Jean-Claude Trichet Getty Images/Adam Berry A conflict that "blew up" within and between the institutions negotiating Greece's 2010 bailout may have played a pivotal role in blocking efforts to ease the country's debt burden, according to a new paper.

The implication of the paper is that the European Central Bank (ECB), the European Commission and the IMF screwed up in 2010 by failing to allow a restructuring of Greek debt that would have avoided the current crisis. If Greece cannot reach a new financing deal over the next few weeks it may exit the euro currency area — potentially causing widespread chaos.

The paper, released by the independent think-tank the Centre for International Governance Innovation (CIGI), claims that the negotiating team from the International Monetary Fund (IMF) had pushed for debt haircuts for private bank sector holders of Greek debt. That would have meant those banks getting less than the amount they expected to be paid back. The idea was to provide an orderly process out of the debt crisis and to put the country onto a sustainable footing to repay its creditors.

However, the paper's authors claim, the proposal came under fierce opposition from former ECB president Jean-Claude Trichet. At an ECB meeting in the spring of 2010 a member of the central bank's executive board brought up the prospect of debt relief. Trichet allegedly "blew up," the paper says:

The ECB president "blew up," according to one attendee. "Trichet said, 'We are an economic and monetary union, and there must be no debt restructuring!'" this person recalled. "He was shouting."

In response to questions from Business Insider on the accuracy of the account, an ECB spokesperson said "we don't comment on executive board meetings".

The CIGI gives some credit to Trichet's rage, by noting that he feared "a Lehman-like event" across all of Europe if bondholders were forced to take less than the face value of their Greek contracts. It could result in a contagion, putting the entire region's financial system into jeopardy. The paper claims these worries ultimately "trumped concerns about what was right for Greece":

Once faith in the creditworthiness of one euro-zone country was shattered, Trichet feared, confidence in the bonds issued by other European governments would be destroyed as well, the almost certain result being a Lehman-like event in which investors pulled money out of markets all over the continent. This anxiety over financial contagion was widely shared in Europe, and it was based on perfectly legitimate reasoning, starting with the fact that the biggest holders of Greek bonds included some of the region's most vulnerable banks. The exposure of French banks to Greece was €60 billion, and German banks had €35 billion worth (Bastasin 2012, chapter 13); if they were obliged to take steep losses on their Greek paper — and on their other euro government bondholdings as well — the financial system's viability would come under a huge cloud.

The negotiations took place only weeks before Greece would be forced to default on a May 19 payment to bondholders unless it received emergency funding, so the Greek government's bargaining position was weak. Ultimately, the prospect of a clash with the ECB president, who controlled the provision of emergency liquidity to troubled Greek banks, was a risk that the Papandreou government was unwilling to take.

The issue the IMF faced was that without a restructuring it was difficult to make the case that Greece's debt profile was sustainable — that is, that the country could actually pay back the loans. This is a problem as under IMF rules it cannot lend to a country, and certainly cannot provide a loan "bigger than any the Fund had given any other country" as it proposed for Greece, unless there is a high probability of debt sustainability.

In effect, to sign up to the bailout the IMF had to either take a collision course with European institutions, including Trichet's ECB, or flout its own rules. With the deadline fast approaching for a deal, it controversially chose the latter much to the chagrin of many within the Fund itself who worried that it risked putting the organisation's credibility at risk.

And so there was no restructuring agreed for Greece. The country paid off its immediate debts to the private financial sector — investment banks, basically — and replacement debt was laid onto European taxpayers. The government agreed to a package of harsh government spending cuts and structural reforms in exchange for loans totalling €110 billion over three years.

However, less than two years later a restructuring did arrive in March 2012 with bondholders taking a hit of between 60-75% on their holdings. And Trichet's fear of contagion failed to materialise. By this time, however, significant damage had been done to the Greek economy through the harsh reform programme imposed on it by the Troika (the European Commission, the ECB and the IMF), impairing its ability to repay debt in future.

The left-wing Syriza party, which currently leads the governing coalition in Athens, has long claimed that the terms of the 2010 deal were unjust and helped prolong the country's economic crisis. This paper is likely to stoke those fires still further.