Greece needs time to convince international investors about its reform programme and may not be able to return to financial markets next year as planned, its finance minister has admitted.

George Papaconstantinou’s comments in a Financial Times interview highlight how Greece continues to struggle to turn its economy round almost a year after the launch of an €110bn European Union and International Monetary Fund bail-out. They may fuel speculation that European leaders will have to find fresh ways of alleviating Greece’s debt problems to avert a default scenario.

Greece’s budget plans are fully funded this year but Athens will have to raise between €25bn-€30bn on financial markets in 2012 – a step that would mark the first stage of its international rehabilitation.

But Mr Papaconstantinou suggested that goal was in doubt and the timetable would not become clearer until an EU-IMF agreement had been struck for Portugal, the latest victim in the eurozone debt crisis.

“A judgment cannot be made before the summer and before Portugal closes its deal,” he said.

“I can understand those who look at the current situation and say, ‘You’ll never have a market [for Greek debt],’ but I can also point to the picture in October and November last year when spreads went down 350 basis points within 40 days before they started climbing again.”

Greece’s recession has been deeper than expected, with a particularly weak fourth quarter of last year, when the economy shrank 6.6 per cent compared with a year before – so government revenues fell short of the target.

The reform programme “proved longer and harder”, Mr Papaconstantinou said. “Yes, we need more time. There is no question about that . . . But more time, not in terms of a new programme but to convince.”

A possible backstop is the EU’s new rescue funds, which will have powers to buy debt directly from governments. Eurozone finance ministries have discussed privately more ways of helping Greece – for instance by agreeing to extend bond maturities – but the European Central Bank believes an orderly debt restructuring might be difficult to implement.

Mr Papaconstantinou said: “Our position is that we are proceeding with the programme . . . This is what we’re doing and we’re ruling out [a debt] restructuring.”

Athens will on Friday unveil a reworking of the EU-IMF agreement, intended to accelerate reforms and restore investors’ confidence.

The medium-term budget plan will include a further €23bn ($33bn) of spending cuts and revenue increases over the next three years, equivalent to about 10 percentage points of gross domestic product.

The plan aims at reducing the budget deficit from nearly 10.6 per cent of GDP last year to below 3 per cent in 2014, in line with the requirement for eurozone members.

“It is an unprecedented fiscal effort. It has proven difficult to put in place all the structural reforms but if you look at the programme, we are on track with everything we said,” Mr Papaconstantinou said.

Chart: 10-year Greek government bonds
© Financial Times

After a strong start last year, Greece’s reform drive has lost steam in the past few months amid resistance from public sector trade unions and opposition by hardline socialist cabinet ministers.

Under the medium-term plan, public sector wages would be streamlined, outdated state entities would be closed or merged and defence spending slashed. “What you have is a rethinking of the public sector in terms of how it works.”

An ambitious privatisation programme will aim to raise €50bn in revenues by 2015. Details of the plan will be presented for approval in parliament next month.

Mr Papaconstantinou was optimistic the economy would start growing again in the third or fourth quarter this year, pointing to a modest recovery in 2012.

But he admitted that Greece’s prolonged recession, now its third year, posed a risk to winning acceptance for the plan.

“In a recession people cannot see the way out – you have a sense of futility that may be gaining ground.”

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