The Greek government began a race for parliamentary approval of a stepped-up austerity package vital to keep the debt-laden euro zone state afloat and buy time for Europe to approve new rescue measures.
As Finance Minister Evangelos Venizelos flew home from talks at the International Monetary Fund in Washington, a newspaper said 85 percent of private sector bondholders had agreed to participate in a voluntary bond swap to restructure Greece's debt burden -- close to the government's 90 percent target.
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Greek officials said the IMF was seeking written commitments on its latest austerity promises before sending inspectors back "most likely this coming week" to conclude a review of compliance with a 110 billion euro bailout program. Greece has repeatedly missed its deficit reduction targets.
IMF and EU approval is essential to release the next 8 billion euros ($11 billion) in emergency loans, without which the government has said it will run out of money to pay salaries, pensions and bills in October.
Public anger over ever more draconian belt-tightening remains high and there is increasingly open talk in Europe and beyond of a probable Greek debt default in the coming months with a far larger haircut for investors.
A government spokesman said the cabinet had not discussed the scenario of a 50 percent haircut, which Venizelos was quoted by newspapers last week as telling lawmakers was one scenario.
Police fired tear gas at protesters on Sunday night in Syntagma Square in front of parliament in the first such unrest after a summer lull, while unions have launched a fresh round of strikes and protests.
Austrian Finance Minister Maria Fekter said a debt cut for Greece, with compulsory write-downs for investors, was an option of last resort. German Chancellor Angela Merkel said on Sunday default was not an option because it would destroy investors' confidence in Europe.
German Deputy Finance Minister Joerg Asmussen said euro zone finance ministers would probably not be in a position to decide on releasing the aid installment at their next meeting on October 3 because of delays in the inspectors' mission. That would set up another cliffhanger that could unsettle financial markets.
Venizelos was expected to lobby lawmakers on his return to pass a new property tax deeply unpopular with the middle-classes, on which parliament is due to vote on Tuesday.
Prime Minister George Papandreou will discuss Greece's economic reform program with Merkel on Tuesday in Berlin, two days before the German parliament is due to vote on new powers for the euro zone's financial rescue fund.
Athens' chronic undershooting of agreed fiscal targets and the failure of European officials to staunch worries of a euro zone meltdown have hit markets and drawn rebuke from critics stretching from Washington to Beijing.
TROIKA EXPECTED THIS WEEK
Daily newspaper Eleftherotypia reported that participation of private sector bondholders in a Greek debt swap plan is nearing 85 percent, close to the 90 percent target set in July.
Under the deal, banks would accept a 21 percent write-down on Greek government bonds. The newspaper said the IMF and Greece discussed at the weekend the possibility of applying a haircut of 40 percent or more if necessary in a second phase.
Privately, bankers say they could face 60-80 percent losses on a Greek default and some would be willing to renegotiate a larger write-down than they have agreed to absorb if it lowers the risk of bankruptcy.
Impatient IMF and EU inspectors abruptly left Greece this month after discovering that Athens was behind on its targets but the government's swift agreement on tougher savings measures looks set to persuade the troika of IMF, European Union and European Central Bank inspectors to release fresh funds.
Investors and policymakers are also watching whether Papandreou can push through legislation to put the new plan in place, a process that has been fraught with political infighting and caused bloody clashes in June.
"They won't get us out of the crisis with these measures. We'll go bust," said Michalis Smirniotis, 50, a private sector accountant and father of two. "They cut my salary when they should be taxing the rich."
The first big hurdle is on Tuesday, when parliament is slated to vote on the property tax bill meant to close 2 billion euro holes in the budget this year and next but which has caused outrage, particularly amongst the hard-pressed middle class.
Ruling PASOK party lawmaker Dimitris Lintzeris said he would back the property levy but he was not certain to support additional austerity measures that might come later.
"The drip torture cannot continue," he said.
Analysts say the stark alternative of default on Greece's 350-billion-euro debt will probably spur ruling Socialist lawmakers to push the law through without the drama that nearly sank an earlier package and pushed Greece to the brink of bankruptcy in June.
STRIKES AND PROTESTS
Taxi drivers are scheduled to stop work this week and rallies are expected to resume outside parliament in Syntagma Square, which has become the epicenter for opposition to the austerity measures.
Greece's two biggest unions, representing about half of the country's 5-million-strong workforce, are gearing up for two 24-hour strikes and rallies in October.
Under the new plan, monthly pension checks, having already been cut by about 15 percent, will fall a further 20 percent on amounts exceeding 1,200 euros.
The government also plans to put 30,000 public sector workers on notice, cutting their pay by 60 percent and giving them a year to find new work in the state sector or be sacked.
That will be only a small dent in a plan to cut the 730,000 strong public sector by a fifth, but Athens has found its hands tied by laws guaranteeing state workers jobs for life.
The troika has also bemoaned slow progress on cracking down on tax evasion and Athens is behind on privatization plans.
(Reporting by Michael Winfrey; Editing by Peter Millership and Paul Taylor)