Greece was clinging on Tuesday to hope of a last-minute bond swap deal to avoid a messy default after euro zone officials sent talks back to square one by rejecting a final offer from the country's private bondholders.

Athens is desperate for a deal within days to ensure funds from a 130 billion euro rescue plan drawn up by European partners and the International Monetary Fund arrive before 14.5 billion euros bond redemptions fall due in March.

After weeks of haggling with creditors in Athens, euro zone finance ministers in Brussels on Monday dealt a sharp setback to those hopes by rejecting creditors' demand for a 4 percent coupon, or interest rate, on new, longer-dated bonds in exchange for existing debt.

Private sector creditors now have the upper hand in deciding whether Athens will be forced into a hard default that could sow chaos across the global financial system and push other weak euro zone members closer to a default.

Charles Dallara, the head of the Institute of International Finance negotiating on behalf of creditors, is due to speak in Zurich later on Tuesday after leaving Athens over the weekend.

Greece's top official at the Brussels meeting remained stoic, saying the country had the euro zone's support to complete the debt swap talks in the coming days.

In reality, we are now entering the final stretch, , Finance Minister Evangelos Venizelos said in a statement.

I believe everyone has now realized that Greece must be supported in its effort, which is of vital importance not only for us but for the euro zone as a whole and the global economy.

Asked if there was still hope of a deal, IMF chief Christine Lagarde said she remained positive.

I'm determined to be positive, she told Deutschlandradio Kultur. Political leaders have the instruments and possible measures in order to manage this situation and bring the euro zone back on to a sustainable path.

Conservative leader Antonis Samaras, head of one of three parties backing Greece's technocrat prime minister, told Reuters he expected the talks to be wrapped up by March 5 at the latest and said the country must head to polls as soon as the EU/IMF bailout is finalized.

He set April 8 as the deadline for elections.


With weeks of talks yielding little progress and growing concern that Greece's fast-deteriorating economic prospects mean it will need more aid from partners either way, European policymakers appeared to be more willing to consider the previously taboo option of an involuntary debt swap.

A voluntary swap where both sides agree to the terms of the deal is required to prevent insurance against a Greek debt default from being paid out.

There has been a slight change in mood, but no change in the policy lines pursued, a senior euro zone source told Reuters when asked about the mood among policymakers on Greece.

A second euro zone source confirmed the perception of a shift but cautioned: We are still in Plan A mode.

A source close to the talks said creditors would go towards an involuntary debt swap if there was no agreement by the end of the week -- raising the risk of a messy default.

The bond swap is meant to cut 100 billion euros from Greece's debt burden of over 350 billion, in a bid to ultimately slash its debt from around 160 percent of GDP to a more manageable 120 percent of GDP by 2020.

Sources close to the talks told Reuters on Monday that the impasse in Brussels largely centred on questions of whether the deal would return Greece's debt mountain to levels that European governments believe are sustainable.

Greece and its private creditors had been converging on an agreement that would see private creditors accepting a real loss of 65 to 70 percent, sources close to the talks said after several rounds of talks last week.

At the time, Athens and its creditors were discussing new bonds would likely feature 30-year maturity and a progressive interest rate averaging out at 4 percent, sources said.

Greece is stumbling through its worst post-World War II economic crisis, with unemployment at record highs and frequest protests against austerity measures demanded by its international lenders as a condition for bailout loans.

The country is now in its fifth year of recession.

(Additional reporting by Sophie Sassard, Writing by Deepa Babington. Editing by Jeremy Gaunt.)