Greece reaches make-or-break moment

European leaders maintained pressure on Greece to accept terms demanded by international lenders during a weekend of talks to avert a financial collapse.

Interim Greek Prime Minister Lucas Papademos struck a tentative deal with party leaders to boost economic competitiveness and extend spending cuts after euro area finance chiefs told them an increase in the 130 billion-euro ($170 billion) aid package wasn?t forthcoming.

?If we determine that it?s all going wrong in Greece, then there won?t be a new program — and that means in March you?ll have a declaration of bankruptcy,? Luxembourg?s Jean-Claude Juncker, who chairs euro finance meetings, told Der Spiegel magazine in an interview published Sunday.

The effort to keep Greece from tumbling into default presents what Deutsche Bank AG (DBK) Chief Executive Officer Josef Ackermann this weekend called a ?make or break? moment. While Greek leaders reached their framework agreement Sunday, New Democracy leader Antonis Samaras said he would ?fight? demands made by the so-called troika of international creditors that could deepen a recession.

The leaders in Athens will meet on Monday aiming to complete an accord as international creditors imposed an 11 a.m. deadline in Athens for a final deal. Greek Finance Minister Evangelos Venizelos told reporters Feb. 4 that negotiations in Athens for more funding hung ?on a razor?s edge.? In Paris, German Chancellor Angela Merkel and French President Nicolas Sarkozy meet Monday for a joint Cabinet meeting.

The euro fell, losing 0.5 percent to $1.3087 as of 2:15 p.m. in Tokyo. Still, the Greek drama came amid the backdrop of signs that the global economy is improving and European Central Bank lending has staved off a financial crisis. The yield on Germany?s benchmark 10-year bond rose 8 basis points to 1.93 percent last week, while the yield on Greek 10-year bonds fell 18 basis points to 34.19 percent.

With Greece at stake, focus over the weekend turned to a race to clinch agreement on a plan that?s been in the works since July, with talks between international monitors and Greek officials running in parallel with discussions among Papademos?s coalition members and Greece?s government and its private creditors.

Attempts to untie the Greek knot have overshadowed progress by EU leaders in setting up a new regime of budget rules and Italian Prime Minister Mario Monti?s success in pushing through budget cuts. Italian 10-year bonds rose for a fourth week last week, the longest run in two years.

Open questions involve how much more aid Greece needs, how much more austerity is required, and how to involve the ECB in the debt swap. Papademos faces a 14.5 billion-euro bond payment on March 20 and general elections as soon as April.

Venizelos had said that everything needed to be completed by Sunday in advance of a meeting of euro area ministers scheduled for Feb. 8. 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.

?The Greek negotiations are getting down to the wire with probably no more than one or two weeks left to get all the agreements in place if we are to avoid a messy default in March,? Erik F. Nielsen, UniCredit?s chief global economist, said in a note to clients Sunday.

The rescue blueprint includes more than 70 percent losses for bondholders in a voluntary debt exchange and loans that will probably exceed the 130 billion euros now on the table.

?We are in a make-or-break situation and Greece plays a very important role — and if we find a solution in the next few days, I think we?re on the right track,? Deutsche Bank?s Ackermann told a panel on Feb. 4 in Munich. Ackermann, who said letting Greece fall would open a ?Pandora?s box,? was due to fly to Athens as talks continued over the swap involving Greek debt with a face value of about 200 billion euros.

Meanwhile, the ECB is considering using its bond holdings to bolster Greece?s next rescue program and support efforts to contain the sovereign debt crisis, three euro-region officials said. The ECB has purchased 219 billion euros of debt-strapped nations? bonds since 2010 and between 36 billion euros and 55 billion euros are invested in Greek sovereign debt, according to estimates by Barclays Capital and UBS AG.

Papademos held meetings over the weekend with members of the so-called troika — the European Commission, the ECB and the International Monetary Fund — over what the country has to do to receive more funds.

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 and hastening a German push to make bondholders contribute. The country?s economy shrank 6 percent last year, according to the latest IMF estimates, the budget deficit is still close to 10 percent of GDP and unemployment is around 18 percent.

The lead negotiators of the creditors? steering committee working on a debt accord with Greece, Charles Dallara, managing director of the International Institute of Finance, and Jean Lemierre, a senior adviser to the chairman of BNP Paribas SA, returned to Athens this weekend to continue talks.

Ackermann is the chairman of the group, based in Washington, which has more than 450 financial firms as members and is representing private creditors in the talks. Those talks are happening in parallel with those with the troika, Venizelos said Feb. 4 ?but that?s now the easiest part of the process.?

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. [Bloomberg]