Greek Prime Minister Lucas Papademos met leaders of political parties in his coalition on Sunday to persuade them to back painful reforms demanded by the near-bankrupt country's foreign lenders.

Now that Greece is close to clinching a long-awaited debt swap deal with private bondholders, attention is shifting to difficult talks with lenders who want new austerity measures before they hand over funds from a 130 billion euro bailout.

But the mix of spending cuts and reforms to reshape the economy risk heaping more misery on austerity-weary Greeks in the short term and few politicians want to be associated with them as they gear up for elections expected as early as April.

This is a crucial day. We must all show strength and seriousness, George Karatzaferis, leader of the far-right LAOS party that is one of three parties in Papademos's government, told reporters before entering talks at the premier's office.

Karatzaferis, whose party's ratings have slipped in opinion polls since December, in recent weeks has stepped up threats to quit the coalition citing a lack of cohesion between partners that include the Socialist PASOK and conservative New Democracy parties.

Underscoring the struggle Papademos faces in implementing reforms, Greece's parliament last week voted against extending pharmacy hours soon after officials from the troika of lenders -- the European Central Bank, the European Union and the International Monetary Fund -- arrived in town to discuss the bailout.

They have demanded Greece make extra spending cuts worth 1 percent of GDP - or just above 2 billion euros - this year, including slashing defence and health spending as well as cutting redundant state entities.

But Greece's European partners are increasingly worried the country no longer has the will or ability to push through change.

European paymaster Germany is pushing for Athens to relinquish control over its budget policy to European institutions as part of discussions over a second rescue package, a European source told Reuters.

Finance Minister Evangelos Venizelos reacted angrily to the suggestion on Sunday, saying Greece was perfectly capable of making good on its promises.

Anyone who puts a nation before the dilemma of 'economic assistance or national dignity' ignores some key historical lessons, Venizelos said in a statement before heading to Brussels for a European Union summit on Monday.


Euro zone leaders at the summit will have the chance to discuss Greece's debt swap deal, which both sides late on Saturday said was close to being finalized after months of negotiation.

Under the swap, private creditors take a 50 percent cut in the nominal value of their Greek holdings in exchange for cash and new bonds. Their actual losses are expected to be much higher depending on the coupon, or interest rate, involved.

Both sides said the deal was along the lines of a proposal made by Jean-Claude Juncker, the chairman of euro zone finance ministers, suggesting creditors had accepted his demand for a coupon of less than 4 percent. That would result in actual losses of close to 70 percent for creditors on their holdings.

Two sources close to the talks said elements of a deal were largely in place with a coupon of below 4 percent, but that a final agreement could not be clinched until euro zone finance ministers signed off on the plan.

The talks had earlier run into trouble over the coupon and whether the ECB and other public creditors must also take losses on their holdings.

Negotiations were further complicated by hedge funds that have built up positions in Greek bonds and who now either want the country to go under so that insurance against the debt could be paid out or hope for payment in full by holding out.

Greece has responded by threatening to enforce losses on investors who do not voluntarily sign up to the swap.

A deal, aimed at chopping 100 billion euros off Greece's debt load, must be sealed in about three weeks at the latest as Greece has to repay 14.5 billion euros of debt on March 20.

Without a deal and a subsequent release of funds from the bailout plan, Greece would sink into an uncontrolled default that risks spreading turmoil across the euro zone.

(Additional reporting by John O'Donnell in Brussels, Writing by Deepa Babington; editing by Tim Pearce)