers to soften their opposition to any “restructuring” of Greek debt stoked fresh tension with the European Central Bank as it warned of potential “catastrophe” from such a departure.

The finance ministers opened the door on Monday night to a “soft restructuring” of Greek debt, saying the country could seek longer debt repayments from creditors if it accelerated fiscal reforms and sold state assets.

After months of resistance to any debt restructuring, some countries such as France remain deeply sceptical. However, the ministers’ move marks an effort to explore whether it is possible to give the country breathing space without triggering a full-blown default.

This prompted volleys of dire warnings from the ECB yesterday as senior policymakers said there was no way of distinguishing between default events.

ECB executive board member Lorenzo Bini Smaghi dismissed the notion of “soft” restructuring as an “empty slogan” and said there was no difference between “hard” or “soft” restructuring. “A solution for reducing debt but not paying for it will not work.”

Fellow executive board member Juergen Stark said Greek restructuring was “not the appropriate way forward” and would “create a catastrophe”.

European officials say Greek banks would have an incentive to give Greece breathing space on their holdings of the country’s sovereign debt. However, Mr Stark said any restructuring would undermine the collateral Greek banks used for ECB loans.

“It’s an illusion to think that a debt restructuring or haircut or rescheduling would help resolve Greeces problems,” he said. “A restructuring would wipe out part or all the capital of the Greek banks.”

Notional Greek borrowing costs remained exceptionally high yesterday, with the yield on its 10-year bonds at 15.7 per cent and the yield on two-year money at almost 25 per cent.

The ministers ruled out full-blown restructuring with compulsory “haircuts” on the money due to creditors as they publicly acknowledged for the first time the possibility of some form of Greek debt rescheduling.

EU economics commissioner Olli Rehn said such a scheme would be voluntary and would be conditional on swifter budget cuts and the initiation of a €50 billion privatisation programme, which is deeply contentious in Greece.

The ministers have been stepping up pressure on Athens on this front, insisting it must produce within days a definitive list of state assets it will sell. They also want a clear timetable of exactly when each of the assets will be sold.

While the ECB’s resistance to restructuring is well known, a European diplomat said the softening in the ministers’ stance reflects an implicit acceptance of the political difficulties faced by Greek prime minister George Papandreou and German chancellor Angela Merkel.

Mr Papandreou is backtracking on the bailout programme due to a political backlash against austerity and Dr Merkel is reluctant to contemplate a new aid package due to the unpopularity of bailouts in Germany.

Dr Merkel ruled out Greek debt restructuring only on Monday, but officials say her administration has tacitly accepted the principle of a “soft” easing of the country’s repayments as a very last resort.

Anxiety about the bailout comes amid increasing expectation an ongoing EU-IMF review will sharply criticise the country’s failure to deliver key policies set out in its rescue plan.