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Europe's sovereign debt crisis could spread and deepen, China said on Tuesday, and the European Central Bank again rejected any private investor involvement in a Greek rescue that was not strictly voluntary.

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The Eurogroup of euro zone finance ministers will meet in Brussels later to plot a way forward with those warnings ringing in their ears and Greek bond yields hitting a euro-era high.

Sources say it is too early for a deal to be struck.

"There are no decisions expected today, it is just about looking for common ground," said one source involved in the meeting's preparation.

China's central bank used its annual financial stability report to sound one of its starkest warnings yet about Europe's debt mire, saying a series of rescue measures had helped stabilise the situation but not tackled the root causes.

"The sovereign debt crisis could continue to weigh on Europe's economic recovery," it said.

"There is a possibility that the sovereign debt crisis will spread and deteriorate." The European Union and International Monetary Fund bailed out Athens to the tune of 110 billion euros ($160 billion) just over a year ago, and followed up with similar packages for Ireland and Portugal.

A new Greek rescue is now being thrashed out as it continues to sink under debt amounting to roughly 150 percent of its GDP.

European paymaster Germany is sticking, so far, to its demand that private investors contribute substantially to a second bailout for Greece, suggesting a swap in which private investors would exchange Greek government bonds for new ones. The ECB refuses to countenance any scheme that is not strictly voluntary, fearing a chain reaction that would stretch far beyond Greece and hit other debt-laden euro zone sovereigns.

"If there is an operation it must be purely and solely voluntary," ECB Governing Council Member Christian Noyer told a news conference.

"It must not lead to a default, even a partial one.

"The idea of involving the private sector in the management of crises has had a destabilising effect," Noyer said.

"Indeed, the uncertainty it created has deterred private creditors from continuing to finance countries in temporary difficulty." All three major ratings agencies have said they would be likely to classify even an ostensibly voluntary debt swap as a "selective default," since it is hard to imagine a rational investor maintaining Greek exposure without coercion.

Greece became the lowest-rated sovereign borrower in the world according to Standard & Poor's, which downgraded it on Monday and warned that any attempt to restructure the country's debt would be considered a default.

Bond and credit market prices imply the risk of an eventual default is high.

Five-year credit default swaps on Greek government debt rose 33 basis points to 1,615 bps, a record high.

Athens sold 1.625 billion euros of 6-month paper on Tuesday with yields rising by eight basis points from the previous auction.

Foreign investors took up 37 percent of the issue.

In a sign that markets do not yet fear Spain getting dragged into the mire, it sold 5.42 billion euros in Treasury bills though at a somewhat higher cost than a month ago.

"That they sold at the top of the target is encouraging at this stage of the game ... and highlights underlying investor faith in Spain," said Jo Tomkins, economist at 4cast.

Clock Ticking

At a Brussels summit on June 23-24, European Union leaders are due to finalise a new deal for Greece that officials say will total 120 billion euros and ensure the country is funded through 2014.

Half of that sum would come from the EU and IMF, with the remainder equally divided between Greek privatisation receipts and a contribution from the private sector, but deep divisions remain about how to engineer that.

In Tuesday's Sueddeutsche Zeitung newspaper, Olli Rehn, the European commissioner for economic and monetary affairs, said an accord was not as far off as some might think.

"We are preparing an agreement on the basis of the 'Vienna Initiative', whereby banks keep their bonds longer and in fact voluntarily," he said.

Sources say France favours a less sweeping form of private sector involvement than Germany, along the lines of the 2009 Vienna Initiative under which international lenders agreed to boost credit to the region and the main commercial banks agreed to maintain exposure and roll over credit lines.

There are signs that European banks holding billions of euros in Greek debt are moving towards an agreement along those lines, although ECB policymaker Ewald Nowotny cautioned that there were big differences between the 2009 initiative and what faces Greece.

The crucial moment could come on Friday when German Chancellor Angela Merkel and French President Nicolas Sarkozy meet in Berlin, although their EU partners have grown increasingly irritated at the bloc's big two deciding on policy before presenting it as a fait accompli.

Either way, many economists believe Athens will struggle to avoid a harsher restructuring in the years ahead.

A deal would not help reduce Greece's massive 340 billion euro debt load, but it would give the country more time to implement economic reforms and return to growth.

The Greek government is trying to push through new austerity measures worth some 6.5 billion euros for 2011 alone, almost doubling the belt-tightening already agreed for this year.

The EU and the IMF have asked that all Greek parties support the new measures ahead of the June 23-24 summit.

Did the International Monetary Fund bailed out Athens to the tune of 110 billion euros ($160 billion) just over a year ago, and followed up with similar packages for Ireland and Portugal?

A. TRUE
B. FALSE 

Did the Greek government is trying to push through new austerity measures worth some 6.5 billion euros for 2011 alone, almost doubling the belt-tightening already agreed for this year?

A. TRUE
B. FALSE