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ATHENS (Reuters) - Prime Minister Lucas Papademos sought backing on Sunday from leading Greek party leaders for painful and unpopular reforms that the near-bankrupt country must negotiate now that a long-awaited debt relief deal seems almost secured.
Attention is shifting to negotiations with Greece's international lenders who want proof that the Papademos coalition will take action on reforms before they hand over funds from a 130 billion euro bailout.
Greece needs the money to avoid a chaotic default when big bond redemptions fall due in March. However, in a sign that the talks will be tough, German Economy Minister Philipp Roesler openly called for Athens to surrender control of its budget policy to outside institutions if it cannot implement the reforms required under the euro zone rescue package.
Such suggestions have raised hackles in Greece and Papademos made clear how hard the talks with its lenders, the IMF and European Union, would be.
"The negotiations are not easy," he said in a statement after meeting the heads of the three parties in his government.
"Despite progress on stabilizing the economy, despite the significant changes and the great sacrifices, deviations from targets and repeated delays in the implementation of specific policies have resulted in our partners setting more terms and commitments."
Greece appears to be close to clinching the bond swap agreement with private creditors after months of talks. This followed suggestions that the creditors are willing to accept a demand made by euro zone ministers for new bonds to carry annual interest of less than 4 percent.
If the deal is sealed, this will ease Greece's debt burden by slashing the value of the creditors' debt holdings and give Papademos a boost, but only briefly.
Exasperated lenders are worried that Greece no longer has the will or ability to ram through changes.
The mix of spending cuts and measures to reshape the economy risk heaping more misery on austerity-weary Greeks in the short term and few politicians want to be associated with them as they gear up for elections expected as early as April.
Papademos, a technocrat who heads a government of politicians, said leaders of the three partners in his coalition - the Socialist PASOK, conservative New Democracy and far-right LAOS parties - had committed themselves to continuing talks and reaching a deal with the lenders.
In Berlin, Economy Minister Roesler became the first German cabinet member to endorse openly a proposal for Greece to surrender budget control.
"We need more leadership and monitoring when it comes to implementing the reform course," Roesler, who is also vice chancellor, told Bild newspaper, according to advance extracts of an interview to be published on Monday.
"If the Greeks aren't able to succeed themselves with this, then there must be stronger leadership and monitoring from abroad, for example through the EU," added Roesler, chairman of the Free Democrats who share power with Chancellor Angela Merkel's conservatives.
Reuters reported on Friday that Germany wants Greece to give up control of budget policy to European institutions as part of discussions over a second rescue package.
Even before Roesler spoke, Finance Minister Evangelos Venizelos reacted angrily to the suggestion on Sunday, saying Greece was perfectly capable of making good on its promises.
"Anyone who puts a nation before the dilemma of 'economic assistance or national dignity' ignores some key historical lessons," he said in a statement before heading to Brussels for a European Union summit on Monday.
LAOS chief George Karatzaferis told reporters after meeting Papademos that Greece must examine whether the lenders' demands are in accordance with the Lisbon treaty and that he would not take any action until the European Parliament made a decision.
"The prime minister said that we are running out of time," he said. "I said that for the sake of Greece's future we can find time."
In recent weeks Karatzaferis has stepped up threats to quit the coalition, citing a lack of cohesion among partners. His party's support has slipped in opinion polls since December.
Underscoring the struggle Papademos faces in implementing reforms, Greece's parliament voted last week against extending pharmacy hours soon after officials from the "troika" of lenders - the ECB, European Commission and International Monetary Fund - arrived in town to discuss the bailout.
The lenders have demanded Greece make extra spending cuts worth 1 percent of GDP - or just above 2 billion euros - this year, including slashing defence and health spending as well as cutting redundant state entities.
Euro zone leaders at the Brussels summit will have the chance to discuss the debt swap deal, which both sides said late on Saturday was close to being finalised.
Under the swap, private creditors take a 50 percent cut in the nominal value of their Greek holdings in exchange for cash and new bonds. Their actual losses are expected to be much higher depending on the coupon, or interest rate, involved.
Both sides said the deal was along the lines of a proposal made by Jean-Claude Juncker, the chairman of euro zone finance ministers, suggesting creditors had accepted his demand for a coupon of less than 4 percent. That would result in actual losses of close to 70 percent for creditors on their holdings.
Two sources close to the talks on Sunday confirmed a deal was largely in place with a coupon below 4 percent, but that a final agreement could not be clinched until euro zone finance ministers signed off on it.
The talks had earlier run into trouble over the coupon and whether the ECB and other public creditors must also take losses on their holdings.
Negotiations were further complicated by hedge funds that have built up positions in Greek bonds and now either want the country to go under so that insurance against the debt could be paid out, or hope for payment in full by holding out.
Greece has responded by threatening to enforce losses on investors who do not voluntarily sign up to the swap.
The swap deal, aimed at chopping 100 billion euros off the debt load, must be sealed in about three weeks at the latest as Greece has to repay 14.5 billion euros of debt on March 20.
Without a deal and a subsequent release of funds from the bailout plan, Greece would sink into an uncontrolled default that risks spreading turmoil across the euro zone and tipping the global economy back into recession.
Additional reporting by John O'Donnell in Brussels, Writing by Deepa Babington; editing by David Stamp