Euro zone finance ministers applied intense pressure on Greece on Monday, saying it had to approve stricter austerity measures before a final decision is made on a further 12 billion euros in loans.
Before launching a second day of meetings on Greece, ministers indicated that the next tranche of EU/IMF aid would be paid by mid-July, allowing Athens to avoid default, but said the country had to show progress first on plans to cut spending, raise taxes and generate other revenue streams.
We are waiting for a decision from the Greek parliament. We are calling for not just the government, but the Greek opposition to support the plan, Belgian Finance Minister Didier Reynders said before the meetings resumed in Luxembourg.
We are increasing the pressure because there are precedents, he said, referring to Greece's previous failures to meet commitments and the issuing of false statistics. We have to be sure that everyone is going to support the plan.
In Athens, anti-austerity demonstrators gathered in the central square outside parliament, but there were no new clashes with security forces. Power workers began a strike and blackouts were expected in parts of the country.
In parliament, Greek legislators debated the highly unpopular plans to cut spending, further increase taxes and privatize state assets -- measures agreed with the European Union, International Monetary Fund and the European Central Bank to bring finances back into line.
On Sunday, Prime Minister George Papandreou asked Greeks to support the austerity steps and avoid a catastrophic default, appealing for the nation to accept measures that certainly in the short-term will make life harder for most citizens.
The consequences of a violent bankruptcy or exit from the euro would be immediately catastrophic for households, the banks and the country's credibility, Papandreou said at the start of a confidence debate on his new crisis cabinet.
Inspectors from the EU and IMF will make a further visit to Athens this week -- having just completed an inspection -- to meet the new finance minister and examine changes the country wants to make to the EU austerity plan.
French and German business leaders urged policymakers to save the euro. In a statement published in the afternoon daily Le Monde and in German media, corporate leaders said: A failure of the euro would be a fatal blow to Europe.
Euro zone ministers seemed intent on delivering a message of tough love to Athens, which agreed a 110 billion euro ($155 billion) program with the EU in May last year and is expected to get a second package worth as much or more before long.
The fifth tranche of the first program -- the 12 billion euro payment -- is due in July. Without it, Athens has warned that it could default on its debts, an event that would could wreak havoc on global markets and threaten other European sovereigns and banks.
Greece itself must create the conditions so that the next tranche can be paid out as agreed. That's due in July. It is Greece's responsibility that we're having difficulties now, German Finance Minister Wolfgang Schaeuble said of the next tranche payment.
Dutch Finance Minister Jan Kees De Jager was also forthright. Will Greece be able to get all the painful measures passed through parliament in the coming days? he asked. It is important that pressure is kept on Greece.
While it seems likely that Athens will eventually get the next tranche, and a further emergency loan program of around 120 billion euros up to the end of 2014 will also be agreed, the net result is only to buy Greece more time -- the possibility of a debt restructuring in the longer-term, or even default on a portion of its debt, has not gone away.
The euro weakened slightly against the dollar on Monday and the cost of insuring Greek and Italian debt against default rose, reflecting concerns that investors may lose confidence in other weak euro zone states.
Ratings agency Moody's said on Friday it could downgrade Italy's Aa2 rating in the next 90 days given concerns Greece's crisis could derail Italy's tepid recovery.
PRIVATE SECTOR ROLE
In a statement issued after a seven-hour meeting in Luxembourg that ended in the early hours of Monday morning, the euro zone finance ministers announced they would put together a second bailout of Greece, which missed debt targets in the first rescue plan by big margins.
To be outlined by mid-July, it will include more official loans and, for the first time, a contribution by private investors, who will be expected to make voluntary purchases of new Greek bonds as existing ones mature.
The statement did not say how large the new bailout would be, or give details of the private sector contribution beyond describing it as substantial.
Euro zone officials have told Reuters the new plan is expected to fund Greece into late 2014 and feature up to 60 billion euros of fresh official loans, 30 billion euros from the private sector, and 30 billion euros from privatizations.
In an attempt to win the cooperation of the ECB, which opposes any scheme that would cause credit rating agencies to declare Greece in default, the ministers said the private sector debt rollover would avoid even a limited or selective default.
They did not say how this would be achieved.
Discussions with private sector creditors -- European banks, pensions funds and other investors in Greek bonds -- have already begun, but Germany's Schaeuble indicated that there was still some way to go before there is an agreement.
We have to talk about that now, with all the institutions involved, he said on Monday. It's a fine line. On the one hand it has to be voluntary, because otherwise there will be consequences, but on the other hand it must also lead to a result. We will continue to work on that.
Germany's banking association BdB signaled on Monday that private bondholders want any such deal made more palatable.
Additional incentives, such as a better credit rating through guarantees, would help make a solution possible, said Michael Kemmer, general manager of the BdB, whose members include flagship lender Deutsche Bank.
(Additional reporting by John O'Donnell, Annika Breidthardt and Julien Toyer in Luxembourg, and Renee Maltezou and George Georgiopoulos in Athens; Writing by Luke Baker; Editing by Mike Peacock/Ruth Pitchford)