Near-bankrupt Greece struggled on with its foreign lenders on Tuesday to show them it can ram through spending cuts and labour reform in exchange for a crucial debt swap deal and a 130 billion euro bailout package needed to avoid an unruly default.
It is under pressure in talks to do more itself to help bridge a funding shortfall driven by a worsening economic climate and its previous reform plan having veered off track.
On top of biting austerity measures already taken that regularly bring droves of angry protesters onto the streets, Greece's lenders have demanded it make extra spending cuts worth 1 percent of GDP - or just above 2 billion euros - this year, including big cuts in defence and health spending.
A senior Greek banker said a deal with private bondholders to restructure 200 billion euros of Greek debt is largely in place after months of negotiating, but that a final accord is on hold until Athens can show it is serious about tackling reforms.
"The debt swap agreement is ready, but it will not be announced before the end of the week and until the government has made certain commitments on reforms, labour issues and the pension system," said the banker, who declined to be named.
"By delaying the debt swap, European partners are putting pressure on the government and political leaders to make certain commitments."
Prime Minister Lucas Papademos earlier on Tuesday confirmed that Athens was aiming for a definitive agreement on the debt swap by the end of this week -- roughly the same time it expects to conclude talks with lenders in Athens on its second bailout.
Papademos acknowledged that the main sticking points in talks with the so-called "troika" of foreign lenders - the European Central Bank, the EU and the International Monetary Fund -- revolved around spending cuts and labour reform.
Talks with the troika have struggled over further cuts in labour costs in the private sector, which Athens has resisted over fears they could deepen a brutal recession and impose additional hardship on the poor, Greek officials say.
The prospect of elections as early as April has further complicated the talks, with political leaders in Papademos' national unity coalition eager to distance themselves from any cuts that herald more pain for ordinary Greeks.
Increasingly exasperated by Athens' failure to live up to pledges on the reform front, European partners have demanded all Greek parties commit to measures agreed under the bailout irrespective of who wins the next elections.
A German minister went so far as to call for Athens to surrender control of its budget policy to outside institutions if it could not implement reforms, though Berlin has toned down the debate after an indignant reaction from Greek officials.
Underscoring the stakes involved, ECB Governing Council member Ewald Nowotny said whether Greece stays in the euro zone depended on its ability to push through a series of measures.
"I hoped that these measures will be implemented but one cannot probably be absolutely sure," Nowotny told Austrian radio station ORF.
DEBT SWAP END-GAME
Finance Minister Evangelos Venezelos was expected to comment on the status of the twin negotiations after he and other Greek officials return to Athens from the European Union summit in Brussels on Tuesday.
At the summit, Papademos gave a broad outline of where things stand to all 27 heads of state, before heading off to talks with senior European officials.
Sources familiar with the matter said euro zone leaders were not asked to give an outright approval or rejection of the deal since that is expected to occur only after a comprehensive agreement is struck on both the debt swap and the bailout.
As part of the swap, banks and insurers would take a 50 percent writedown on the notional value of the Greek debt they hold, easing Athens' debt load by 100 billion euros.
Their actual losses on the holdings are expected to be closer to 70 percent, however, based on an average coupon of under 4 percent, a level the two sides have converged on after several rounds of talks, the senior Greek banker said.
Still, previous declarations of an imminent deal have failed to come to fruition and one senior Greek official cautioned: "Not everything has been agreed yet."
The talks had been complicated by hedge funds that built up positions in Greek bonds, as they hoped the country would go under so that insurance against the debt could be paid out, or that they would be paid in full by holding out.
Greece has responded by threatening to enforce losses on investors who do not voluntarily sign up to the swap.
Time is running short for Greece, which needs to wrap up both set of talks by mid-February at the latest to ensure it gets money in time to avoid a chaotic default when 14.5 billion euros of bond redemptions fall due in March.
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 and tipping the global economy back into recession.