Greek political leaders failed early on Thursday to sign off on a tough reform and austerity program, the price of a new international bailout for the nation, but Prime Minister Lucas Papademos said they would try to strike a deal within hours.
Speaking after seven hours of negotiations, Papademos said chiefs of the three parties in his coalition had agreed on all the points to secure the 130 billion-euro ($172 billion) bailout, bar one.
But Papademos, a technocrat who leads a cabinet of party politicians, said after the talks broke up in the early hours of Thursday that he wanted agreement to be reached before euro zone finance ministers meet in Brussels at 12:00 p.m. EST on Thursday.
Prospects for a long-awaited deal on Greece's second bailout since 2010 appeared to brighten when the finance ministers' chairman Jean-Claude Juncker called the Brussels meeting - which IMF managing director Christine Lagarde will also attend - to examine the bailout and accompanying bond swap.
But Papademos said the party leaders needed more discussions with officials from the troika of Greece's international lenders - the European Commission, European Central Bank and IMF.
The party leaders had agreed on all points of the program with one exception which requires further inspection and discussion with the troika, he said.
This discussion will take place immediately in order to complete the deal before the Eurogroup meeting.
On offer from the EU and IMF is a package involving the new rescue funds - which Greece needs to avoid a chaotic default when big debt repayments fall due on March 20 - and a bond swap with private creditors to ease the nation's huge debt burden.
In return, Athens must accept conditions requiring big cuts in many Greeks' living standards. Here the talks hit snags with the smallest member of the coalition, the far-right LAOS party.
The president of LAOS George Karatzaferis expressed serious reservations, said Papademos, a former central banker brought in to lead the country when a government of the socialist PASOK party collapsed last November.
Panos Beglitis, spokesman for PASOK which is in the coalition along with LAOS and the conservative New Democracy party, said the stumbling block was the level of cuts to supplementary pensions needed to safeguard the pension system.
However, Beglitis told reporters the leaders had agreed to cut the minimum wage by 22 percent as part of efforts to make the economy more competitive, although plans to scrap bonuses paid to private sector workers at Christmas, Easter and in the summer had been dropped.
A DREADFUL YEAR
Greeks face a dreadful year of recession, a government source said. Athens now forecasts the economy will shrink between four and five percent in 2012, the source said, adding to a relentless dive in economic output for the last four years which has sent unemployment soaring.
The figure, contained in a draft letter to Lagarde, is far worse than the 2.8 percent fall in gross domestic product forecast when the 2012 budget went to parliament in November, highlighting the conundrum that more austerity will damage the economy further and drive Greece's massive debts yet higher.
Two sources close to the Athens talks said the government would promise spending cuts and tax rises totaling 13 billion euros from 2012 to 2015, almost double the seven billion it originally pledged.
International lenders are demanding that the party leaders commit themselves in writing to implement the program of pay and pension cuts, structural and administrative reforms.
Euro zone officials say the full package must be agreed with Greece and approved by EU, ECB and IMF before February 15 so that complex legal paperwork can be completed in time for a bond redemption deadline on March 20.
However, the leaders have been loath to accept the lenders' tough conditions, which are certain to be unpopular with voters,
as they face parliamentary elections possibly as early as April.
Other elements of the deal have been gradually slotting into place, including the bond swap with private creditors to ease Greece's debt burden by reducing the value of government bonds held by banks and insurers.
The new bonds would have an average interest rate of around 3.5 percent, said state NET TV, with creditors having to swallow a 70 percent cut in the value of their debt holdings.
German Deputy Finance Minister Thomas Steffen said in Berlin the bond swap offer to private creditors could be made as early as next week.
He voiced exasperation at Greece's failure to implement economic and fiscal reforms since the debt crisis erupted two years ago, saying governance remained below European standards.
I believe we can say today that we have made little progress on Greece since 2010, worryingly little progress, Steffen said.
Ratings agency Standard & Poor's said Greece would probably fail to achieve manageable debt levels if it relied on the 70 percent reduction in the value of bonds held by private creditors, putting the onus on the ECB to take losses too.
With banks and insurers having mostly agreed to take a hefty writedown, Athens and the commercial banks are urging the ECB to forego profits on its Greek bond holdings to help cut the debt to a sustainable level. That could raise 12 billion euros or more.
But ECB policymakers are still divided on what contribution the bank could make to a restructuring of Greek debt, two euro zone monetary policy sources said.
While the ECB has ruled out joining the private creditors in voluntarily accepting losses on its Greek bonds, it could provide indirect relief by renouncing profits from bonds it bought at below face value.
The ECB's 23-member Governing Council, which holds its monthly meeting on Thursday, has yet to agree a position. Some policymakers are reluctant to share the burden for fear of easing pressure on Athens to agree spending cuts. There are also concerns about setting a precedent for other countries.
There is no agreement yet. Some people on the Council still oppose this, said one monetary policy source, adding that ECB President Mario Draghi had not yet revealed his position.
(Additional reporting by Ingrid Melander, George Georgiopoulos and Harry Papachristou in Athens and Paul Carrel in Frankfurt; Writing by David Stamp and Deepa Babington,; editing by Mike Peacock)