Euro officials upbeat on Greek deal

Euro zone finance officials voiced optimism today that a deal to avert a disorderly Greek defaut was imminent and that key building blocks to resolve Europe's sovereign debt crisis are gradually fitting into place.

EU economic and monetary affairs commissioner Olli Rehn said an agreement between the Greek government and its private creditors on voluntary losses for bondholders would be complete within days and the euro zone was making progress on strengthening its financial firewalls.

"We are very close to a deal. If not today then over the weekend and preferably in January, not February. We are very close," Mr Rehn said, speaking at the World Economic Forum in Davos, Switzerland.

German finance minister Wolfgang Schauble, speaking on the same panel, said crafting a new rescue package for Greece was not easy because of past slippage in its performance, but it would be done in the coming days.

"We don't expect a default in Greece," he said.

However, he cautioned that Athens would have to meet commitments to economic and fiscal reform that it had not delivered over the past two years and warned against giving Greece the wrong incentives.

The emerging private sector bond swap deal seems set to leave a funding gap of €12-15 billion to bring Greece's debt down to a level of 120 per cent of annual output regarded by the IMF as sustainable, EU officials say.

A report obtained by Reuters shows the European Union and IMF want Greece to push through more budget cuts and implement a series of long-agreed austerity reforms before they agree on a new bailout the country needs to avert bankruptcy.

US treasury secretary Timothy Geithner today called on Europe to commit more resources to beat the crisis.  "The only way Europe's going to be successful in holding this together, making monetary union work, is to build a stronger firewall," Mr Geithner said at Davos.

If Europe does provide more cash then the International Monetary Fund is likely to be "supportive." "But not as a substitute for a more effective euro zone response," Mr Geithner said. "My sense is Europeans recognise that."

Athens needs a deal quickly to avert a chaotic default when a major bond redemption comes due in March. Greece's creditors are demanding that the ECB contribute to a deal to put the country's messy finances back on track. Any debt-restructuring deal between Greece and its creditors may need to be topped up with further European funds, EU officials have admitted.

Mr Rehn became the first EU official yesterday to concede more financial support may be needed. This morning, Austrian newspaper Der Standard published an interview with Eurogroup head Jean-Claude Juncker in which he said euro zone members may have to increase their financial support for Greece if Athens and the private sector do their part to address the country's debt crisis.

With talks between Greece and its creditor banks in their third week, Mr Rehn’s public remarks about a potential funding shortfall reflects private concerns expressed by German chancellor Angela Merkel and other leaders in Davos.

Outstanding agreement on a second bailout deal with Greece worth €130 billion is based on an understanding that Greek creditors accept voluntary debt restructuring.

Mr Rehn said he was hopeful EU leaders would agree to expand the EU rescue funds’ capacity, hours after Dr Merkel ruled out such a move.

The ECB, which owns roughly €40 billion worth of Greek bonds, is no closer to agreeing on whether or not it will take losses on the Greek bonds it owns after a late night Wednesday meeting.

ECB president Mario Draghi told the Davos forum today that the near €500 billion it pumped into the banking sector in cheap three-year liquidity has averted a major credit crunch but credit remains seriously impaired in parts of the euro area.

He also said the risk premium on euro zone government bonds was likely to remain high for an extended period, despite budget deficit cuts, economic reforms and moves to strengthen Europe's fiscal discipline and financial firewalls.

Mr Draghi said it was not yet clear whether the liquidity was filtering through to companies and consumers.

The flood of cheap money had also had some impact in easing tension on the government bond market, he said, but it had not yet persuaded banks to lend to each other.

Additional reporting: Agencies