Demonstrators from the Communist-affiliated trade union PAME march to the parliament building in Athens, in protest against new austerity measures.
FRANKFURT (MarketWatch) ? With pressure mounting, Greek party leaders were reportedly close Tuesday to finalizing an agreement for a second rescue package needed to avert a chaotic default that could propel Greece out of the euro.
Several news reports said government officials drafted a final document detailing provisions of a 130 billion euro ($170 billion) rescue package. The document is set to be presented to leaders of the three parties that back Prime Minister Lucas Papademos?s interim unity government at a meeting on Wednesday, after being postponed from late Tuesday.
Hopes that the development signals an imminent agreement on austerity measures demanded by the European Union and the International Monetary Fund in return for the rescue package helped lift the euro EURUSD , which jumped 0.6% against the dollar to trade at $1.3205. Read more in Currencies.
Papademos conducted negotiations with Greece?s so-called troika of international lenders ? the IMF, the EU and European Central Bank ? that lasted until early Tuesday morning. This followed hard-fought talks between party leaders over the weekend.
Greece a! greed to lay off 15,000 public-sector workers by the end of the year, meeting one of the demands posed by the country?s international creditors. But party leaders had yet to agree on EU and IMF demands for private-sector wage cuts and other cutbacks they say must be delivered in order for Greece to receive the ?130 billion in what would be a second bailout.
Without the additional aid, a default by Greece is seen as a certainty when a ?14.5 billion debt repayment comes due in March. Economists fear a disorderly default could stir massive market turmoil and lead to Greece?s exit from the euro.
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Time is not on Greece's side
The euro-zone dominoes are teetering. Now, the probability of Portugal following Greece down an economically chaotic path has grown substantially. (Photo: Reuters.)
But with Greece entering a fifth year of recession and unemployment nearing 20%, party leaders have been reluctant to impose further cutbacks. The economy has contracted by around 12% since 2008.
?With national elections possible by April, it is clear that none of the parties want to be seen condemning the country to more draconian austerity,? said Steven Barrow, currency and fixed-income strategist at Standard Bank, in a note to clients.
?Our assumption is still that the parties will agree to the plans, but it is going down to the wire, which may unnerve the markets and we might also find that when (or if) a deal is agreed, the relief rally is pretty limited,? Barrow said.
Greece is also attempting to wrap up negotiations with private-sector creditors on voluntary write-downs for privately held Greek debt, with the aim! of cutt ing Greece?s debt pile by around ?100 billion.
Meanwhile, Greek unions staged a day-long strike to protest the demands for cuts. Private-sector unions and employers? associations have protested calls by the troika for wage reductions, although news reports on Monday said party leaders were near agreement on a 20% reduction in Greece?s minimum wage.
Meanwhile, economists noted increased contemplation of a Greek exit from the euro in Athens and elsewhere.
A senior Socialist party official told a Greek radio station that Papademos had instructed the nation?s finance ministry to document the economic costs of abandoning the shared currency, Dow Jones Newswires reported Tuesday.
Neelie Kroes, the European Commission?s vice president, told a Dutch newspaper that an exit by Greece wouldn?t be a disaster for the shared currency.
?It?s always said that if you let one country get out, if it asks to get out, then the whole structure collapses. But that?s simply not true,? Kroes said, according to the BBC. ?The Greeks have to realize that we Dutch and we Germans can only sell emergency Greek aid to our taxpayers if there?s evidence of good will.?
Carsten Brzeski, economist at ING Bank in Brussels, believes there?s good reason to doubt if European leaders will ultimately allow a disorderly Greek default. Such a move by Greece would threaten efforts to stabilize Spain and Italy ? much larger and more crucial euro-zone economies ? ?and would completely reverse latest confidence gains in markets,? he said in a research note.
?Despite the current excitement and uncertainties, our baseline scenario remains that there will be an agreement on a second bailout package for Greece,? Brzeski! wrote.