ATHENS/BRUSSELS (Reuters) - The IMF will release crucial loans to save Greece from default despite a likely delay by the European Union in agreeing a second bailout for the heavily indebted state, euro zone sources said on Thursday.
The news came as Greek Prime Minister George Papandreou, beset by mass street protests and resignations from his ruling socialist party, was planning to reshuffle his cabinet and drive through a draconian austerity plan to meet EU/IMF terms.
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With financial markets unnerved by a deteriorating political situation in Greece and lack of agreement in the euro area on a new rescue plan, the EU's top economic official said he expected Athens will get the desperately needed next aid tranche in July.
"I am confident that next Sunday, the Eurogroup will be able to decide on the disbursement of the fifth tranche of loans for Greece in early July. And I trust that we will be able to conclude the pending review in agreement with the IMF," Economic and Monetary Affairs Commissioner Olli Rehn said in a statement issued to try to calm markets.
Two lawmakers quit Greece's ruling PASOK party and a group of dissident socialists requested a caucus meeting in a challenge to Papandreou's efforts to drive his program through parliament despite national strikes and violent protests.
A senior IMF official said the International Monetary Fund was deeply concerned by the latest turmoil in Athens but stood ready to help if the government can win consent for its package of spending cuts, tax rises and state asset sell-offs.
"I am concerned the situation has changed very dramatically in the last 24 hours," Zhu Min, a special advisor to the IMF's managing director, said in Paris after a giant demonstration in Athens turned violent and Papandreou offered to quit.
"We hope the Greek government will have consent ... and we will be able to conclude our review," he said. "We are ready to provide support because it is an absolutely important issue for Greece, for Europe and the whole global economy."
The IMF had made the release of the 12 billion euro ($17 billion) aid tranche, due on June 29, conditional on euro zone states agreeing to meet Greece's funding needs for the next 12 months.
But sources said a political pledge would be enough.
"The situation is clear: if there is a strong commitment from the Europeans to do whatever it takes to back Greece, the IMF will pay the money. And I can tell you there will be such a commitment," one senior euro zone source told Reuters.
The cost of insuring Greek debt against default soared to a new peak on Thursday, forcing up the risk premium on the bonds of several other euro zone countries -- including Spain and Italy -- as investors fled to safe-haven German bunds.
Ireland's finance minister added to market jitters by saying on Wednesday that Dublin would seek to impose losses on senior bondholders in nationalized Anglo Irish Bank
The European Commission, which has opposed such a move in the past, said it had not received any proposal on this from Ireland.
The euro extended losses against the dollar and the yen and fell to a record low against the Swiss franc.
DELAY TILL SEPTEMBER
Rehn also said he expected euro zone finance ministers to take decisions on a successor program for Greece on July 11.
But two sources briefed by the German government said Berlin wanted to postpone until September an EU agreement on a new 120 billion euro program, including 30 billion in privatization proceeds, due to disputes over how to involve private investors.
A high-level banking source in Germany said Berlin was pushing for a delay until September, the main reason being that rating agencies needed to be convinced.
Slovak Finance Minister Ivan Miklos said on Wednesday he expected the deal, initially sought at an EU summit on June 23-24, would be put off until July 11.
Germany, backed by the Netherlands and Finland, has proposed a "voluntary" debt swap in which bondholders would be given new bonds with a seven-year maturity, but credit rating agencies have warned they would treat that as a selective default.
That could prompt the European Central Bank to refuse to accept Greek bonds as collateral, depriving the Greek banking sector of vital liquidity on which it is totally dependent.
The European Commission, the ECB and France favor a softer form of private sector involvement under which banks would agree to roll over Greek bonds as they mature and are redeemed.
Fitch Ratings appeared to open the door to a possible compromise on Wednesday by saying that while it would treat such a rollover as a "restrictive default," it would keep Greek bonds rated at CCC, meaning the ECB could continue to accept them in its refinancing operations.
(Additional reporting by George Georgiopoulos in Athens, Daniel Flynn in Paris, Ilona Wissenbach and Jan Strupczewski in Brussels, Noah Barkin and Andreas Rinke in Berlin, Edward Taylor in Frankfurt; writing by Paul Taylor, editing by Mike Peacock)