Greece will submit a request to the euro zone on Thursday to extend a "loan agreement" for up to six months but EU paymaster Germany says no such deal is on offer and Athens must stick to the terms of its existing international bailout.
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The move, confirmed by an official spokesman, is an attempt by the new leftist-led government of Prime Minister Alexis Tsipras to keep a financial lifeline for an interim period while sidestepping tough austerity conditions in the EU/IMF program.
An EU source said whether finance ministers of the 19-nation currency bloc, who rejected such ideas at a meeting on Monday, accept the request as a basis to resume negotiations will depend on how it is formulated.
Hardline German Finance Minister Wolfgang Schaeuble poured scorn on the Greek gambit, telling broadcaster ZDF on Tuesday evening: "It's not about extending a credit program but about whether this bailout program will be fulfilled, yes or no."
However, German Economy Minister Sigmar Gabriel, leader of the Social Democratic junior partners in conservative Chancellor Angela Merkel's coalition, welcomed what he called the signal from the Greek government that it was ready to negotiate.
With the current bailout deal with the euro zone due to expire on Feb. 28, Tsipras said talks were at a crucial stage and his demands for an end to austerity were winning support.
"There were protests across Europe supporting the moves made by Greece and we have managed for the first time through contacts with foreign leaders to create a positive stance on our requests," he said at a televised meeting with President Karolos Papoulias.
EU officials said intensive consultations were under way between Athens, the Eurogroup and the European Commission, with Italy and France also involved in the search for a compromise.
Germany and other euro zone countries were standing firm on their insistence that there can be no roll-back of reforms already implemented under the bailout and that Greece will have to repay all it has borrowed, they said.
European stocks rose to multi-year highs on Wednesday amid rising optimism that a Greek debt deal would be reached by the end of the week. Greek government bond yields fell sharply and Spanish, Portuguese and Italian yields also fell as fears of contagion to other peripheral euro zone countries eased.
Government spokesman Gabriel Sakellaridis initially said Athens would send a formal application on Wednesday, but a government official later said it would be submitted on Thursday morning.
"We will not back down on certain points that we consider red lines. The (bailout) memorandum died on Jan. 25," Sakellaridis told Antenna TV.
That was the day Greek voters elected a government led by Tsipras's hard left Syriza party, which had promised to scrap the 240 billion euro bailout, reverse austerity measures and end cooperation with the hated "troika" of inspectors from the Commission, the European Central Bank and the IMF.
ECB REVIEWS LENDING
The ECB's governing council will meet later on Wednesday (10:00 a.m. EST) in Frankfurt to decide whether to continue and possibly increase emergency lending assistance to Greece's banks, plagued by deposit withdrawals.
The ECB is not expected to pull the plug this week but Germany's Bundesbank is leading opposition to any increase in the funding by the Greek central bank, people familiar with the situation told Reuters.
Without added liquidity, the banks face a tightening squeeze as savers withdraw money that could force Greece to introduce capital controls if there is no deal.
A source close to the Greek government said the loan request would be based on a text drawn up earlier this week by EU Economics Commissioner Pierre Moscovici, which was discarded by euro zone finance ministers when they met on Monday.
The Moscovici draft would also have committed Greece not to take unilateral steps to reverse measures implemented under the bailout, but Tsipras told Syriza lawmakers on Tuesday he would hasten legislation to scrap labor market deregulation.
A German Finance Ministry spokesman said any extension of the loan agreement could not be separated from the reform commitments in the bailout program.
With several euro zone countries needing parliamentary ratification of any change or extension, time is running short.
Dijsselbloem has said Greece must request an extension of the existing bailout by the weekend or the program will expire at the end of this month. Greece could then run out of money within weeks since it has to make hefty repayments to the IMF in March.
As the deadline approaches, several European leaders called Tsipras to seek a solution, including Italian Prime Minister Matteo Renzi, French President Francois Hollande and Cypriot President Nicos Anastasiades, as well as European Commission President Jean-Claude Juncker.
(Additional reporting by George Georgiopoulos and Deepa Babington in Athens, Jan Strupczewski in Brussels, Caroline Copley in Berlin and Paul Carrel in Frankfurt; Writing by Paul Taylor and David Stamp; Editing by Sonya Hepinstall and Paul Taylor)