Greek Premier Lucas Papademos on Sunday night presented party political leaders with a stark choice: accept tough fiscal measures in return for a second €130-billion ($170-billion) bailout or plunge the country into a chaotic default.
After five hours of discussions, the three leaders of Greece's coalition national unity government had still not accepted demands by international lenders for immediate deep spending cuts and labour market reforms as part of a new medium-term package. They must respond to proposals made by the country's international lenders for a new bailout deal by noon local time on Monday, a spokesman for the PASOK socialist party said on Sunday.
The talks with the three party leaders came after Athens failed to persuade the so-called "troika" of lenders – representatives of the European Commission, European Central Bank and International Monetary Fund – to ease conditions for the rescue deal.
It was not clear whether George Papandreou, the former socialist premier, and Antonis Samaras, the conservative leader bidding to succeed him, would ask for the troika mission chiefs to join the discussion.
Mr. Samaras last week threatened to veto the package unless concessions were made on private-sector wages, claiming the cuts would prolong a recession that is already in its fifth year. George Karatzaferis, head of a small right-wing party, also opposes further austerity measures.
The two sides were still far apart over projected cuts of 25 per cent in private-sector wages, 35 per cent in supplementary pensions and the closing of about 100 state-controlled organizations with thousands of job losses.
Creditors' patience with Greek politicians has evaporated. During a conference call on Saturday, euro zone finance ministers bluntly told Athens to deliver on its promises and agree to reforms or face default next month.
Euro zone officials are deliberately refusing to allow Greece to sign off on a €200-billion bond restructuring plan because the threat of default is the leverage they have to convince recalcitrant Greek ministers to implement necessary cuts.
One EU official compared the talks between Greek political party leaders to "debating whether to jump from the plane without knowing if they have a parachute."
While some recognize that Greek politicians must be seen by voters to be putting up a fight, there are fears that the show of brinkmanship could go too far and backfire, with disastrous consequences. "Anything like this just before an election is not without its risks," the official added.
The second Greek bailout, which must be approved in a matter of days, has serious implications for the wider euro zone.
Markets may react negatively if Athens fails to complete on time, on worries that Greece could default on a €14.5-billion bond repayment on March 20, and that "contagion" could spread to Portugal and Italy.
A further complication is the uncertainty over supplementing the €130-billion bailout to take account of the deteriorating economic position in Greece.
Some officials believe around another €15-billion is needed – funds that Germany and other countries have said they are unwilling to provide.
The financing gap is likely to open a fierce debate over the sacrifices required of public bondholders such as the European Central Bank, which is being urged to forgo any profits on bonds that are fully paid on maturity.
The standoff has also delayed a separate agreement with private bondholders' representatives who flew to Athens to finalize a €200-billion debt swap included in the rescue package.
Josef Ackermann, chief executive of Deutsche Bank , has warned that failure to agree on a voluntary debt rescheduling for Greece could open "a new Pandora's box" in the eurozone crisis.
"We are in a make or break situation," said Germany's most powerful banker and senior participant in the talks led by the Institute of International Finance.
Private-sector creditors were being "extremely generous" in offering to take a loss of more than 70 per cent on their Greek government bonds, he said, as a contribution to helping Greece manage its debts.
"I think the markets are recognizing this," Mr. Ackermann told a conference in Munich. "But we have to fix the Greek problem."