Euro zone leaders told near-bankrupt Greece at an emergency summit on Sunday that it must restore trust by enacting key reforms before they will open talks on a new financial rescue to keep it in the European currency area.
Leftist Prime Minister Alexis Tsipras will be required to push legislation through parliament from Monday to convince his 18 partners in the monetary union to release immediate funds to avert a Greek state bankruptcy and start negotiations on a third bailout program.
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Some laws will have to be passed by Wednesday and the entire package endorsed by parliament before talks can start, one minister said.
Tsipras said on arrival in Brussels he wanted "another honest compromise" to keep Europe united.
"We can reach an agreement tonight if all parties want it," he said.
But German Chancellor Angela Merkel, whose country is the biggest contributor to euro zone bailouts, said the conditions were not yet right to start negotiations, sounding cautious in deference to mounting opposition at home to more aid for Greece.
"The most important currency has been lost and that is trust," she told reporters. "That means that we will have tough discussions and there will be no agreement at any price."
European Council President Donald Tusk canceled a planned summit of all 28 EU leaders that would have been needed in case of a Greek exit from the single currency, and said euro zone leaders would keep talking "until we conclude talks on Greece".
Eurogroup finance ministers wrapped up a meeting broken off after nine hours of acrimonious debate on Saturday night without a firm recommendation on Greece's application for a three-year loan on the basis of reform proposals Tsipras sent on Thursday.
A Eurogroup document seen by Reuters said Greece must pass laws to change its value added tax and pension systems, reform bankruptcy rules and strengthen the independence of its statistics office before bailout talks can even begin.
Eurogroup chairman Jeroen Dijsselbloem said that while ministers had made good progress, a couple of big issues were left for the leaders to resolve.
"The Eurogroup ... came to the conclusion that there is not yet the basis to start the negotiations on a new program," the document sent to national leaders said.
"Only subsequent to legal implementation of the above mentioned measures can negotiations on the memorandum of understanding commence, subject to national procedures having been completed," it said, in a reference to authorization by national parliaments in countries such as Germany.
The draft said Greece needed 7 billion euros by July 20, when it must make a crucial bond redemption to the European Central Bank, and a total of 12 billion euros by mid-August when another ECB payment falls due.
It did not say how those needs would be met, and EU officials said finance ministers had been unable to agree on emergency finance.
Several hardline countries voiced support for a German government paper that recommended Greece take a five-year "time-out" from the euro unless it accepted and implemented swiftly much tougher conditions, notably by locking state assets to be privatized in an independent trust to pay down debt.
But French President Francois Hollande, Greece's strongest ally in the euro zone, dismissed the notion, saying it would start a dangerous unraveling of EU integration.
"There is no such thing as temporary Grexit, there is only a Grexit or no Grexit. There is Greece in the euro zone or Greece not in the euro zone. But in that case it's Europe that retreats and no longer progresses and I don't want that," he said.
Argument among finance ministers became so heated on Saturday evening that Dijsselbloem decided to adjourn at midnight and resume talks at 11 a.m. to allow tempers to cool.
The ministers agreed in principle to seek ways to make Greece's debt burden manageable by extending loan maturities and other steps stopping short of a "haircut" or writedown, provided Athens first implements reforms.
At one stage in the debate on Greece's debt sustainability, hardline German Finance Minister Wolfgang Schaeuble snapped at ECB President Mario Draghi: "I'm not stupid," a person familiar with the exchange said. Schaeuble also clashed with the head of the euro zone bailout fund, Klaus Regling, on whether Greece could afford to service its debt or not, another source said.
GREEKS SEE HUMILIATION
Greece's new finance minister, Euclid Tsakalotos, was silent in public but the reaction among some lawmakers in Tsipras' radical leftist Syriza party, still smarting from having to swallow austerity measures they had opposed, was furious.
"What is at play here is an attempt to humiliate Greece and Greeks, or to overthrow the Tsipras government," Dimitrios Papadimoulis, a Syriza member of the European Parliament, told Mega TV.
With banks shuttered for two weeks, cash withdrawals rationed and the economy on the edge of an abyss, some Greeks in the streets of Athens vented their anger on Merkel and Schaeuble.
"The only thing that I care about is not being humiliated by Schaeuble and the rest of theme" said Panagiotis Trikokglou, a 44-year-old private sector worker.
Greece has already had two bailouts worth 240 billion euros from euro zone countries and the International Monetary Fund, but its economy has shrunk by a quarter since the crisis began, unemployment has soared above 25 percent and one in two young people is out of work.
Athens defaulted on an IMF loan repayment last month and faces state bankruptcy if it cannot make the bond redemption on July 20, which would likely force the ECB to cut emergency funding for Greek banks.
German sources said Schaeuble, Merkel and Social Democratic Vice Chancellor Sigmar Gabriel had agreed on a division of labor to force Greece to accept tougher conditions or leave the currency area temporarily.
However economists said the idea of a temporary exit was likely to mean ejecting Athens from the European monetary union in the end.
Paul De Grauwe, a Belgian economist at the London School of Economics, compared it to a couple having a trial separation.
"Temporary Grexit is like temporary divorce. Most if not all end up being permanent," he said in a Twitter message.
Holger Schmieding, chief economist of Berenberg Bank, was even more categorical, saying: "Temporary Grexit is Grexit."
Analyst Nicolaus Heinen of Deutsche Bank told Reuters that billions of euros withdrawn by Greeks before capital controls were imposed would crowd out any new currency in a cash economy similar to Cuba or Lebanon, where the dollar is king.
There would be political conflict over a date for Athens' return to the euro zone, and "tension between Greece and the rest of Europe would be bound to grow if Greece was sent to stand outside the classroom like a naughty schoolboy," he said.
Merkel requires the assent of the German parliament to agree to the opening of loan negotiations. Diplomats expected her to commit to calling a special session of the Bundestag to give her that mandate if Greece enacts prior reforms this week.
The United States has added its voice to calls for a deal this weekend, concerned at the geopolitical consequences if Greece were to be cut loose and become a failed state in the fragile southern Balkans, adjoining the Middle East.
"No one wants to see a North Korea in southeastern Europe," a European Commission official said.
(Additional reporting by Alastair Macdonald, Philip Blenkinsop, Foo Yun Chee, Robert-Jan Bartunek, Tom Koerkemeier, Julien Ponthus, Francesco Guarascio, Julia Fioretti and Alexander Saeedy in Brussels, Michele Kambas and Matthias Williams in Athens, Rene Wagner and Paul Carrel in Berlin and Crispian Balmer in Rome; Writing by Paul Taylor; Editing by Giles Elgood)