Greece on 'Knife Edge' of Default Again; Premier Pleads for Euro Bailout

(Reuters) - Greece's prime minister scrambled Sunday to convince lenders and politicians to sign off on a 130 billion euro rescue, after his finance minister said just hours remained to clinch a deal to avoid a messy default.

A technocrat appointed in November, Prime Minister Lucas Papademos is fighting to prevent cash-strapped Greece from sinking into a chaotic default when big bond redemptions come due next month.

His finance minister said Athens had only until Sunday night to clinch a second financing package from lenders, after euro zone ministers bluntly told him their patience was wearing thin because of Athens' dithering on painful reforms.

We are on a knife edge, Finance Minister Evangelos Venizelos said Saturday after what he called a very difficult conference call with euro zone counterparts.

The moment is very crucial.

Papademos's first mission Sunday was to agree at least a preliminary deal with the troika of foreign lenders on reforms included in the bailout, after several days of talks failed to resolve the thorny issue of cutting wages and spending.

Greek officials have emerged increasingly despondent after each round of talks, complaining that the European Central Bank, European Union and International Monetary Fund troika were stubbornly refusing to yield on demands to cut the minimum wage level, axe holiday bonuses and fire public sector workers.

A meeting between the two sides ended Sunday afternoon without any immediate indication on whether they had been able to resolve outstanding issues.

Papademos now faces an even tougher task convincing party chiefs in his own national unity coalition to back the reforms demanded by the lenders at the risk of ruining their chances at national elections expected in April.

Talks with the socialist, conservative and far-right party leaders in his coalition were continuing Sunday.

The conservative New Democracy and the far-right LAOS party in particular have staunchly opposed further wage and spending cuts, arguing they risk pushing Greece into an even deeper recession and imposing more pain on struggling Greeks.

LAOS leader George Karatzaferis rejected what he called the ultimatum to strike a deal Sunday.

Papademos's government implored them to be more cooperative.

We have carried out superhuman negotiations. And so political leaders must help us now, a senior government official said, adding that the party chiefs were free to join the Sunday talks with lenders if they wanted.

Greece's lenders, who want spending cuts worth about 1 percent of GDP -- or just above 2 billion euros -- this year, have demanded all political leaders endorse the cuts irrespective of the outcome at the polls.

LIMITED PROGRESS

Athens has wrangled without luck for weeks on the bailout package and a debt restructuring plan, putting itself dangerously close to bankruptcy as 14.5 billion euros of debt falls due in mid-March.

The lack of agreement has kept financial markets on tenterhooks as investors fret a messy default could cause shockwaves across the financial system, triggering a credit crunch and sending the global economy back into recession.

Athens says it has notched up some progress by agreeing a plan to recapitalize Greek banks and details on privatization, even if bigger issues on reform remain unresolved. A senior banker told Reuters the recapitalization would occur mainly via common shares with restricted voting rights.

The lack of progress has angered Greece's European partners, who first rescued Greece in May 2010. Euro zone officials say finance ministers told Greece Saturday it could not go ahead with an agreed deal to restructure privately held debt until it guaranteed it would implement reforms.

There is a great sense of frustration that they are dragging their feet, one euro zone official said.

The talks have moved slowly also because the troika wants agreement on all parts of the complex Greek rescue deal, including any contribution by public creditors like the ECB, before approving the bailout, a source close to the talks said.

The rescue package, drawn up in October, also includes a bond swap under which banks and insurers will take real losses of about 70 percent on the Greek debt they hold in a bid to ease Greece's debt burden by 100 billion euros.

But Greece's deteriorating economic prospects and struggles with reform have fed concern that it will not be enough to get its debt back to a manageable level and Athens wants public creditors like the ECB to also take part in the bond swap.

Representatives for the banks and insurers had been expected to continue talks in Athens over the weekend on the bond swap, which Venizelos has said is now the easier part of the overall process to save Greece.

The debt swap and bailout was designed to bring Greece's debt down to 120 percent of GDP by 2020, but EU sources say euro zone governments may now have to cough up an extra 15 billion euros on top of the agreed 130 billion for that to happen.

But in a sign of how politically difficult any further aid to Greece will be, a poll in German newspaper Bild am Sonntag showed a majority of Germans feel the single currency bloc would be better off if Greece left.

(Writing by Deepa Babington; Editing by Peter Graff and Will Waterman)