Greece's new finance minister sought to explain gaps in his austerity plan to EU and IMF officials on Thursday, with European leaders insisting on deep spending cuts and tax hikes if Athens wants to secure funds and avoid potential default.
Euro zone governments are at the same time talking to European banks and insurance companies to try to convince them voluntarily to maintain their exposure to Greek debt when the bonds mature as part of a possible second rescue for Athens.
Greek Finance Minister Evangelos Venizelos met inspectors from the European Commission, European Central Bank and the International Monetary Fund in Athens to try to iron out differences over a bailout program.
Venizelos wants to change some measures Greece already agreed with the EU, IMF and ECB this month and present a slightly softer package to the Greek parliament for approval on June 28, an effort to win over an angry Greek public. But the changes mean Athens will fall short on austerity expectations.
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 raise a tax on heating oil -- both measures that might secure public support but which create a large funding gap.
An EU source said the euro zone was not against changes to the terms of the package in general, but that any alterations need to be backed up by credible funding alternatives.
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. If the Greek parliament does not approve the package on June 28, the EU/IMF would not be able to release the next tranche of emergency loans for Greece -- 12 billion euros ($17.2 bln) -- and Athens would default on debts.
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 12 billion euros in emergency aid on July 3 only if parliamentary and public support is there.
HELP GREECE TO HELP ITSELF
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. Leaders are expected to agree a statement on Greece during dinner on Thursday.
But 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
Even if Greece manages to persuade the EU and IMF that it is fully committed to making the budget adjustments demanded, it will only buy the government a few months' respite and most economists expect Athens 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, explaining that part of the aim was to keep discussions on a national level so that voluntary agreement is reached.
At meetings on Wednesday, banks and insurers in Germany, France, Spain and Belgium were asked by national financial authorities to roll over their holdings of Greek debt voluntarily when the bonds mature.
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 and Luke Baker, editing by Janet McBride)