European officials should accept that Greece may never repay its $366 billion debt, analysts told CNBC, even if the troubled economy secures a bailout extension.
Greek debt is not repayable in this life, Kingsley Jones, founder and CIO of Jevons Global, told CNBC on Monday: "We have to be realistic here. Greek debt is now 175 percent of gross domestic product (GDP); it's higher than it was when this whole business first started."
"Just look at Japan. It has government debt rapidly approaching 300 percent of GDP. One day, that debt pile simply implodes. It is not ever going to be repaid, nor will the Greek debt. There is no use standing on the high moral ground," Jones said.
Athens' current bailout program with European creditors requires Greece to reduce its debt to below 110 percent of GDP by 2022. The program was extended for another four months in a last-minute deal on Friday, failing to meet ruling party Syriza's request for an official haircut, or reduction, on outstanding debt – a promise that brought the leftist party to power last year. However, final confirmation of Friday's bailout extension hinges on the list of reforms Prime Minister Alexis Tsipras submits on Monday.
"The terms of the current agreement pretty much require Greece to attempt to run a primary budget surplus over 4 percent for well over a decade...No country with an unhealthy economy has ever managed to do that. So, we think that the current terms that are required of Greece are frankly pretty unrealistic," Jones added.
While Tsipras is no longer demanding a haircut given his limited bargaining power, experts say European creditors must realize there's no other solution if they want Greece to remain in the euro zone given the country's weak finances.
"What the Eurogroup should accept is that Greece is insolvent and needs a material haircut. They should have done that in 2010, but they chose to extend Greece more credit and push out the problem," said Nicholas Ferres, investment director of global asset allocation at Eastspring Investments.
"Greece has had a 30 percent cut in output from peak levels, which is equivalent to the Great Depression in the 1930s, it's [austerity] just not sustainable," he added.
However, European institutions will likely continue to reject the option of a haircut since they want Greece to get its fiscal house in order, explained Evan Lucas, market strategist at IG, adding that officials would be willing to consider any other Greek concession except for a haircut.
While Friday's eleventh-hour deal did spark optimism for a permanent solution, calls for a Greek exit, or 'Grexit,' from the euro zone are still high.
"If you actually look at [Friday's] deal, Greece got nothing and Germany got everything and we are now edging towards a Greek exit from the EMU [European Economic and Monetary Union], said IG's Lucas.
He expects that any bailout deal will jeopardize Syriza's political mandate and increase the prospect of snap elections, which would likely endanger any existing bailout deal with European institutions.
Barclays voiced a similar outlook, stating the likelihood of Greece leaving the monetary union is higher now than it ever has been: "Greek authorities might start feeling the pressure of domestic public opinion, leading them to relax policy implementation while international creditors may not be willing to tolerate any further program slippage," the bank said in a note on Monday.
Morgan Stanley meanwhile puts the near-term chances of a 'Grexit' at 25 percent in the next three to six months.