ATHENS Greece's prime minister will call the country's political leaders in the next few days to seek backing for more austerity after the International Monetary Fund warned this was key to securing the new bailout Athens needs to avoid a messy default.
With a long-delayed deal with private sector creditors to cut Greece's debt mountain by 100 billion euros nearly wrapped up, the government is now racing to complete talks on the 130-billion euro ($170.18 billion) bailout by the end of the week.
To do so, Athens must first persuade the European Union and the IMF - which have grown increasingly exasperated with its repeated failures to meet deficit and reform targets - that it will implement long-delayed reforms and slash spending further.
Bankers said the bond swap deal, which will mean real losses of about 70 percent for Greek bond holders, is essentially done. But the second bailout and any official sector participation must be agreed before announcing a deal as all elements are interlinked.
"The PSI (private sector participation) deal has been done but we are waiting for the second bailout to come together and no announcements should be expected before Monday," said a senior Greek banker close to the negotiations. "The coupon is under 4 percent."
ECB action to further reduce the burden is seen as imperative and is proving a sticking point.
The Insitute of International Finance, which represents banks and insurers in the debt swap talks, said "constructive discussions" continued and that it hoped various elements of the Greek rescue package would come together in the coming days.
The prospect of elections as early as April complicates the talks with lenders, with political leaders in Prime Minister Lucas Papademos's coalition eager to distance themselves from any cuts that herald more pain for ordinary Greeks.
Antonis Samaras, whose conservative party shares power in the coalition, has rejected any further austerity, saying it risked plunging Greece even deeper into recession. Several lawmakers from all three major parties have said the same.
This worries Greece's lenders, who want to make sure Athens will deliver this time.
"We need assurances that whoever is in power after the election and reasonably wishes to make some changes in economic policy will make sure they are in line with the targets and the basic framework of the agreement," Poul Thomsen, the head of the IMF's mission for Greece, told daily Kathimerini on Wednesday.
Government spokesman Pantelis Kapsis said Papademos would convene the conservative, socialist and far-right leaders in the coming days to ask them to back any deal but gave no date.
"The meeting of the political leaders is crucial," Kapsis told reporters. "In order to have a final deal, we first need to have a meeting of political leaders."
Thomsen, who is in Athens to negotiate the new bailout together with a "troika" of senior EU and ECB officials, said the minimum wage level may have to be lowered and holiday bonuses cut to make Greece's firms more competitive. Athens may also have to fire civil servants, he said in the interview, though the bulk of savings in the public sector payroll will come from retirements.
These demands are hotly contested in Greece. Labor unions have rejected cutting the minimum wage and slashing holiday bonuses and are seeking, together with employers, other ways to cut labor costs.
"It's all down to whether the Greeks manage to convince the troika that they will implement the necessary austerity measures," said a source close to the negotiations.
Thomsen also called for a new policy mix, which could help get political parties on board.
"We will have to slow down a little as far as fiscal adjustment is concerned and move faster - much faster - with implementing reforms," he said, adding that there are "limits" to what society can take.
More reforms and slower deficit reduction would be a policy shift compared with the country's first 110-billion euro bailout, which relied heavily on tax increases and less on spending cuts and which some economists blame for social unrest and the country's worst post-war recession.
Greece has been dragged deeper into recession since it was first rescued by the EU and IMF in May 2010.
The economy is set to contract by at least 3 percent this year, while Greece's lenders projected it would grow by 1.1 percent when they drafted the first bailout. Athens blames the deeper-than-expected recession for its failure to meet deficit targets while the lenders point to the delays on reforms.
In a sign of Greece's economic struggles, manufacturing remained in deep recession in January with a record drop in production and a sharp decline in new orders leading to more job losses, a survey showed on Wednesday. Production fell at a record pace as new order volumes and work backlogs continued to decline sharply, the Markit survey showed.
Some analysts said Thomsen's suggested policy switch would not work unless Greece's lenders, including the IMF, increase their aid for Greece above the 130 billion euro mark.
"It makes sense to put the emphasis on structural reforms and less on deficit reduction but this strategy will mean that Greece needs extra support and, at the moment, I don't see anybody willing to do that," said Christoph Weil, a Frankfurt-based economist at Commerzbank.
Greece's lenders have demanded it make extra spending cuts worth about 1 percent of GDP - or just above 2 billion euros - this year, including big cuts in defense and health spending. Thomsen said he was optimistic a deal would be done in days.
Greek bank shares jumped after both the finance minister and Thomsen indicated that banks would escape nationalization when they are recapitalized.
($1 = 0.7639 euros)
(Additional reporting by Sophie Sassard in London; Writing by Ingrid Melander and Dina Kyriakidou; Editing by Jon Boyle)