Prospects for a deal on a second international bailout for Greece brightened on Wednesday when euro zone finance ministers were summoned to talks in Brussels while Greek political leaders met to approve a tough new reform and austerity programme.
Eurogroup chairman Jean-Claude Juncker invited ministers from the 17-nation single currency area to meet on Thursday evening and the International Monetary Fund said managing director Christine Lagarde would also attend.
They are expected to examine a complex package involving a 130 billion euro EU/IMF rescue and a bond swap with private creditors, which hinges on Athens accepting conditions that require big cuts in many Greeks' living standards.
Greeks face a dreadful year of recession, a government source said. Athens now forecast the economy will shrink between four and five percent in 2012, the source said, adding to a relentless dive in economic output for the last four years which has sent unemployment soaring.
The figure, contained in a draft letter to Lagarde, is far worse than the 2.8 percent fall in gross domestic product forecast when the 2012 budget went to parliament in November, highlighting the conundrum that more austerity will damage the economy further and drive Greece's massive debts yet higher.
Juncker called the Eurogroup meeting even though leaders of the three Greek coalition parties were still discussing with Prime Minister Lucas Papademos the terms of a rescue package to avoid a chaotic default in March that would send tremors around the euro zone and possibly further afield.
Two sources close to the Athens talks said the government would promise spending cuts and tax rises totalling 13 billion euros from 2012 to 2015, almost double the seven billion it originally pledged.
The bailout package also pledges a 22 percent cut to the minimum wage level, a party official said.
International lenders are demanding that the leaders of the conservative New Democracy party, PASOK socialists and far-right LAOS commit themselves in writing to implement the programme of pay and pension cuts, structural and administrative reforms.
Euro zone officials say the full package must be agreed with Greece and approved by the euro zone, European Central Bank and IMF before Feb. 15 so that complex legal paperwork can be completed in time for a bond redemption deadline on March 20.
However, the leaders have been loath to accept the lenders' tough conditions, which are certain to be unpopular with voters,
as they face parliamentary elections possibly as early as April.
After a series of delays, the leaders finally received a 15-page document on Wednesday morning laying out the principles of the bailout and its conditions, a party official told Reuters. Attached were a further 30 or so pages laying out how the programme will be implemented.
The leaders will have to decide whether to push through a 15 percent cut to supplementary pensions or a combination of cuts in main and supplementary pensions, the official said.
Other elements of the deal have been gradually slotting into place, including a bond swap with private creditors to ease Greece's debt burden by reducing the value of government bonds held by banks and insurers.
The new bonds would have an average interest rate of around 3.5 percent, said state NET TV, with creditors having to swallow a 70 percent cut in the value of their debt holdings.
Private holders of Greek debt will discuss the debt swap plan aimed at slashing the country's debt pile in Paris on Thursday, a banking official told Reuters.
German Deputy Finance Minister Thomas Steffen said in Berlin the bond swap offer to private creditors could be made as early as next week.
He voiced exasperation at Greece's failure to implement economic and fiscal reforms since the debt crisis erupted two years ago, saying governance remained below European standards.
"I believe we can say today that we have made little progress on Greece since 2010, worryingly little progress," Steffen said.
Ratings agency Standard & Poor's said Greece would likely fail to achieve sustainable debt levels if it relied on a 70 percent reduction in the value of bonds held by private creditors, putting the onus on the ECB to also take losses.
"The reduction ... is probably not sufficient to make the debt sustainable, given the outlook for GDP itself," S&P analyst Frank Gill said.
With banks and insurers having mostly agreed to take a hefty writedown, Athens and the commercial banks are urging the ECB to forego profits on its Greek bond holdings to help cut the debt to a sustainable level. That could raise 12 billion euros or more.
But ECB policymakers are still divided on what contribution the bank could make to a restructuring of Greek debt, two euro zone monetary policy sources said.
While the ECB has ruled out joining private creditors in voluntarily accepting losses on its Greek bonds, it could provide indirect relief by renouncing profits from bonds it bought at below face value.
The ECB's 23-member Governing Council, which holds a regular monthly meeting on Thursday, has yet to agree a position. Some policymakers are reluctant to share the burden for fear of easing pressure on Athens to agree spending cuts. There are also concerns about setting a precedent for other countries.
"There is no agreement yet. Some people on the Council still oppose this," said one monetary policy source, adding that ECB President Mario Draghi had not yet revealed his position.
An opinion poll on Wednesday showed that PASOK, which ruled Greece until Papandreou's government collapsed last November, has most to fear from elections. The monthly survey by Public Issue for Kathimerini newspaper showed support for PASOK had collapsed to eight percent from the nearly 44 percent it commanded when it returned to power in 2009.
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