The tussling in Athens threatens to hold up a critical element of the second financing package: a debt swap that will slice 100 billion euros off more than 200 billion euros of privately-held debt. The rescue blueprint includes a loss of more than 70 percent for bondholders in the voluntary debt exchange as well as loans that will probably exceed the 130 billion euros now on the table.

The ECB is prepared to swap its holdings of Greek government bonds to contribute to a reduction of the country's debt burden, Dow Jones reported yesterday, citing unidentified people briefed on the talks. The agreement could reduce Greece's debt by as much as 11 billion euros, Dow Jones said.

A formal offer for the debt swap must be made by Feb. 13 to allow all procedures to be completed before the March 20 bond comes due. Parliament may be called to vote on the terms of the writedown on Feb. 12, state-runs Athens News Agency reported yesterday, without saying how it got the information.

Euro High

The euro touched an eight-week high against the dollar today, reaching $1.3289, the most since Dec. 12. European stocks advanced, with the Stoxx Europe 600 Index up 0.3 percent after two days of losses. U.S. index futures and Asian shares also rose.

Papademos met last night for “constructive” talks with Charles Dallara, managing director of the International Institute of Finance, which has negotiated the terms of the swap, and Deutsche Bank AG Chairman Josef Ackermann, according to an IIF statement.

Creditors are prepared to accept an average coupon of as low as 3.6 percent on new 30-year bonds in the exchange, said a person familiar with the talks, who declined to be identified because a final deal hasn't been struck yet.

While the prime minister and party chiefs have agreed to make further cuts this year equal to 1.5 percent of gross domestic product, they have yet to close gaps over measures demanded by creditors for the rescue. Unions, which struck yesterday, have derided the conditions as “blackmail.”

“There is a path here for Greece, there is a way out for Greece, if it wants to take it, but there's no denying this will be tough,” Grant Lewis, an economist at Daiwa Capital Europe Ltd. in London, said in a radio interview with Bloomberg's Ken Prewitt yesterday. “You are talking about multi-year austerity packages against a backdrop of an economy that's shrinking very rapidly.”

A Greek official said yesterday the government and international creditors were close to a final draft of an agreement on budget and structural measures needed to extend the financial lifeline. Another official said earlier yesterday talks were focused on how to make up for a 550 million-euro shortfall in new austerity measures for this year.

At stake is whether Greece wins the bailout, secures a debt write-off with private creditors and remains in the euro region. Failure and the country's bankruptcy means even greater sacrifice, Finance Minister Evangelos Venizelos has warned.

With elections due as early as April, Greek political leaders are arguing over demands such as ensuring the viability of pension funds and reducing wage- and non-wage costs to boost competitiveness.

Efforts to win a second bailout from the troika have hung in the balance over the past five days as lenders demand officials sign up to measures ranging from a cut in the minimum wage, lower pensions and immediate layoffs for as many as 15,000 state employees.

Merkel, speaking in Berlin late yesterday at an event on Europe's future, said the impact of a Greek exit from the euro would be “incalculable,” and restated her determination to keep Greece in the single currency region.

“I don't want Greece to leave the euro and therefore the question doesn't arise,” Merkel said. “I won't take part in any effort to push Greece out of the euro. It would have incalculable consequences.”

Even so, the chancellor, who heads Europe's biggest economy and the biggest contributor to euro-area bailouts, said there is “no way around” Greece carrying out reforms. Greece is in a “very complicated situation,” she said.

Greek Recession

The troika argues that lower wage costs and pension cuts are among reforms necessary to boost competitiveness in the country. Those opposed say the cuts would deepen the country's recession, now in its fifth year.

Antonis Samaras, the head of the second-biggest party, New Democracy, has indicated he will oppose measures that will deepen the country's downturn. George Karatzaferis, the head of Laos, one of the three supporting Papademos, said he would seek assurances that the measures would lead the country out of the crisis.

Guarantees from Greek leaders such as Samaras, who is ahead in opinion polls, are key to securing the funds. International lenders want assurances that whoever wins the next election will stick to pledges made now to receive financing.

Samaras's party has 31 percent support from voters, according to a Public Issue poll, compared with 8 percent for the socialist Pasok party, which is the biggest party in the current parliament. The survey of 1,002 Greeks showed a growing number of Greeks wanting elections immediately and waning support both for Papademos and the parties that back him.

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