A European Central Bank policymaker said a voluntary deal for investors to keep renewing their Greek debt holdings might be acceptable, raising hopes on Wednesday for a deal to prevent a default by Greece.
The euro rose to a one-month high on Wednesday, helped by optimism that a compromise on Greek funding was possible, but a poor debt auction in Portugal and stalled Spanish wage talks highlighted market concerns that the crisis could still broaden and deepen further.
The German finance ministry played down concerns that the International Monetary Fund might balk at releasing its share of the next tranche of Greek aid and leave Europe scrambling to make up the difference.
And Juergen Stark of the European Central Bank said a voluntary rollover of Greek debt, the soft option being considered by European policymakers, might be an acceptable way to involve the private sector in future debt relief for Greece.
ECB officials have warned for months against any steps involving private creditors which might be seen as a default and Stark's comments suggested a compromise was closer.
Everyone seems to be converging slowly but surely toward a consensus which is likely to involve a mix of additional aid, more austerity and some private sector involvement, said Gilles Moec, an economist at Deutsche Bank in London.
Sources close to talks between Athens and inspectors from the European Commission, European Central Bank and International Monetary Fund (IMF) said they expected the latest review of Greece's fiscal progress to be completed by Friday.
One Greek official involved in the discussions expressed optimism that this troika of institutions would release a 12 billion euro ($17 billion) tranche Greece needs to cover its short-term funding needs.
There will be a way for the disbursement of the fifth installment to be approved, the official told Reuters, requesting anonymity. The negotiations with the troika will be concluded today or tomorrow, the latest by Friday.
The reassuring signals helped the euro push above $1.4450 to a four-week peak against the dollar, which was undermined by weak U.S. jobs data.
PORTUGAL COSTS SPIKE
But Portugal's short-term borrowing costs spiked higher in a bill auction and data showed manufacturing weakness across the periphery of the 17-nation euro zone as the debt crisis that erupted in late 2009 continued to take its toll.
Portugal, which agreed to a 78 billion euro EU/IMF bailout last month and received its first tranche on Wednesday, sold 850 million euros in four-month T-bills at an average yield of 4.967 percent, more than 30 basis points above what it paid for three-month paper less than a month ago.
Elisabeth Afseth, a fixed income analyst at Evolution securities, said the sale showed there was still a lot of nervousness in the market and fears that there will be contagion from the Greece situation to Ireland and Portugal.
In neighboring Spain, Economy Minister Elena Salgado conceded that talks between unions and employers on reforming collective wage bargaining were stalling.
A reform of rules governing wage agreements would be one way to reassure markets and Spain's peers that it is serious about boosting productivity levels that are among the lowest in the euro zone. The government has warned it will push through the reforms unilaterally by June 10 if no deal is possible by then.
Ireland, the other country alongside Greece and Portugal to receive a bailout, received some support overnight when Standard & Poor's said it believed the country had a good chance of returning to the capital markets next year to raise long-term funding.
PRIVATE SECTOR PLAN
But in Greece, a senior official at the private sector union GSEE said its workers would stage a 24-hour general strike on June 15 to protest against new austerity measures and planned privatizations.
Even if a deal to tide Greece over through the end of 2013 is sealed, it is unlikely to assuage concerns that it will eventually be forced into a coercive restructuring of its debt, which stood at nearly 330 billion euros -- or close to 150 percent of GDP -- at the end of last year.
A harsh restructuring that would force losses on private creditors has been ruled out for now, but Germany and allies like Finland and the Netherlands are urging some sort of symbolic participation from the private sector.
Sources have told Reuters for the past two weeks that investors who hold Greek bonds due to mature in 2012 and 2013 could be encouraged to roll over that debt under a scheme similar to the Vienna Initiative used in early 2009 to safeguard banking systems in central and eastern Europe.
It is unclear what incentives governments could offer to convince investors to buy new Greek bonds, but in similar cases in the past, they have been promised higher interest payments, preferred creditor status or collateral as inducements.
In addition to the private sector role, a new package for Greece -- expected to total around 65 billion euros according to EU officials -- could involve a mixture of collateralized loans from the EU and IMF, as well as more revenue measures.
Athens could also come under pressure to accept unprecedented intrusive external supervision of its privatization program, which has yet to sell anything since the 110 billion euro EU/IMF rescue one year ago.
While confirmation of the latest aid tranche could come soon, haggling over the shape of a second bailout package is expected to continue over the coming weeks, culminating in a summit of EU leaders in Brussels on June 24.
That summit is expected to be preceded by two separate meetings of euro zone finance ministers. The results of European bank stress tests, another key hurdle for the bloc, are now expected to be published in early July, the European Banking Authority said on Wednesday.
(Additional reporting by Brian Rohan in Berlin, Elisabeth O'Leary and Paul Day in Madrid, writing by Noah Barkin, editing by Mike Peacock/Ruth Pitchford)