A debt swap meant to help Greece avoid default and win time to repair its tattered public finances hung in the balance on Friday with expectations of take-up by private creditors slipping amid fierce European pressure on Athens.
Banks and insurers were due to indicate by Friday whether they intend to join the bond exchange, part of a planned second international bailout package agreed in July which is in doubt due to Greece's failure to meet its fiscal targets.
Officials said they expect a take-up rate of about 70 percent, well short of the original 90 percent target, which would see 135 billion euros ($189 billion) of Greek bonds maturing by 2020 swapped or rolled over in a global transaction.
Greece had threatened to cancel the deal unless it got 90 percent participation but is in no position to walk away as it already faces the threat of its EU partners blocking bailout loans if it does not improve its debt-cutting performance.
Even with a participation rate of 70 percent or better, which is my current view, (it) will proceed, said an Athens-based banker close to the procedures.
No official announcement of the take-up rate was expected on Friday, but a source close to the scheme said a bigger response rate was likely as bond holders rush on the last day.
Germany and its north European allies made private sector involvement one condition for a second rescue of Greece by international lenders, but it is unclear how any shortfall will be met if participation is lower than initially forecast.
The euro and Greek bank shares fell and the cost of insuring Greek debt against default soared above 3,000 basis points on the deadline day.
The market moves reflected investor worries about the debt swap but also over an impasse in Athens' negotiations with the European Union and the International Monetary Fund, and the wider impact of the euro zone debt crisis for banks' solvency.
IMF Managing Director Christine Lagarde renewed her call to European countries on Friday to take urgent action to recapitalize banks at risk from their sovereign debt exposure.
Speaking hours before she attends a meeting of Group of Seven finance ministers and central bankers in Marseille, France, Lagarde said: In view of the heightened risks and uncertainties -- and the need to convince markets -- some banks need additional capital.
We must not underestimate the risks of a further spread of economic weakness, or even a debilitating liquidity crisis. That is why action is needed so urgently so that banks can return to the business of financing economic activity, she said.
EU officials have publicly brushed off Lagarde's call and disputed the IMF's estimates of banks' capital needs.
But an EU official involved in crisis management said privately there was concern in Brussels that negative feedback loops between sovereign debt and the banking sector were materializing and could cause problems for some euro zone banks.
GREEK TALKS IMPASSE
EU and IMF inspectors suspended talks and went home last week after Greece admitted this year's budget deficit would be well above the target set in its first 110 billion euro rescue program and failed to present a draft 2012 budget.
European partners have since ratcheted up pressure on Athens, warning it will not get the next 8 billion euro tranche of vital loans due this month if it does not improve fiscal discipline.
Some senior politicians in Germany, the Netherlands and Finland are suggesting Greece may have to leave the euro zone, although Dutch Economy Minister Maxime Verhagen said a Dutch proposal for a European fiscal discipline czar was not intended to push Greece out.
Governments in northern Europe are under pressure from public opinion angry at euro zone bailouts, fuelling support for populist Euro skeptical parties such as the True Finns, Finland's main opposition party.
True Finns leader Timo Soini told Reuters Insider television in an interview that Greece was bound to default and prolonging bailouts would only make matters worse by pouring in taxpayers' money to support cheats.
With Greece it is clear that they cheated -- some of their politicians. Of course the ordinary people are in trouble and they are innocent in this one, but if the political system doesn't fix itself then the consequences are really hard, he said.
We think also that those countries that cannot follow the rules, they must exit the system. Or the other option is that countries like Finland, Holland, maybe Germany, leave because they cannot pay any more.
Euro zone ministers faced pressure from the United States and Japan as well as the IMF at the G7 meeting to get a grip on the debt crisis, which has spread beyond the three countries under assistance programs -- Greece, Ireland and Portugal.
The European Central Bank has had to intervene in the bond market to buy Italian and Spanish government debt after those countries' borrowing costs soared in August, forcing both to adopt new austerity measures.
In one glimmer of positive news in the euro zone debt crisis, EU and IMF inspectors reported that Ireland was on course in implementing its deficit-cutting commitments, and its public deficit was likely to fall to 8.6 percent in 2012, better than the 8.8 percent target in its adjustment program.
Irish Prime Minister Enda Kenny said the quarterly progress report was international recognition that Ireland can emerge from its bailout.
However, the official lenders noted that the implementation of reforms of the Irish financial sector, the collapse of which forced Dublin to seek emergency loans, would remain challenging in the near term.
(Additional reporting by Alan Wheatley and Mark Cotton in London, Jan Strupczewski and Philip Blenkinsop in Brussels; Writing by Paul Taylor, editing by Mike Peacock)