Greece's new finance minister grappled with EU and IMF officials over gaps in his austerity plans on Thursday, with European leaders insisting on deep spending cuts and more tax hikes if Athens wants to secure funds and avoid potential default.

Euro zone governments are meanwhile talking to European banks and insurance companies to try to convince them voluntarily to maintain their exposure to Greek debt when their 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 the current bailout program.

Venizelos had wanted to change some measures Greece had already agreed with the EU, IMF and ECB and present a slightly softer package to the Greek parliament for approval on June 28, in an effort to win over an angry and frustrated Greek public.

But the changes meant Athens would have fallen short on its austerity promises and so the gap -- which officials said was 3.8 billion euros out of a total 28.3 billion adjustment package -- has now largely been closed, with moves to lower the tax threshold to 8,000 euros and raise heating oil taxes.

The basic issue of the day is to finalize the program, Venizelos told a news conference as he announced the lower tax threshold and other measures, which he said had not yet been finally agreed with the EU, IMF and ECB but should be soon.

Our basic aim is to regain our credibility.

Once completed, the package will be put to the Greek parliament on Tuesday. If it is approved, the EU and IMF should release the next tranche of emergency loans -- 12 billion euros ($17 bln) -- by mid-July, allowing Athens to escape bankruptcy.

All conditions must be met, Luxembourg Prime Minister Jean-Claude Juncker told reporters as he arrived for a summit of EU leaders at which Greece's crisis will top the agenda.

If Greece does what it has to do, we will do what we have to do. This is not a threat. It's just a confirmation that we're continuing our efforts.

German Chancellor Angela Merkel, who has taken perhaps the toughest line on Greece, urged the Greek opposition to do what was necessary and get behind the package. In such a situation, everyone must stand together in a country, she said.


While Papandreou has expressed confidence over the June 28 vote in public, Slovak Prime Minister Iveta Radicova said he had voiced uncertainty 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 will dominate debate at the summit, the fourth the EU's 27 leaders have held this year as they grope for a solution to debt woes that have forced Greece, Portugal and Ireland to seek bailouts and roiled global financial markets.

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 a 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.


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 involve 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.

(Additional reporting by Martin Santa in Bratislava, Ben Deighton and Robert-Jan Bartunek in Brussels, George Georgiopoulos, Dan Flynn and Lefteris Papadimas in Athens; Writing by Paul Taylor and Luke Baker, editing by Alistair Lyon)