Euro zone finance ministers aim to agree a second financing package for Greece on Monday, a decision they hope will boost market confidence in euro zone public finances and help contain the two-year-old sovereign debt crisis.
A deal for Greece would include agreement on official new financing, the size of voluntary losses banks and other private bondholders are willing to accept and new reforms Athens must undertake.
This would end months of uncertainty over private sector losses on Greek bonds and over the sustainability of the country's debt, now at 160 percent of GDP, which have increased costs of borrowing in many other euro zone countries.
Senior euro zone officials are expected to meet on Monday between 0800 and 1400 GMT (3 a.m. and 9 a.m. EST) in Brussels to prepare the package, which would then likely be submitted for approval by euro zone finance ministers at an extraordinary meeting at 1600 GMT.
We are very far in the negotiations and we should be able to close them in the coming days, EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters in The Hague.
We are negotiating a second program for Greece. The ball is now in the Greek court to agree to do its job concerning the prior actions, Rehn said, referring to Greek reforms.
EU leaders agreed in October they would lend Greece another 130 billion euros, assuming investors would forego half of what Greece owes them in nominal terms. But talks on the terms of those losses - called private sector involvement or PSI - have moved on since then and the chief executive of Deutsche Bank said bondholders were now ready to lose 70 percent of the net present value of their investment.
Luxembourg's Jean-Claude Juncker, the chairman of the Eurogroup countries, described the talks between the Greek government and private sector creditors - banks and insurance companies that own Greek government debt - as ultra-difficult.
Juncker also said the outcome of the leaders' summit on January 30 was largely insufficient when it came to tackling the sovereign debt crisis and that further steps would be needed to tighten fiscal rules for the 17 euro zone countries.
The euro zone leaders called at the summit for rapid agreement on the second package that is to keep Athens financed through 2014 after the previous, 110 billion euro bailout runs out this year.
MORE GREEK PAIN
Officials stressed the PSI was just one part of the deal.
The focus was now on what additional reforms Athens would have to undertake in return for the new help and how much euro zone governments and institutions would contribute to the effort to make Greek debt sustainable at 120 percent of GDP in 2020.
It is all linked. The PSI cannot be agreed without the rest of the package, since PSI needs to be financed from the official financing contribution to the second program, said one euro zone official with knowledge of the talks.
Leaders have earmarked 30 billion euros of the 130 billion promised in October as a sweetener for the bond swap that carries out the PSI side of the deal.
Euro zone finance ministers said on January 23 that all political parties in Greece would have to sign a letter pledging they would honor reform commitments under the second bailout plan, to avoid using the reforms in the Greek election campaign before elections scheduled for April.
Greek Prime Minister Lucas Papademos, a technocrat appointed in November, may meet the socialist, conservative and far-right leaders in his coalition on Thursday or Friday to win their blessing for reforms for the bailout.
None of the Greek politicians want to be linked to painful measures, which are likely to involve lowering the minimum wage level, cutting holiday bonuses and pension reforms.
On the whole, lenders have demanded extra spending cuts worth about 1 percent of GDP - or just above 2 billion euros - this year, including big cuts in defense and health spending.
And then there would have to be some form of approval from the IMF board for the whole agreement, an EU official said.
The IMF contributed 30 billion euros out of the 110 billion of the first Greek bailout and euro zone governments expect it will also participate in the second bailout, supplying one third of the money, but the IMF has made no clear commitment yet.
The Fund signaled on Wednesday that it was time for a new policy mix that focused more on reforms and less on tax rises aimed at cutting the deficit.
But Greece's inability to push through such reforms and crack down on tax evasion has spurred growing concern that repeated bailouts are only a temporary bandage and that European partners will soon be forced to stump up more money.
(Additional reporting by Angeliki Koutantou in Athens, Sara Webb in The Hague; Editing by Patrick Graham)