By Paul Taylor
PARIS (Reuters) - The stakes keep rising in a multi-dimensional poker game over Greece's debt crisis, but none of the key stakeholders appears to have any interest in pushing Athens into default.
Barring a political accident, a new EU/IMF bailout package for Athens -- barely a year after an initial 110 billion euro ($158 billion) rescue -- is likely to be agreed by the end of June, several officials involved in the negotiations say.
Financial markets seem to believe that and have begun to lower Greek bond yields slightly from stratospheric levels.
In some ways, the deal will be tougher on Greece than the last one; it will give creditors a supervisory role over the privatization of Greek state assets that will intrude on national sovereignty, officials say.
It will probably also involve "voluntary" commitments by private investors to maintain their exposure to Greece, the officials say, although this remains highly sensitive.
The European Central Bank and credit rating agencies have warned that the European Union would be playing with fire if it tinkered, even on a voluntary basis, with the terms of existing bonds. That could trigger a chain of downgrades and defaults.
Privately, one ECB source predicted the central bank would ultimately acquiesce if banks volunteered to roll over credit to Greece. But before the new deal for Greece is reached, officials may continue to clash publicly over this and other issues.
"Expect an aggravation of the stress relationships between all partners -- international institutions, national governments and domestic players in Greece -- between now and the (June 24) European summit," a senior EU source involved in the talks said.
"There will be public statements that will raise tensions. The communication will get much worse before it gets better."
Like other European, International Monetary Fund and national officials and central bankers interviewed for this article, the source spoke on condition of anonymity because of the acute sensitivity of the negotiations.
All said they expect a three-year program worth some 65 billion euros to be agreed, after much kicking and screaming, to keep Greece on an international lifeline and avoid a first default in the 17-nation European single currency area, which could trigger a domino effect among other weak euro zone states.
A portion of the program would be provided by the euro zone's bailout fund, the European Financial Stability Facility, and a smaller portion -- half the EU's share, if the model of past bailouts is followed -- by the IMF. The rest of the money would be raised through asset sales by the Greek government.
The IMF turned up the pressure last week by threatening to withhold its share of 12 billion euros of loans to be disbursed on June 29 under Greece's original bailout, unless the EU guaranteed to meet Greece's funding needs for the coming year.
That put the squeeze not only on Athens to accept stricter austerity measures and forge a political consensus in support of the EU/IMF program, but also on Germany, the Netherlands and Finland to overcome domestic hostility to a new bailout.
"Some creditor countries had signaled they needed more time until September to build parliamentary support for any further assistance," an IMF source said. "This put a gun to their head."
Former IMF Managing-Director Dominique Strauss-Kahn, facing unease among the non-European majority on the global lender's board, had been due to deliver that uncomfortable message to German Chancellor Angela Merkel at a May 15 meeting in Berlin.
His arrest in New York the day before on charges of sexually assaulting a hotel maid, which he denies, removed an influential deal-broker from the complex negotiations.
Since his departure, officials involved in the talks say, the IMF has reverted to a more rules-bound, cautious approach, making life harder for EU crisis managers.
"The IMF lacks political leadership at a crucial moment," said Domenico Lombardi, a former IMF executive board member now at the Brookings Institution think tank.
"The Europeans are still hugely divided. We see the (IMF) institution has become more conservative and is playing things by the book and becoming risk-averse," he said.
The United States, the IMF's biggest shareholder, has backed euro zone rescues so far to preserve global financial stability. Indeed, President Barack Obama called Merkel at decisive moments last year to press her to back bailouts for Greece and Ireland.
But doubts may be growing now. A senior Western diplomat said that in Washington's eyes, a restructuring of Greek debt is "100 percent unavoidable".
"Greece has two options: raise revenue or restructure. The former is unfeasible," the envoy said.
Any form of restructuring is taboo for the ECB, which fears it could spread financial chaos across the euro zone, and for ratings agencies, which say they might have to downgrade not only Greece but also other peripheral euro zone countries.
An EU/IMF/ECB inspection mission in Athens, which found that Greece is falling short of its fiscal targets mostly because a deep recession and chronic tax evasion have slashed revenues, is due to report its findings by the end of this week.
