ATHENS/MADRID (Lefteris Papadimas and Paul Day) - Greece intends to present a fresh austerity plan on Friday, a government official said, after Moody's cut its credit rating deep into junk territory and said there was an even chance of eventual default.
The budget plan will include a faster pace of privatisation and 6.4 billion euros ($9.2 billion) of new savings, including some tax rises, to eat into Greece's debt mountain, the senior official told Reuters.
Talks between Athens and inspectors from the European Commission, European Central Bank and International Monetary Fund are expected to wind up on Friday and Prime Minister George Papandreou will present the details to Luxembourg's Jean-Claude Juncker, who chairs the group of euro zone finance ministers.
The euro rose in response to the Reuters report.
Greece signed up to a 110 billion euro bailout in May last year and as well as working to secure the latest portion of that, is discussing a second rescue deal that could total some 65 billion euros to tide it over through 2013.
Greek officials are hopeful the "troika" of institutions will now release a 12 billion euro loan tranche Athens needs to cover its immediate funding needs.
Minds will be concentrated after ratings agency Moody's downgraded Greece by three notches deep into junk territory, citing a growing risk that Athens would have to restructure its debt and impose losses on private investors.
Short-dated Greek bond yields were up to 45 basis points higher on Thursday, while the cost of insuring against a default rose 40 basis points to 1,470..
"It looks increasingly likely some sort of package will be cobbled together," said Nick Stamenkovic, rate strategist at RIA Capital Markets. "But until then investors are wary and there's a huge amount of uncertainty given the political problems."
EU and ECB policymakers have differed over the shape of a second rescue, with the latter arguing firmly against any form of debt restructuring.
ECB hawk Juergen Stark offered a glimmer of compromise on Wednesday, saying a voluntary deal for investors to keep renewing their Greek debt holdings might be acceptable as part of a broader package.
His intervention may help ease the way to a further bailout but there is still no sign of consensus between Greek political parties, demanded by the EU as a condition for further help.
IMF officials had warned over the past week that the global lender would not pay up its part of the latest aid tranche this month unless Greece's 2012 funding gap was addressed, forcing euro zone governments to come up with a broader financing plan.
A harsh restructuring that would force losses on private creditors has been ruled out for now, but Germany and allies such as Finland and the Netherlands want some sort of symbolic participation by the private sector in a second rescue.
EU finance ministry officials met in Vienna on Wednesday to come up with a range of options for their bosses to consider.
While confirmation of the latest aid tranche could come soon, haggling over the shape of a second bailout package is expected to continue, culminating in a summit of EU leaders in Brussels on June 24, which is expected to be preceded by two separate meetings of euro zone finance ministers.
But as Moody's underlined, even a second rescue would be unlikely to assuage concerns that Athens will eventually be forced into a coercive restructuring of its debt, which stood at nearly 330 billion euros -- or close to 150 percent of gross domestic product -- at the end of last year.
SOLID SPANISH AUCTION
A key fear for investors is that a Greek restructuring would spill over to other high debtors in the euro zone with Spain's much larger economy the potential tipping point for the bloc.
Spain saw strong demand at an auction of 3.95 billion euros ($5.7 billion) of medium-term bonds on Thursday, suggesting investors view it as a different proposition to its debt-laden peers though uncertainty over how talks on fresh aid for Greece will pan out kept yields elevated.
"You'll see plenty of buyers coming in at that level, especially since the Greek deal seems to be moving in a positive direction." said Jo Tomkins, economist at 4Cast.
Greek newspapers reported that Athens had agreed to sell a 10 percent stake in OTE Telecom to Deutsche Telekom and has begun talks on selling a further 6 percent to the German firm.
The sale will fetch 410.7 million euros to help pay down debt, the first baby step toward a 50 billion euros target for privatisation proceeds, which the EU is demanding be stepped up.
The EU may pressure Athens into accepting unprecedented intrusive external supervision of its sell-off of state assets to ensure progress.
(Writing by Mike Peacock; Editing by Ruth Pitchford)
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