ATHENS/BRUSSELS (Reuters) - Greece's creditors prepared on Thursday for the start of bailout talks in Athens, after lawmakers adopted a second package of reform measures before dawn despite a left wing rebellion that may bring early elections.
In a sign of how the goal of coming to grips with the country's debt is swiftly sliding even further away, Greece's most influential think tank predicted a sharp drop back into recession.
That adds to the headwinds facing leftwing Prime Minister Alexis Tsipras, who must negotiate a bailout worth up to 86 billion euros with sceptical lenders while struggling to hold his divided Syriza party together.
After another marathon session that ended in the early hours of Thursday, the Greek parliament voted overwhelmingly to approve the second package of reform measures. But 36 Syriza lawmakers rebelled, forcing Tsipras to rely on opposition votes.
While his personal popularity is high, a renewed drop into recession after a modest recovery last year would test his government's ability to push through the tough mix of tax hikes, spending cuts and economic reforms demanded by the lenders.
A spokeswoman for the European Commission, one of the three creditor institutions alongside the European Central Bank and the International Monetary Fund, welcomed the Greek vote. Formal negotiations are due to start on Friday.
Greek officials say they aim to wrap the talks up and have a deal approved in parliament by Aug. 20, when a 3.4 billion euro repayment to the ECB falls due.
The new IMF representative for Greece, Delia Velculescu, and officials from the Commission and the ECB are expected in Athens on Friday. Talks will be on two parallel tracks, one dealing with a new memorandum of understanding on actions Greece has to take and a second stream on the loans it hopes to obtain.
But already there have been doubts about whether the severely weakened Greek economy can support the program after a six year-long slump that has cut national output by a quarter and sent unemployment over 25 percent.
In its quarterly report, the IOBE institute said capital controls imposed last month to save the financial system from a bank run would exact a heavy toll. Reversing a forecast for growth this year of 1 percent made as recently as April, it said the economy would contract by as much as 2.0-2.5 percent after growing 0.7 percent in 2014, and stay in recession next year.
Banks have re-opened after the ECB restored emergency funding last week but capital controls remain in place, hobbling companies that deal with suppliers outside Greece and highlighting the fragile state of the financial system.
The extent of the IMF's future participation is also still unclear once its current program expires next year. The Washington-based institution says Greece's huge public debt must be restructured if the bailout is to have any chance of success but it faces resistance from reluctant European partners.
"Clearly it's a difficult path ahead, we're just at the beginning of the process," said IMF spokesman Gerry Rice.
A senior Greek official said on Thursday that Greece would not reach a one percent primary budget surplus, net of interest rate payments, this year, missing a target agreed with the lenders prior to the imposition of capital controls.
The banks, which would collapse immediately without the ECB's emergency funding, face recapitalization but how much the operation will cost will only be known after banking stress tests due to start in August, the official said.
The start of negotiations with the lenders has been overshadowed by the turmoil inside Syriza, which has raised the prospect of a snap election in September or October, once the deal is sealed.
The rebellion was slightly smaller than in a vote on a first bailout bill last week when 39 Syriza lawmakers dissented. But it confirmed the deep split in the radical leftwing party, which won power in January vowing to end austerity. Many Syriza lawmakers are furious at the perceived betrayal of their ideals.
The party's political committee, which is also divided, is due to meet at 6.00 p.m. (1500 GMT).
State Minister Nikos Pappas, one of Tsipras' closest aides, told the semi-state Athens News Agency that the government would move to complete the bailout negotiations before taking a decision on its next political move.
"Unfortunately, a rupture has been confirmed but I think we will get the procedures for the deal concluded first and then we will look into all these things at the party," he said.
If the talks are not completed in time, European authorities who provided a 7 billion euro bridging loan to allow Athens to meet debt repayments this week may have to provide further temporary financing. A senior Greek official said the government wanted to have the bailout in place in time. European Economic Affairs Commissioner Pierre Moscovici said that a change in the rules governing the EFSM, an EU fund that was used to provide the first bridging loan, would enable the fund to be used for a second loan if needed. The new rules provide a guarantee to non-euro member contributor states which had been concerned that the fund, intended for the full 28-member EU rather than the narrower group of countries in the single currency, was being diverted to bail out the euro.
Additional reporting by Lefteris Papadimas, Costas Pitas, Renee Maltezou and Ingrid Melander and Krista Hughes in Washington; Writing by James Mackenzie; Editing by Peter Graff