Greece and its private creditors worked on stitching together the final bits of a complex debt swap agreement on Saturday, amid growing optimism a deal will be clinched in time to avert an unruly default.
After weeks of muddling through round after round of inconclusive talks, the negotiations appear to be in their final phase, though it was unclear if a preliminary deal could be secured in time for Monday's European Union summit.
Greek officials and Charles Dallara, chief negotiator for banks and insurers, left Saturday's negotiating session without making any comment. Earlier, Prime Minister Lucas Papademos told Reuters he expected the deal to be concluded within days.
Still, for Athens, progress on the debt swap front is at risk of being overshadowed by increasingly problematic talks with its foreign lenders, whose inspectors are in town demanding unpopular reforms that no politician wants to be linked to.
Today will be another tough day, said George Karatzaferis, leader of the far-right LAOS party, one of three parties in Papademos's emergency coalition government. We will see whether we can bear the burden that lies ahead.
European paymaster Germany is pushing for Athens to relinquish control over its budget policy to European institutions as part of discussions over a second rescue package, a European source told Reuters.
With many Greeks blaming Germans for the austerity medicine their country has been forced to swallow, officials in Athens dismissed the idea as out of the question.
There is no way we would accept such a thing, a Greek government official told Reuters on condition of anonymity.
The official said a similar proposal had been made in the past by a Dutch minister without getting anywhere.
The European Commission, the executive arm of the 27-country bloc, said it wanted the Greek government to maintain autonomy.
The Commission is committed to further reinforcing its monitoring capacity and is currently developing its capacity on the ground, said a spokesman. But executive tasks must remain the full responsibility of the Greek Government, which is accountable before its citizens and its institutions. That responsibility lies on their shoulders and it must remain so.
A government source in Berlin said Germany's proposal was aimed not just at Greece but at other struggling euro zone members who receive aid and are unable to make good on their obligations as well.
It is not a 'lex Greece' but rather a suggestion how one can deal in general with countries that are unable to implement their promised reforms in exchange for support, the source said.
All options can obviously be introduced only with the agreement of, for example, the Greeks themselves, he added.
Separately, a senior member of parliament in Chancellor Angela Merkel's ruling Christian Democrats said taking control of Greece's budget was the right way to go.
In view of the fact that many of the proposals for Greece have not been implemented, the suggestion for more control and supervision goes in the right direction, Norbert Barthle, a budget policy leader for the CDU in parliament, told Reuters.
DENSE, DIFFICULT AND CRUCIAL
Crushed by 350 billion euros of debt and running out of cash quickly, Greece finds itself in a precarious position as it scrambles to appease the troika of foreign lenders and stitch up a deal with private creditors simultaneously.
Unimpressed with Athens dragging its feet on reforms, the troika of foreign lenders - the European Commission, IMF and European Central Bank - have warned they could hold up aid if more is not done to restructure the Greek economy.
It's all very dense, difficult and crucial, a Greek finance ministry official said. There is optimism because the country needs to survive and we need to protect its citizens because they have suffered a lot.
The debt swap, in which private creditors take a 50 percent cut in the nominal value of their Greek holdings in exchange for cash and new bonds, is also a prerequisite for the country to secure a 130-billion-euro rescue plan drawn up last year.
The two sides have broadly agreed that new bonds under the swap would have a 30-year maturity, but the talks have struggled over the interest rate Greece must pay on the new bonds and whether the European Central Bank and other public creditors will also accept losses on their holdings.
A debt deal, aimed at chopping 100 billion euros off Greece's debt load, must be sealed in about three weeks as Greece has to repay 14.5 billion euros of debt on March 20.
Otherwise Greece will sink into an uncontrolled default that might spread turmoil across the euro zone and tip the global economy back into recession.
International Monetary Fund Managing Director Christine Lagarde said on Saturday euro zone members were making progress to overcome their crisis but must do more to strengthen their financial firewall, adding the IMF was ready to help.
There is progress as we see it, Lagarde told a panel discussion at the World Economic Forum in Davos.
But it is critical that the euro zone members actually develop a clear, simple, firewall that can operate both to limit the contagion and to provide this sort of act of trust in the euro zone so that the financing needs of that zone can actually be met.
Concern has also grown in recent days that the debt swap may not do enough to get the country's debt reduction plan back on track, and that Greece's European partners will be forced to stump up funds to cover the shortfall.
The German news magazine Der Spiegel reported on Saturday that Greece's international lenders thought Athens would need 145 billion euros of public money from the euro zone for its second bailout rather than the planned 130 billion euros.
The magazine said the extra money was needed because of the deteriorating economic situation in Greece, echoing a Reuters report on Thursday.
Greece is in its fifth year of recession, and hopes of an end to the crisis in the near term have virtually gone, because of the combination of squabbling politicians, rising social anger and its inability to push through badly needed reforms.
(Additional reporting by Andreas Rinke in Berlin and John O'Donnell in Brussels, Writing by Deepa Babington; Editing by Tim Pearce and Janet Lawrence)