Greece faced a new test in its attempt to avoid bankruptcy Wednesday as international auditors headed for Athens, while Germany suggested a new bailout may be renegotiated as argument rages over whether private creditors should take bigger losses.
The troika audit team from the European Union, European Central Bank and IMF is expected to start arriving Wednesday and begin talks the day after on the Greek government's plan to deepen budget cuts and raise new taxes.
This will allow Athens to meet its commitments under a second aid program EU leaders agreed to in principle in July that also touched off a new cycle of strikes and protests.
However, German Chancellor Angela Merkel suggested that parts of the new 109 billion euro ($148.6 billion) rescue for the debt-laden country could be reopened, depending on the outcome of the troika's audit.
We have to wait and see what the troika ... finds and what it will tell us (whether) we will have to renegotiate or not, she told Greek state television NET, without elaborating.
Germany has repeatedly said negotiations about the details of the second rescue deal can begin only when the troika says Greece has qualified to receive a fresh, sixth tranche under the first bailout agreed back in 2010.
The second bailout aims to ease Greece's debt burden by imposing a 21 percent loss on private Greek bondholders. But many economists believe that a 50 percent loss is necessary to make the country's debt viable.
The Financial Times reported that a split had opened in the euro zone over the deal. Quoting senior European officials, it said as many as seven of its 17 countries argued that the private bondholders should swallow bigger writedowns.
Hardliners in Germany and the Netherlands were leading the calls for bigger writedowns but meeting fierce resistance from France and the ECB, which feared more selling of shares in European banks with big Greek bond holdings.
Germany's Bundestag will vote Thursday on widening the scope of the European Financial Stability Facility bailout fund, as agreed by the EU leaders on July 21.
Merkel faces a revolt within her conservative camp and may have to rely on support from the opposition Social Democrats and Greens to get the measure approved, damaging her authority.
PREPARING TO STRIKE
In Greece, taxi drivers, bus and tram operators and tax collectors prepared to strike for a second day on Wednesday, and rail and subway workers promised to join them.
Lawmakers opened the way to the troika visit on Tuesday by passing a property tax bill. That piles the pressure on Greeks suffering from several waves of belt-tightening and deepens an economic downturn heading into its fourth year.
Prime Minister George Papandreou's 154 Socialist deputies forced the measure through in the 300-seat parliament.
Police dispersed thousands of protesters with tear gas in Athens's Syntagma Square, center of anti-austerity protests that culminated in bloody clashes with police in June.
I've been trying to find a job for a year now and it's impossible, said Maria Kappa, a graduate of the School of Philosophy in Athens. I don't see the rich people hurt by this austerity, it's always the poor who have to pay.
Inertia in implementing the bailout deal coupled with European leaders' inability to erect a wider safety net stoked fears a Greek default could bring down other euro zone states such as Italy and Spain and trigger a new global recession.
Angry at the Greek government's slowness in starting reforms, the troika quit talks with Athens this month and threatened to shut off funding unless it mended its ways.
Finance Minister Evangelos Venizelos has since drafted a plan to catch up on the delays, which have put the government behind on a goal to cut the budget shortfall to 7.6 percent of gross domestic product this year.
In the accelerated strategy, the government will cut the 730,000-member public workforce by a fifth, reduce the public wage bill by 20 percent, as well as lower overall pensions by 4 percent in addition to a 10 percent cut already agreed in previous plans.
It will also now extend the new real estate tax until 2014, two years longer than originally planned, after the troika judged Greece's estimate that it would raise 2 billion euros a year to be two times too high.
The EU and the IMF say Greece has been focusing too much on one-off tax measures to plug its budget gap rather than streamlining administration and cutting spending.
(Additional writing by David Stamp; Editing by Ramya Venugopal)