Talks between government officials and representatives of private holders of Greek bonds on a debt swap (dubbed PSI) stalled on Friday following a dispute about the interest rate levels and law that will apply to the new bonds.

The development fueled concerns about a possible default if talks collapse and European Union leaders refuse to add more funds to a second Greek bailout.

Government officials tried to put on a brave face, with Finance Minister Evangelos Venizelos reportedly saying that the talks were at a “good level” and would resume next Wednesday -- a day after officials from the European Commission, European Central Bank and International Monetary Fund, or the troika, are to arrive in Athens.

But the Institute of International Finance (IIF), a steering committee representing private investors, issued a curt statement. The IIF’s proposal has “not produced a constructive consolidated response by all parties,” it said. “Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach.”

The statement followed talks between IIF chief Charles Dallara and Jean Lemierre, adviser to France’s BNP Paribas, who are representing investors, and Prime Minister Lucas Papademos and Venizelos.

The talks stalled due to a dispute over the level of the interest rate on the new bonds investors will be asked to take and over investor demands that British law govern these bonds. Sources said investors want an interest rate above 5 percent while Greek officials are reportedly willing to agree to around 4 percent. German authorities reportedly want a much lower coupon of 2 to 3 percent while the IMF is said to have proposed a rate of 3 to 4 percent.

The government is reportedly drafting legislation that would introduce collective action clauses (CACs) into bond contracts to ensure 100 percent participation in the debt swap. Even Brussels, which has been insisting that the debt swap be voluntary as agreed at last October’s EU summit, is now said to be considering the use of CACs.

Government officials are also scrambling to finalize a catchall bill of reforms, to be voted on by next Thursday. Troika officials have made it clear that they expect to see progress on reforms. They are also expected to push for action on the lowering of the minimum wage and the reduction of holiday bonuses in the private sector. Papademos on Friday played this down, stressing that the issue of labor relations would be discussed.

The premier is tomorrow to receive German Foreign Minister Guido Westerwelle in Athens for talks expected to focus on the problematic debt swap talks and on the reform effort.