ATHENS, Nov 14 (Reuters) - Greece needs a softer pace of fiscal adjustment to get out of its debt crisis and lower financing terms can help, but a writedown on official loans does not look politically feasible, the head of the IIF bank lobby group said on Wednesday.
"Europe and Greece need to steer a new course to find a better balance between austerity and growth. Greece now urgently needs greater emphasis on growth. Europe needs the same," Charles Dallara, managing director of the IIF told bankers in Athens.
The Institute of International Finance (IIF) played a coordinating role in Greece's debt restructuring talks which led to the so-called private sector involvement (PSI) in March, a writedown that helped cut the country's debt burden.
In the debt swap, banks, insurers and other private sector investors holding about 206 billion euros of Greek bonds took a 53.5 percent haircut on the nominal value of their securities.
With debate heating up on how to tackle Greece's debt sustainability problem, the International Monetary Fund is pressing Europe to restructure official loans the country owes to euro zone nations to further ease Athens's debt burden.
But while Dallara welcomed the IMF move, he suggested that imposing the type of "haircut" endured by the private sector for official lenders was not feasible at the moment.
"An official sector haircut along the lines of the PSI would be politically combustible in Europe. Now is not the time," Dallara said.
He said Europe's future will hang in the balance so long as doubts remain over Greece's future in the euro, urging a more moderate pace of deficit reduction along the path Ireland is following.
"Allow some breathing room for this economy. Until the Greek economy returns to growth those doubts will persist, fuelling contagion elsewhere in the euro area," Dallara said.
More moderate targets would be more tenable, have a less negative impact on unemployment and positive effects on market sentiment, he said. This could help put Greece on a more plausible path to regaining market access.
Data on Wednesday showed the economic slump deepened in the third quarter, with national output shrinking 7.2 percent on an annual basis as Athens heads into its sixth consecutive year of recession in 2013.
"Without stabilisation and a renewal of growth we cannot solve debt sustainability," Dallara said.