Greece's new finance minister met EU and IMF officials on Thursday to address gaps in his austerity plans with European leaders insisting harsh measures are adopted in return for funding to avert bankruptcy.
Euro zone governments are meanwhile arm-twisting banks and insurers to maintain exposure to Greek sovereign debt when their bonds mature as part of a planned second rescue for Athens.
Inspectors from the European Commission, European Central Bank and International Monetary Fund met Finance Minister Evangelos Venizelos in an effort to iron out differences on the bailout program, which he wants to amend to appease an angry Greek public.
There is a gap of 3.8 billion euros out of the total package of 28 billion euros which should be discussed with the troika, a lawmaker who took part in a parliamentary committee with the minister told Reuters. Athens has agreed to a five-year austerity plan worth 28.3 billion euros in spending cuts and tax rises.
Officials say Venizelos, pledging a fairer tax system, wants to backtrack on plans to lower the income tax threshold, and to raise heating oil tax -- which would create a funding gap.
While not against changes in principle, there must be robust, credible alternative measures to plug the gap, an EU source said.
The stakes are high with signs of economic slowdown in Europe emerging even without the threat of a Greek default and the contagion that would follow.
The risk of a serious financial crisis and start of a new recession are very high at the moment, Jyrki Katainen, officially sworn in as Finnish prime minister on Wednesday, was quoted as saying by public broadcaster YLE.
Combining brow-beating and moral support, EU leaders gathering in Brussels will tell Greek Prime Minister George Papandreou they will release the next 12 billion euros ($17.2 billion) in emergency aid on July 3, to prevent Athens running out of money, provided the Greek parliament adopts key economic reforms in a crunch parliamentary vote next week.
The EU's top economic official, Olli Rehn, said Europe was ready to help Greece return to economic growth, but the first thing is that Greece must help itself, so that the other Europeans can help Greece. That's the bottom line.
While Papandreou has expressed confidence over that vote in public, Slovak Prime Minister Iveta Radicova said he had voiced doubts in a private telephone call on Wednesday.
Papandreou has serious doubts about whether the necessary steps will pass in parliament, Radicova told the Slovak parliament's European affairs committee.
The Greek crisis is set to dominate the fourth EU summit this year as the 27 leaders grope for a solution to debt woes that have forced Greece, Portugal and Ireland to seek bailouts.
No formal decisions on Greece are expected but the gathering will be monitored intensely by financial markets for any message it sends on whether the EU plan can work.
Investors are skeptical. Five-year credit default swaps on Greek government debt rose 138 basis points to 2,025 bps, according to data monitor Markit, implying a more than 80 percent probability of default over that period.
U.S. Federal Reserve Chairman Ben Bernanke stressed on Wednesday that much more than the future of Greece was at stake.
If there were a failure to resolve that situation, it would pose threats to the European financial system, the global financial system, and to European political unity, I would conjecture, as well, he said.
A Greek default would force European banks and governments to take big losses, spread contagion to other stressed euro zone sovereigns and potentially plunge the economy of the world's biggest trading bloc, already slowing, into recession.
GETTING BANKS ON BOARD
Papandreou's reshuffled government won a confidence vote in parliament early on Wednesday, clearing one of several hurdles on the path to avoiding a default.
On June 28, parliament will vote on a package of spending cuts, tax increases and privatization measures and euro zone finance ministers will review progress on July 3 with a view to releasing the next tranche of loans.
Despite EU and IMF calls for Greek political leaders to unite behind the program, all opposition politicians voted against the government in the confidence vote, and 20,000 protesters chanted insults outside parliament.
Conservative EU leaders were planning to apply strong pressure on Greek opposition leader Antonis Samaras to support the bailout plan at a pre-summit meeting on Thursday.
Even if Greece manages to persuade the EU and IMF that it is fully committed to making the budget adjustments demanded, this will buy the government only a few months' respite and most economists expect it will have to default eventually.
Greece accepted a package of 110 billion euros of EU/IMF loans in May 2010 and now needs a second bailout of a similar size to meet its financial obligations until the end of 2014, when it hopes to return to capital markets for funding.
Euro zone member states, led by Germany, insist any second aid package must include the involvement of the private sector. But credit rating agencies have said they would treat even a voluntary debt rollover as a selective default, potentially starting a chain reaction of turmoil in markets. ? We are working on a solution which is based on a voluntary rollover and I expect it will not create a credit event, Rehn said.
At meetings on Wednesday, banks and insurers in Germany, France, Spain and Belgium were asked by national central banks to roll over their holdings of Greek debt voluntarily when the bonds mature, banking and government sources said.
A financial source said Franco-Belgian banking group Dexia is prepared to roll over its exposure to Greek debt, the biggest among Belgian banks, adding to the list of banks prepared in principle to take part.
The medium-term economic reform program agreed by Athens envisages raising 50 billion euros by selling off state firms and includes 6.5 billion in spending cuts and tax rises in 2011.
Even if Greece achieves its targets -- and it has already missed many -- it will still not be in a position to manage its debts, which amount to 150 percent of gross domestic product.
(Additional reporting by Martin Santa in Bratislava, Ben Deighton and Robert-Jan Bartunek in Brussels, George Georgiopoulos and Lefteris Papadimas in Athens; Writing by Mike Peacock, editing by Janet McBride)