European and IMF partners will need to re-negotiate the terms of Greece's bailout this summer due to the worsening economic situation, a senior European Union official said Tuesday.
"It is delusional to say we cannot or need not re-negotiate the Greek programme," the official said on condition of anonymity ahead of talks among eurozone finance ministers in Luxembourg on Thursday.
It would be "stupid" to keep the memorandum intact because the economic environment has deteriorated in and outside Greece, the official said as Greek parties tried to form a coalition government after Sunday's elections.
"We would be signing off on an illusion," the source said, citing a lengthy period of limbo around back-to-back elections in less than two months, plus tax receipts and privatisations income that was off track.
This "will not be done in two weeks' time," the official said, but likely "in the course of the summer."
Greece has been forced to seek bailouts twice after hiding the extent of its debt woes, first for 110 billion euros ($139 billion) in 2010 and then for 130 billion euros earlier this year.
It has also had a 107-billion-euro private debt write-off.
Under the current conditions, Greece has to cut 11.5 billion euros -- the equivalent of five percent of its gross domestic product -- by 2014 although Greek parties wants this deadline to be extended to 2016.
This delay would mean a combination of billions more in funding from international creditors, or billions more in cuts and revenues raised by the Greek government.
Belgium's Foreign Minister Didier Reynders has suggested such an extension might be acceptable.
But the EU official said the Eurogroup of finance ministers does "not want at this stage any extension of maturities," although there had been "no discussions yet."
Thursday's talks will also begin outlining a "framework of conditions" for Spain's banking bailout, with the first results from a series of stress tests expected that day.
Ministers already have to tackle a debate over the source of funding, with a "strong preference" expressed by many eurozone governments for the incoming European Stability Mechanism to make the loans.
This is complicated by the fact that a July 9 target date for full ratification of the ESM increasingly looks like being missed.
Investors have clearly shown a preference for the existing European Financial Stability Facility since Eurogroup ministers first agreed to lend up to 100 billion euros to Madrid to recapitalise its financial sector.
Under the EFSF, public creditors are not given preferred status in the event of default, but lending governments do not need to put spending on ESM commitments against EU-agreed public deficit and debt targets.
The official underlined that "direct recapitalisation of banks" with monies raised by EU partners, not funnelled first through government books, "is not possible under the current rules."
IMF managing director Christine Lagarde will brief ministers at the start of the talks on "spillover effects" for the eurozone as a whole, before reporting to EU heads of state and government at next week's summit.
Cyprus is also heating up as an issue, its banks having been badly hit under the near-total write-down of privately-held Greek public debt.
Days from Nicosia assuming the EU's six-month chair, the prospect of a further bailout for Cyprus -- and talk of its Communist president negotiating a second bailout loan from Russia -- will also feature in Luxembourg.