Euro zone finance ministers and the International Monetary Fund began their third attempt in as many weeks to release emergency aid for Greece on Monday, with policy makers saying a write-down of Greek debt is off the table for now.
Greek Finance Minister Yannis Stournaras voiced confidence the ministers would finally reach a deal after Greece had fulfilled its part of the deal by enacting tough austerity measures and economic reforms.
"I'm certain we will find a mutually beneficial solution today," he said on arrival for what was set to be another marathon meeting.
Greece, where the euro zone's debt crisis erupted in late 2009, is the currency area's most heavily indebted country, despite a big "haircut" this year on privately-held bonds. Its economy has shrunk by nearly 25 per ent in five years.
EU Economic and Monetary Affairs Olli Rehn said it was vital to disburse the next €31-billion ($40.2-billion U.S.) tranche of aid "to end the uncertainty that is still hanging over Greece". He urged all sides to "go the last centimetre because we are so close to an agreement".
Greece had met international lenders' conditions and "Now it is delivery time for the euro group and the IMF," Mr. Rehn said.
Negotiations have been stalled over how Greece's debt, forecast to peak at almost 190 per cent of gross domestic product next year, can be cut to a more sustainable 120 per cent within 8-10 years.
Without agreement on how to reduce the debt, the IMF has held up payments to Athens because there is no guarantee of when the need for emergency financing will end.
The key question is: Can Greek debt become sustainable without the euro zone writing off some of the loans to Athens?
IMF Managing Director Christine Lagarde said on arrival that the solution must be "credible for Greece". The IMF argues that the debt can only be made sustainable if euro zone governments write off some of their loans to Athens, but Germany and its northern European allies have so far rejected any such idea.
Two European Central Bank policy makers, vice-president Vitor Constancio and executive board member Joerg Asmussen, said debt forgiveness was not on the agenda for now.
"It has been clearly stated. It is not on the table. Everything else is just rumours," Mr. Constancio told reporters in Berlin.
Mr. Asmussen told Germany's Bild newspaper the package of measures would include a substantial reduction of interest rates on loans to Greece and a debt buy-back by Greece, funded by loans from a euro zone rescue fund.
So far, the options under consideration include reducing interest on already extended bilateral loans to Greece from the current 150 basis points above financing costs.
How much lower is not yet decided – France and Italy would like to reduce the rate to 30 basis points (bps), while Germany and some other countries insist on a 90 bps margin.
Another option, which could cut Greek debt by almost 17 per cent of GDP, is to defer interest payments on loans to Greece from the EFSF, a temporary bailout fund, by 10 years.
The European Central Bank could forego profits on its Greek bond portfolio, bought at a deep discount, cutting the debt pile by a further 4.6 per cent by 2020, a document prepared for the ministers' talks last week showed.
Not all euro zone central banks are willing to forego their profits, however, the German Bundesbank among them.
Greece could also buy back its privately-held bonds on the market at a deep discount, with gains from the operation depending on the scope and price.
But the preparatory document from last week said that the 120 per cent target could not be reached in 2020, only two years later, unless ministers accept losses on their loans to Athens, provide additional financing or force private creditors into selling Greek debt at a discount.
The latest analysis for the ministers showed the debt could come down to 125 per cent of GDP in 2020, one euro zone official with insight into the talks said.
To cut the debt more boldly, the IMF wants the euro zone to forgive Greece some of the official loans, in what is called Official Sector Involvement (OSI) in EU jargon.
On Monday, the biggest battle is likely to be over just that.
"OSI is at the core of the problems with reaching a deal," one euro zone official with insight into the talks said.
German central bank governor Jens Weidmann has suggested that Greece could "earn" a reduction in debt it owes to euro zone governments in a few years if it diligently implements all the agreed reforms. The European Commission backs that view.
An opinion poll published on Monday showed Greece's anti-bailout SYRIZA party with a four-per cent lead over the Conservatives who won election in June, adding to uncertainty over the future of reforms.
German paper Welt am Sonntag said on Sunday that euro zone ministers were considering a write-down of official loans for Greece from 2015, but gave no sources and a euro zone official said such an option was never seriously discussed.
"It will be touch-and-go if we get a deal on Greece on Monday," a senior euro zone official said. "Euro zone countries have made concessions worth a lot of money already, so it is difficult to see how this can move even further."
French Finance Minister Pierre Moscovici said on Sunday that euro zone ministers made big progress to reach a common position during at a conference call on Saturday in preparation for their talks with the IMF on Monday.
"I will go with a firm determination, with a mandate from the president and prime minister, to reach a conclusion," Moscovici said. "We are very close to a solution."
Mr. Moscovici mentioned the reduction of interest on bilateral loans, foregoing ECB profits on Greek bonds and the debt buy-back as the options that would need to be applied for a deal as well as additional financing for Athens to keep it funded until 2016, rather than only until 2014.