Greek Prime Minister Lucas Papademos plans on Tuesday to discuss with the nation’s political leaders the implementation of additional fiscal measures needed to secure a second European Union-led bailout.

While Papademos and the party chiefs already 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. European leaders raised pressure on meeting the conditions of the 130 billion-euro ($171 billion) rescue, with German Chancellor Angela Merkel saying “time is running out.”

“There are fears that the Greek government will note the country has reached the limits on austerity,” UBS AG currency analysts including Chris Walker in London wrote in a note to clients on Monday. “The week ahead will be extremely significant for event risk and headlines could become a dominant driver for the euro.”

At stake is whether Greece can win the bailout, secure a deal with private creditors and remain in the euro region. Finance Minister Evangelos Venizelos told reporters late on Monday that “failure of these talks, failure of the plan, the country’s bankruptcy, means even greater sacrifice.”

The euro was little changed at $1.3118 as of 10:06 a.m. in Tokyo as investors await the outcome of the Greek talks. Asian equities were also little changed, after U.S. and European stocks fell overnight, driving the Dow Jones Industrial Average down from an almost four-year high.

Unions to strike

Greek political leaders have yet to resolve issues from recapitalizing banks, ensuring the viability of pension funds and reducing wages and non-wage costs to boost competitiveness. Greece still needs to agree on 600 million euros of fiscal measures for 2012, a government official told reporters in Athens on Monday. Meantime, unions called their first general strike of the year.

Papademos met early this morning with representatives from the European Commission, the European Central Bank and the International Monetary Fund to continue talks on possible spending cuts.

“The salvation of the country, remaining in the euro, means great sacrifices,” Venizelos told reporters in Athens late on Monday after his meeting with the so-called troika of representatives.

Merkel perplexed

With the country set to pay a 14.5 billion-euro bond due on March 20, Merkel said in Paris that “I can’t quite understand why we need a few more days.” French President Nicolas Sarkozy said there could be no funds without reforms. Allowing Greece to go bankrupt “isn’t an option,” he said.

Greece’s efforts to win a second bailout from the troika have hung in the balance over the past four days as negotiations in Athens failed to clinch an agreement on measures demanded by lenders, which could include a cut in the minimum wage, lower pensions and immediate layoffs for state employees.

The country will sell 625 million euros of 26-week Treasury bills today, a week earlier than usually scheduled to allow for the rollover of 26-week bills due on the Feb. 10. Short-term debt sales like those are the only source of market financing available for the nation. Bonds repayable in 2022 are worth about a third of their face value.

Bailout package

Euro-area finance chiefs told Venizelos on Feb. 4 that an increase in the bailout package wasn’t forthcoming, underscoring their frustration at a lack of progress on fixing the economy. Keeping Greece from tumbling into default presents what Deutsche Bank AG Chief Executive Officer Josef Ackermann calls a “make or break” moment.

Venizelos described the talks in Athens as a “Hydra’s head”, a reference to the monster in Greek mythology that grew back more heads than the one cut off.

Citigroup Inc. raised the probability that Greece will be forced to leave the euro area in the next 18 months to 50 percent from 25 percent to 30 percent previously.

“To remain in the euro area, the Greek government needs to exhibit a minimum degree of compliance with the fiscal and structural conditions of the bail-out program,” Chief Economist Willem Buiter said in an e-mailed note. “The hurdles for Greece set by euro area negotiators to receive the second bail-out are high.”

Off the job

Adding to pressure on Papademos and political leaders, the biggest public-sector and private-sector union groups, ADEDY and GSEE, hold a 24-hour general strike on Tuesday, shutting down government services, courts, schools and ferry services. Dockworkers and bank employees will also walk off the job while a walkout by culture ministry workers will force the closure of museums and other tourist attractions.

Public transport in Athens will operate during the day to bring protestors to the city center. Workers from the state-run Hellenic Railways Organization, one of the biggest loss-making state-owned companies, will shut down rail service across the country.

“What is taking place isn’t a negotiation,” GSEE president Yannis Panagopoulos said in an e-mailed statement. “It’s raw, cynical blackmail against a whole people.”

Administration Minister Dimitris Reppas said the troika asked for 15,000 state jobs to be cut this year, part of plans by Greece to gradually phase out 150,000 employees by the end of 2015. He told Athens-based Mega TV he was opposed to “blind firings.”
 
The troika argues that lower wage costs is 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.

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

George Papandreou, the former prime minister who leads the Pasok socialist party, the biggest in the Greek parliament, proposed that Papademos’s mandate be extended to boost confidence among lenders the pledges will be implemented.

Election call

That is an option likely to be opposed by Samaras, who has called for elections as soon as the new financing is agreed.

Open questions involve how much more aid Greece needs, how much more austerity is required, and how to involve the ECB in the private-sector creditor debt swap.

The rescue blueprint includes a loss of more than 70 percent for bondholders in a voluntary debt exchange that will slice 100 billion euros off 200 billion euros of privately-held Greek debt and loans that will probably exceed the 130 billion euros now on the table. 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.

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.

Greece has lagged behind budget targets set when it won an initial, taxpayer-funded rescue of 110 billion euros in May 2010, prompting euro-area threats to cut off aid. The country’s economy shrank 6 percent last year, according to the most recent IMF estimates, the budget deficit is still close to 10 percent of GDP and unemployment is about 18 percent.

Debt burden

Even after a second bailout, Greece may be saddled with too much debt, too little growth and too large a budget hole to do without even more money, which euro nations led by Germany are increasingly reluctant to offer.

The only way out for Greece is “a reduction in debt, progress on wages, on labor costs and the commitment by the Europeans to extend funds for as long as it’s needed,” International Monetary Fund chief economist Olivier Blanchard said in Washington on Monday. “Under these three conditions it’s still a terribly ugly and unpleasant path but it is at least one which can be tried.”

[Bloomberg]