Greece goes head to head with creditors on Wednesday amid rising optimism the country can overcome an impasse in talks and hammer out a bond swap deal to stave off a painful default.
Private sector creditors represented by the Institute of International Finance (IIF) begin meetings in Athens with the government at around 1500 GMT, though any deal is unlikely to be wrapped up until the end of the week.
Talks broke down last week over the interest rate Greece will offer on new bonds and a plan to enforce investor losses, but analysts and a source close to the talks say the costs of failure are too high for either side to leave without a deal.
"In the end something is likely to be agreed partly because no side is going to want to see a disorderly default," said Ben May, European economist at London-based Capital Economics.
"A lot of what's been going on is maneuvering from both sides to get a better deal. There's likely to be an element of brinkmanship taking place from both sides in order to get the best terms."
One source close to the talks said logic dictated that a deal will come together one way or the other and a banking source close to negotiations said it was imperative a deal is reached by early next week at the latest.
Athens needs a deal with the private sector within days to avoid going bankrupt when 14.5 billion euros ($18.5 billion) of bond redemptions fall due in late March. The country's foreign lenders have warned no further aid will be released until the bond swap deal is completed.
Investors fear a disorderly default will be a shock to the financial system and tip the global economy back into a recession.
Ratcheting up pressure on hedge funds and other holders of Greek debt ahead of the talks, Prime Minister Lucas Papademos told the New York Times he will consider legislation forcing creditors to take losses if no agreement can be reached.
Papademos said that if Greece did not receive 100 percent participation in a program in which bondholders would voluntarily write down 100 billion euros ($130 billion)from Greece's debt of more than 350 billion euros, the country would consider passing a law to require the holdouts to take losses.
"It is something that has to be considered in the light of expectations about the degree of the participation to be achieved," Papademos, who is due to meet IIF chief Charles Dallara later on Wednesday, was quoted as saying.
"It cannot be excluded. It is contingent on the percentage," he said, while noting that he still expected the talks to be completed successfully.
"Get Lost"
Hedge funds holding Greek bonds that mature in March may have the strongest hand when talks resume.
The Greek government wants to swap out that maturing debt for new, lower-yielding bonds and a small cash payment. But some hedge funds in London and New York that have snapped up chunks of Greece's next big maturing bond, the March 2012, for around 40 cents on the euro, are balking.
A team of European Union, International Monetary Fund and European Central Bank officials are already combing through Greece's books as part of efforts to finalize a 130-billion-euro rescue package the country needs to stay afloat.
The bailout, together with structural reforms, aim to reduce Greece's debt to a more manageable 120 percent of gross domestic product in 2020 from about 160 percent now.
The debt swap deal would see creditors voluntarily giving up 50 percent of the nominal value of the bonds they hold.
The real loss, known as net present value, is estimated at between 60 and 70 percent depending on the coupon, maturity and discount rate. The hit on individual banks would also depend on the price at which they bought Greek bonds.
The stumbling block in the negotiations has been the low coupon, or interest payment, offered on the new bonds. A low interest rate could push investor losses well above the 50 percent originally envisaged in the voluntary writedown.
Bloomberg News quoted a U.S. hedge fund manager as saying that Greece was nearing a deal with private creditors that would give them cash and securities with a market value of about 32 cents per euro of government debt.
Bruce Richards, CEO of New York-based Marathon Asset Management LP which is a member of a Greek creditors' committee, told Bloomberg he was "highly confident the deal will get done."
No one was immediately available at Marathon to confirm the comments.
The talks come against a backdrop of rising anger among ordinary Greeks, who have been hit hard by the tax increases and spending cuts which were part of a first bailout agreed in 2010.
They now fear more austerity and wage cuts with the second bailout and say they cannot take more belt-tightening.
Greece has entered its fifth consecutive year of austerity-fuelled recession, with unemployment reaching a record high of 17.7 percent in the third quarter of 2011.
Resentment of outsiders is evident.
"We want them to get lost. They are pushing the country towards collapse with these measures. They are selling off Greece," said Yannis Tsalimoglou, a 51-year old dockworker, whose income has taken a 30-percent hit with the crisis.
Thousands marched to parliament on Tuesday to protest against austerity, waving banners reading "EU, IMF out!."
A 48-hour strike by journalists on Tuesday and Wednesday, part of a broader protest by workers in Athens, was also timed to coincide with the arrival of a technical mission from the troika this week. ($1 = 0.7851 euros)
(Additional reporting by Ingrid Melander and Angeliki Koutantou)