Germany and France pressed on Monday for a rapid deal between Greece and its private creditors that cuts its soaring debt to sustainable levels and said they were committed to a sealing a new bailout for Athens by March to avert a disastrous default.
Euro zone finance ministers met in Brussels to discuss the terms of a Greek debt restructuring and new treaties that will pave the way for tighter fiscal discipline and a new rescue fund the bloc wants in place by mid-year.
Ahead of that meeting, French Finance Minister Francois Baroin said an elusive deal to convince the banks and investment funds that own Greek debt to accept deep losses on their holdings appeared to be "taking shape".
But his German counterpart Wolfgang Schaeuble warned that any deal must help Greece cut its debt mountain to "not much more than 120% of GDP" by the end of the decade, from roughly 160% today, something many economists believe will not be achieved by the existing plan.
"The negotiations will be difficult, but we want the second programme for Greece to be implemented in March so that the second (bailout) tranche can be released," Schaeuble told a news conference in Paris with Baroin and the heads of the German and French central banks.
After several rounds of talks, Greece and its private creditors are converging on a deal in which private bondholders would take a real loss of 65 to 70% on their Greek bonds.
But some details of the debt restructuring, which will involve swapping existing Greek bonds for new, longer-term bonds are unresolved.
Charles Dallara, the Institute of International Finance chief who is negotiating on behalf of the private debt holders, left Athens over the weekend saying banks had no room to improve their offer.
Sources close to the talks told Reuters on Monday that the impasse centred on questions of whether the deal would return Greece's debt mountain, currently over 350 bln euros, to levels that European governments believe are sustainable.
In Brussels, European Economic and Monetary Affairs Commissioner Olli Rehn said talks had been "moving well" and expressed confidence a deal could be sealed this week.
German Chancellor Angela Merkel said there was no question of extending Greece a bridging loan if talks with the private sector dragged on further.
The euro pushed up to its highest level against the dollar in nearly three weeks on hopes Greece and the banks could overcome differences and seal a successful debt swap.
LAGARDE DEMANDS
Speaking in Berlin not far from Merkel's Chancellery, IMF chief Christine Lagarde urged European governments to increase their financial firewall to prevent Greece's troubles from ensnaring bigger countries like Italy and Spain.
She also called on European leaders to complement the "fiscal compact" they agreed last month with some form of financial risk-sharing, mentioning euro zone bonds or bills, or a debt redemption fund as possible options.
Berlin opposes those steps and Merkel told a news conference with the Belgian prime minister that it was not the time to debate an increase in the euro zone's bailout funds — the European Financial Stability Facility (EFSF) and its successor, the 500 billion euro European Stability Mechanism (ESM).
Italian Prime Minister Mario Monti, who has complained openly that his reform efforts have not been recognised by the markets, is reportedly pushing for the rescue fund to be doubled to 1 trillion euros. Lagarde stopped short of advocating that, saying: "I am not saying double it."
The more immediate worry is Greece. Without the second bailout from the euro zone and the IMF, Athens will not be able to pay back 14.5 billion euros in maturing bonds in March, triggering a messy default that would hurt the entire euro zone and send tremors beyond the 13-year old single currency bloc.
DETERIORATION
Euro zone leaders agreed in October that the second bailout would total 130 billion euros, if private bondholders forgave half of what Greece owes them in nominal terms.
But Greek economic prospects have deteriorated since then, which means either euro zone governments or investors will have to contribute more than thought.
A key sticking point is the coupon, or interest rate, the new Greek bonds would carry. Officials said the new bonds are likely to be 30 years in maturity and carry a progressively higher coupon, which would average out at around 4%.
Progress will be presented to the Eurogroup, the euro zone ministers, by Greek Finance Minister Evangelos Venizelos.
"We will listen to the Greek finance minister to hear what models there are," said Austrian Finance Minister Maria Fekter as the talks got under way. "It is important to have a long-term model so that Greece has time … We know that the banks are not overly happy, but a crash is far more expensive than such a long-term plan."
