Greece said on Friday that international lenders had concluded an inspection of its bailout program positively, as the country's prime minister outlined plans for deeper austerity measures.
The prospect of a second bailout for debt-stricken Greece calmed market fears of a default, but a brief statement by the Greek Finance Ministry made no mention of any agreement on further assistance.
The discussions of the Greek government with the representatives of the EC, the ECB and the IMF concluded today positively, it said, referring to the European Commission, the European Central Bank and the International Monetary Fund.
The inspectors are due later on Friday to issue their own verdict on Greece's troubled implementation of a 110 billion euro ($160 billion) bailout plan agreed last year.
The Greek statement was made as Prime Minister George Papandreou met Jean-Claude Juncker, head of the group of euro zone finance ministers, to deliver a medium-term budget plan.
The scheme features deeper spending cuts, measures to boost revenues and a faster sell-off of state assets in hopes of persuading the European Union and the IMF to grant additional emergency loans for a longer period.
The two men embraced but made no comment to reporters before their talks in Luxembourg.
Greek bond yields and the cost of insuring Greek debt against default fell sharply after a source familiar with the negotiations told Reuters that euro area officials had agreed in principle on a new rescue program with extra official funding. Greek bank shares rose 4.1 percent.
Athens has veered off course in its current bailout program because of a revenue shortfall due to a deep recession and chronic tax evasion, requiring extra steps worth 6.4 billion euros or 2.8 percent of gross domestic product this year.
The finance ministry statement said the government had reaffirmed its commitment to the program with decisions in recent weeks, and would finalize new measures in coming days, putting them to parliament after the cabinet approves them.
Leftists staged a protest at the finance ministry in Athens, hanging a huge banner across the building to denounce policies which they said would turn workers into modern slaves.
The new program faces rising opposition from trade unions and youth protesters, as well as from some back-bench members of Papandreou's governing PASOK socialist party.
Increased European funding for Greece may in turn face resistance in the parliaments of fiscally conservative northern states, especially Germany and the Netherlands.
Deputy finance ministers of the euro zone meeting, in Vienna on Wednesday night, reached an outline deal on a three-year program for Greece to run until mid-2014, but detailed funding arrangements remain to be agreed, the source said.
The new plan would effectively supersede the 110 billion euro rescue which Greece agreed with the EU and IMF a year ago.
Whereas taxpayers in donor countries have so far borne the burden of rescuing Greece and fellow euro zone members Ireland and Portugal, the new deal would involve some participation of private sector investors, the source told Reuters.
KICK CAN DOWN ROAD
Some European politicians and economists have argued that investors who bought Greek government bonds should share that burden, perhaps by cutting the value or extending maturities.
Claudio Loser, a former director of the Western Hemisphere for the IMF, said the Fund should push harder for Greece to restructure its debt and negotiate so-called haircuts, or reductions in the value of bonds, with investors.
Greece will have to take one or two of the two actions -- restructuring with a haircut and maybe abandoning the euro, although I would say abandoning the euro will be more complicated, Loser told Reuters Insider television.
The ECB has fought such ideas, fearing it would provoke a crisis among European banks which hold large sums in Greek debt, and lead to a violent chain reaction on financial markets far beyond Greek borders.
The source said the participation of private sector investors in the new deal would be limited to avoid triggering a credit event. He gave no figures.
I think (official lenders) have a plan in their head that is reasonable for kicking the can down the road another three months, said Gianluca Salford, European fixed income strategist at JP Morgan.
One scenario, Greek newspaper Kathimerini reported, is for the new bailout to total 85 billion euros over three years up to 2014, with the EU and International Monetary Fund contributing more than 30-40 billion euros.
The rest would come from privatisations and a voluntary rollover of privately held bonds, probably to be swapped for new ones maturing 10 to 15 years later, Kathimerini said.
Most market economists polled by Reuters believe Greece's 340 billion euro debt mountain is unsustainable and will have to be restructured sooner or later.
Activists from the Communist-affiliated PAME group got into the Greek finance ministry, which stands on Syntagma Square where protesters gather nightly to demonstrate against corruption and economic mismanagement.
Organize and fight for an overthrow -- General Strike, read a banner draped from the roof by PAME, which advocates non-violent protest. The Greek flag remained flying from the building but next to it, PAME banners replaced the usual circle of yellow stars on a blue background of the EU.
(Additional reporting by George Georgiopoulos and Ingrid Melander in Athens, Paul Taylor in Paris, Marius Zaharia, Ana Nicolaci da Costa and Chloe Hayward in London; Writing by Paul Taylor; Editing by Ruth Pitchford and Andrew Torchia)