BRUSSELS/ATHENS (Reuters) ? European Union leaders will pile pressure on Greece at a summit on Thursday to adopt deeply unpopular austerity measures in return for fresh funds to avert a bankruptcy that could shake the global economy.
Euro zone governments are meanwhile arm-twisting banks and insurers to maintain their exposure to Greek sovereign debt when their bonds mature, despite the heightened risk of default, as part of a planned second financial rescue for Athens.
Combining brow-beating and moral support, leaders will tell Greek Prime Minister George Papandreou they will release the next 12 billion euros ($17.2 billion) in emergency aid on July 3, to prevent Athens running out of money in mid-July, provided the Greek parliament adopts key economic reforms next week.
While he has expressed confidence over that vote in public, Slovak Prime Minister Iveta Radicova said Papandreou had voiced doubts in a private telephone call.
"Prime Minister Papandreou has serious doubts about whether the necessary steps will pass in parliament," Radicova told the Slovak parliament's European affairs committee.
Inspectors from the European Commission, European Central Bank and International Monetary Fund met new Greek Finance Minister Evangelos Venizelos in an effort to iron out differences on the bailout program, which he has said he wants to amend to appease an angry Greek public.
"Venizelos will not go to Brussels. He will continue the negotiations with the troika," a lawmaker who took part in a parliamentary committee with the minister told Reuters. "There is a gap of 3.8 billion euros out of the total package of 28 billion euros (in the mid-term fiscal plan) which should be discussed with the troika."
The Greek crisis is set to dominate the fourth EU summit this year as the 27 leaders grope for a solution to the debt woes that have forced Greece, Portugal and Ireland to seek bailouts, diplomats said.
German Chancellor Angela Merkel underlined that no formal decisions on Greece will be taken at the meeting, but the gathering will be monitored intensely by financial markets for any message it sends on whether the EU plan can work.
Investors are skeptical: Five-year credit default swaps on Greek government debt rose 138 basis points to 2,025 bps, according to data monitor Markit, implying a more than 80 percent probability of default over that period.
U.S. Federal Reserve Chairman Ben Bernanke stressed on Wednesday that much more than the future of Greece was at stake.
"If there were a failure to resolve that situation, it would pose threats to the European financial system, the global financial system, and to European political unity, I would conjecture, as well," he said.
The summit agenda also involves appointing Mario Draghi as the next head of the European Central Bank, agreeing to increase the size of the euro zone's current bailout fund, and completing the creation of a permanent crisis fund from June 2013.
STRESS THE POSITIVE
In an attempt to offer positive incentives to Greeks, who have staged mass protests against pay and pension cuts and are resisting privatizations demanded by the EU and IMF, European officials stressed their support for Athens' recovery.
"My message to the Greek people is that, if the government acts, Europe will deliver. If Greece can demonstrate that it is genuinely committed to the reform package ... we will accompany Greece on its journey back to growth," European Commission President Jose Manuel Barroso said on Wednesday.
Papandreou's reshuffled government won a confidence vote in parliament early on Wednesday, clearing one of several hurdles on the path to avoiding a default.
On June 28, parliament will vote on a package of spending cuts, tax increases and privatization measures that Athens has agreed with the EU and IMF. Euro zone finance ministers will review progress on July 3 with a view to releasing the tranche.
Despite EU and IMF calls for Greek political leaders to unite behind the program, all opposition politicians voted against the government in the confidence vote, and 20,000 protesters chanted insults outside parliament.
Even if Greece manages to persuade the EU and IMF that it is fully committed to making the budget adjustments demanded, this will buy the government only a few months' respite and most economists expect it will have to default eventually.
Greece accepted a package of 110 billion euros of EU/IMF loans in May 2010 and now needs a second bailout of a similar size to meet its financial obligations until the end of 2014, when it hopes to return to capital markets for funding.
Euro zone member states, led by Germany, insist any second aid package to include the involvement of the private sector.
At meetings on Wednesday, banks and insurers in Germany, France, Spain and Belgium and possibly other countries were asked by their national central banks to roll over their holdings of Greek debt when the bonds mature, banking and government sources said.
Belgium's De Tijd newspaper said Belgian private bondholders were asked to buy new five-year bonds at the euro zone rescue fund's lending rate upon maturity.
There was no official confirmation of the terms, but a spokeswoman for Franco-Belgian banking group Dexia said it is prepared to roll over its 5.4 billion euro exposure to Greek debt, the biggest among Belgian banks.
Credit ratings agencies have said that even a voluntary rollover would be classified as a default, which would have a profound impact on European and global financial markets.
The medium-term economic reform program agreed by Athens envisages raising 50 billion euros by selling off state firms and includes 6.5 billion in spending cuts and tax rises in 2011.
Even if Greece achieves its targets -- and it has already missed many objectives set by its international lenders -- it will still not be in a position to manage its debts, which already account for 150 percent of gross domestic product.
(Additional reporting by Martin Santa in Bratislava, Ben Deighton and Robert-Jan Bartunek in Brussels, George Georgiopoulos and Lefteris Papadimas in Athens; Writing by Paul Taylor, editing by Mike Peacock)
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