IMF Definition: The structural primary balance is the recorded fiscal balance minus two components: (1) interest payments, which cannot be directly reduced in the short run by fiscal policy, and (2) that part of the recorded balance that results from the phase of the business cycle (for example, the amount the government pays out in unemployment benefits during a recession, or the amount of windfall tax revenue during boom times).

A temporary Greek default is likely if private bondholders voluntarily participate in a new bailout program that is currently being discussed, the International Monetary Fund said Wednesday. The IMF has pencilled in €33bn of private sector burden-sharing through 2014 and says such an approach is "appropriate."

"There will be some form of PSI," Poul Thomsen, deputy director of IMF's European Department and mission chief to Greece said Wednesday in a teleconference call with journalists, referring to private sector involvement.

Christine Lagarde, managing director of the Fund said in a statement on Monday following the Eurogroup meeting of Eurozone finance ministers: “We...welcome the Ministers’ recognition of the need for a broader, more forward-looking policy response to assist Greece in its efforts to restore growth and competitiveness, and to bolster debt sustainability.  The IMF will continue to work closely with Greece and European partners to support these objectives.”

In a staff report (pdf) published on Wednesday, the IMF said if the authorities are able to implement their "very ambitious fiscal and privatization programs, public debt would peak at 172% of GDP in 2012 and decline to 130% of GDP by end-2020 (compared with 159 and 130% of GDP at the third review)." The higher peak relates to higher estimated upfront FSF (financial stability fund) funding needs.

The report says open discussions of Greece’s financing challenge and Eurozone countries’ insistence on private sector involvement to resolve this have convinced markets that Greece will restructure its debt. The latest market surveys suggest that about 95% of participants expect this outcome.

The IMF said the fiscal position has stalled at a primary deficit of around 3½%, as progress with underlying reforms has lagged behind.

The report acknowledged that only the threat of wider financial contagion allowed the IMF to keep lending to a country with such an unstable debt situation.

Rating agencies have said that any private sector involvement in burden sharing, even if it is voluntary, would trigger a selective default on Greek debt. Any such default would have to be short as Greek banks use the sovereign debt they hold as collateral to borrow from the European Central Bank.

The IMF warned against further delays in agreeing a new deal.

"The uncertainty has affected market conditions unfavorably, there's no doubt about that, and there is an urgency to coming to a conclusion on this issue," Thomsen said on his teleconference call.

On Wednesday, Fitch, the US rating agency, downgraded Greek debt, citing the uncertainty surrounding private sector involvement.

Default: Viable Option?: