By Deepa Babington and Renee Maltezou
ATHENS (Reuters) - Greece's government will likely scrape through a debt payment next week but has only a short window to overcome wide differences with creditors before the specter of default returns.
The government is talking up chances of an aid-for-reform agreement before a roughly 300 million euro payment falls due on June 5 to the International Monetary Fund, which along with the euro zone funds Greece.
"Based on the ground we have covered in the negotiations we believe we are close to a deal," government spokesman Gabriel Sakellaridis said, adding a deal was likely by Sunday.
Sources close to the talks say an agreement is unlikely so soon, but despite dire warnings from Greek officials, June 5 is no longer seen as doomsday since Athens has enough cash and options to avoid a default on that date.
Even if Greece did miss an IMF payment, the consequences need not be immediately catastrophic, experts say.
The government has made clear it considers not paying the IMF a lesser evil than not paying civil servants and pensioners, so a key question it faces over the next week is whether it can scrape together money to pay both in June.
Greece has already commandeered cash from state entities and raided its IMF reserves, and people close to the government say as of now it does not have enough money to pay both, given the total IMF June bill of 1.5 billion euros in four tranches.
If a new round of talks that began in Brussels on Wednesday advances well and Athens is confident of a deal to unlock aid before wage and pension payments fall due at the end of June, it will probably make the 300 million payment, these people said.
Another option would be to seek approval to lump together all the IMF payments at the end of the month - something euro zone officials have suggested is a possibility, though Athens has so far ruled it out.
A third option to buy more negotiating time would be to make the June 5 payment but skip either the 340 million euro due on June 12 or two subsequent payments on June 16 and 19 if a deal still appeared distant.
"FORGET ABOUT IT"
Sources close to the talks say an agreement will only come if Prime Minister Alexis Tsipras offers substantial concessions on sticking points such labor and pension reform, on which he has refused to budge so far.
"They need to compromise, do at least half of what they are supposed to do," said one source close to the lenders.
The talks have stumbled on Greece's insistence on reversing planned pension cuts, restoring collective bargaining rights and minimum wage levels. The two sides are also haggling over value-added-tax reforms, fiscal targets for this year and 2016 and the size of the civil service.
With cash running out and the economy seizing up as the government halts payments to suppliers and curtails investment, Tsipras faces intense pressure to capitulate soon to prevent an economic collapse.
That could a trigger a revolt within his Syriza party, where a minority far-left faction has become increasingly vocal. The party's central committee only defeated a hard-left motion to stop paying the IMF by 95 against 75 at the weekend.
A senior party official said any backlash from that faction will be manageable as long as Tsipras secures some concession from lenders that he can sell as a victory - such as restoring collective bargaining rights or a promise of future debt relief. Faced with a deal he sees as humiliating, Tsipras may well have to resort to elections or a referendum, government sources say.
"If the institutions opt for a 'Take it or leave it' approach then we will need to resort to the popular will," Nikos Filis, the party's parliamentary spokesman, told Reuters.
Greece's fate ultimately depends on how much Tsipras will concede and when, though his rhetoric has left no doubt that he is willing to take the game of brinkmanship to the edge.
"The deal must be clinched, there is no doubt about it," he said in his last public speech. "However, no one should think that as time goes by the Greek side's resilience will be tested and its red lines will fade away. If some people have that in the back of their minds, they should forget about it."
Time is running out. A deal must be concluded before the current bailout expires at the end of June to ensure aid of 7.2 billion euros from the program is paid out.
In practice, that means a draft agreement is needed by the end of next week, leaving almost four weeks for approval by the lending institutions, finance ministers and some national parliaments before aid is disbursed, a euro zone source said.
It will also require Greece to take some "prior actions" to start implementing agreed reforms before it receives any cash.
One source of interim funding could come via the European Central Bank, which could ease restrictions on how much short-term government debt Greek banks can buy if there were a "credible prospect" of aid being disbursed, a banking source told Reuters on Wednesday.
If Tsipras were to choose the "nuclear option" of skipping a payment to the IMF, the consequences are difficult to predict - the big risk being whether it prompts a bank run that forces the government to introduce capital controls.
IMF rules give a country a 30-day "grace period" before the global lender's board is informed about the non-payment, which means Greece could avoid the more serious consequences of a default if it used that window to wrap up negotiations and used bailout money disbursed to pay off the arrears.
A senior euro zone official said a non-payment would not immediately trigger cross-default clauses, while lawyers say a missed payment to the IMF is also unlikely to trigger credit default swaps - insurance against a default.
For now, analysts expect Tsipras to calculate that the risk of avoiding a default and agreeing a deal even with significant concessions outweighs the risk of triggering financial chaos.
"His political survival depends on reaching a deal," political analyst John Loulis said. "People expect him to give in and the political cost would be very small compared to what one imagines. The opposite would mean a bigger political cost."
(Additional reporting by Lefteris Papadimas in Athens, Jan Strupczewki and Paul Taylor in Brussels, Writing by Deepa Babington; Editing by Paul Taylor)