Greece and its private bondholders resume debt swap talks on Friday amid signs they are inching closer to a long-awaited deal needed to prevent a chaotic default by Athens.
Cash-strapped Greece is fast running out of time as it pushes to wrap up an agreement by Monday paving the way for a fresh injection of aid before 14.5 billion euros (11 billion pounds) of bond redemptions fall due in March.
After a breakdown in talks last week over the coupon, or interest payment, that Greece must offer on its new bonds raised fears of a disastrous bankruptcy, the two sides appeared to be moving to overcome their differences.
The atmosphere was good, progress was made and we will continue tomorrow afternoon, Finance Minister Evangelos Venizelos said after Thursday's round of talks in Athens with Charles Dallara, head of the Institute of International Finance representing bondholders.
The IIF issued a statement echoing the minister, and called the discussions productive.
Bankers and sources close to the talks say an agreement could be sealed in the next few days, though previous predictions of a quick resolution have proven premature.
They are moving towards a deal and I believe they will clinch it as early as possible, maybe even before next week's Eurogroup meeting, an official who declined to be identified told Reuters.
The stakes could not be higher as the two sides head back to the negotiating table on Friday.
Greece needs to have a deal in the bag before funds are doled out from a 130 billion euro rescue plan that the country's
official lenders, the European Union and the International Monetary Fund, drew up in October.
The paperwork involved alone is expected to take weeks, meaning failure to secure a deal soon could put Athens at risk of a chaotic default in March, which in turn could jolt the financial system and tip the global economy into recession.
A large chunk of the bond swap must be agreed by noon on Friday and formalised before Monday's meeting of euro zone finance ministers, Venizelos has said.
Adding to the pressure, officials from the troika of foreign lenders have begun meetings with the Greek government on Friday to discuss reforms and plans to finalise that bailout package.
Now is the crucial moment in the final battle for the debt swap and the crucial moment in the final and definitive battle for the new bailout, Venizelos told parliament on Thursday. Now, now! Now is the time to negotiate for the sake of the country.
The troika heads are meeting Finance Minister Evangelos Venizelos and are scheduled to visit Prime Minister Lucas Papademos at 1600 GMT.
Progress has been hard to come by in the latest round of negotiations, with bankers worried about suffering losses far higher than the 50 percent writedown they were expected to take on the nominal value of their bonds.
Actual losses for investors are expected to be much higher depending on the terms, such as the coupon, being negotiated.
A source close to the talks earlier said Athens and its foreign lenders had initially offered a coupon of just over 3.5 percent, but bondholders rejected that as too low. They were seeking a coupon of at least 4 percent, the source said.
One of the options being considered is a coupon that rises after staying stable for the first 10 years, another source close to the talks has said.
According to Greek press reports not identifying their sources, the two sides may agree a coupon ranging between 3 and 5 percent, depending on the new bonds' maturities, resulting into a net present value loss for investors between 65 and 70 percent.
Investors have also bridled at Greece's threat to enforce losses if not enough bondholders sign up to the deal.
For a Breakingviews calculator on how Greek bondholders could get a scalping see: http://graphics.thomsonreuters.com/12/01/BV_GRBZZCT0112_VF.html
The swap is aimed at cutting 100 billion euros off Greece's over 350 billion euro debt load.
Greece is stumbling through its worst economic crisis since World War Two, with unemployment at record highs and near-daily protests and strikes against austerity measures that have deepened an already brutal recession.
Nearly one out of two youths is unemployed and anger against waves of tax hikes and pay cuts is running high.
Its latest bailout - drawn up on condition Greece pushes through painful cuts and structural reforms - is expected to reduce Greece's debt to a more manageable 120 percent of gross domestic product in 2020 from about 160 percent now.
(Writing by Deepa Babington; additional reporting by Athens office; editing by David Stamp/Chris Pizzey)