Negotiations with the Greek government on additional public spending cuts, tax measures and privatization measures are at an advanced stage to enable the inspectors to report that Athens is taking corrective action to get back on track.
Several sources said the inspectors would duck the crucial question of whether Greece's debt -- about 330 billion euros or close to 150 percent of national output in 2010, and still rising -- is sustainable, giving only a conditional answer.
"It's not a static thing," one EU official involved in the talks said. "They will say something like: 'Greece's debt will be sustainable if it receives X billion in further assistance and privatizes X worth of assets by X date, while increasing revenue by X billion and cutting spending by X billion.'"
ECB executive board member Juergen Stark said last weekend that Athens has state investments and property worth as much as 300 billion euros which it could sell.
That is six times the 50 billion euros that Prime Minister George Papandreou's socialist government has agreed to raise by selling off airports, sea ports, industrial and banking stakes. Even those sales are far from problem-free.
Part of the trouble, euro zone and Greek officials say, is that the country has no proper land register, and some politicians may have an interest in avoiding a thorough audit that could expose decades of patronage and graft.
One of the EU's conditions for any new funding is that the Greek government and the main conservative New Democracy party reach a consensus in support of key economic and fiscal reforms.
But there is no bipartisan tradition in Greece's polarized politics. The opposition, which blew out the budget deficit and fiddled the figures while in power, has seized the opportunity to demand tax cuts that could deepen the revenue shortfall.
To satisfy sticklers for fiscal discipline in the German, Dutch and Finnish parliaments, the EU is pressing for international supervision of the disposal of state assets.
One model might be the independent Treuhand agency which sold off the assets of East Germany after unification in 1990, Dutch Finance Minister Jan Kees de Jager told Reuters. The IMF and other creditors could sit on the board of such a body.
To some Greeks, that smacks of one of the most humiliating episodes in their history -- the imposition of International Financial Control by six great powers led by Britain in 1898. In return for a loan, finally paid off some 80 years later, the six powers helped themselves to Greek tax revenues.
The other ultra-sensitive issue is how to involve private sector investors in sharing the burden of a second Greek bailout. EU officials say there is strong pressure from the Germans, Dutch and Finns to show that bondholders, and not just taxpayers, are sharing the pain and risks.
Like so many key decisions since the start of the euro zone debt crisis 18 months ago, it will probably be taken in Merkel's office at the last minute before the crucial EU summit.
One formula would be to persuade banks to maintain their current level of exposure by rolling over maturing debt. Another, which could incur the wrath of ratings agencies, would be to change Greece's debt profile by extending the maturities of current bonds. Official lenders might again lengthen the maturity of their loans and further cut the interest rate.
France, which had previously opposed any private sector involvement for fear of triggering a catastrophic "credit event", softened its stance last week in an apparent gesture to help Merkel, its partner in European leadership.
French President Nicolas Sarkozy is working behind the scenes to find a compromise with Merkel to keep aid flowing to Greece, diplomats say.
But she faces huge pressure from right-wing lawmakers and influential figures such as former ECB chief economist Otmar Issing to avoid new payments for Greece that could turn the EU into a "transfer union" fueled by hard-earned German money.
The European Commission too is trying to reconcile the conflicting demands and domestic pressures, and persuade the IMF to show "pragmatic flexibility" in disbursing the June aid tranche on time, a senior euro zone official told Reuters.
"If you put all the red lines together, there is no solution yet," the official said.
Asked where the biggest risk of a deal-breaker lay, a European central banker said: "In Germany, as usual. Angela Merkel has withstood pressures in her coalition so far and done the right thing for Europe. But it's getting harder. There is a risk that they will not agree."
However, he said he was optimistic there would be a solution because a Greek default would be devastating for the euro zone.
(Additional reporting by Jan Strupczewski and Luke Baker in Brussels, Lesley Wroughton in Washington, Noah Barkin in Berlin, Dina Kyriakidou in Athens, Emmanuel Jarry and Yann Le Guernigou in Paris and Gavin Jones in Rome; Editing by Andrew Torchia)